Be sure you have read the BBC Case.

Before attempting this discussion. In your initial post, you will need to:

• assess the vision and mission the owners have for the company
• assess the opportunities and threats presented by the external environment
• develop an understanding of the firm's resources and capabilities, particularly the distinctive competencies
• incorporate action timing and expected response by rivals into an overall strategy for the firm

IBluegrass Bottling Company INTRODUCTION Coca-Cola and PepsiCo dominate the US. soft drink industry, controlling a combined 74 percent of national market share as of 2005. It was not always this way: in the early part of this century, several thousand local and regional soft drink bottlers operated throughout the United States, and no national brands existed. But, with the rise of national and global brands, especially following World War II, fewer than 100 independent soft drink bottlers remain. One survivor of this industry shakeout is the Bluegrass Bottling Company of Winchester, Kentucky. Founded in 1902, originally as G. L. Wainscot & Partners, BBC has been family owned and controlled for nearly a century. The company produces only one product, Mountain Ale, a semi-clear, ginger-flavored soft drink. At one level, the company clearly fails to keep pace in a competitive environment characterized by billion dollar advertising and promotion budgets, intense competition for retail shelfspace, constant discounting, and saturated distribution channels. BBC DESCRIPTION AND HISTORY In the small, rural town of Winchester, a unique ginger-flavored soft drink called Mountain Ale has been manufactured by the same family since 1927. The 'Winchester Champagne\" in the returnable emerald green bottle has developed a loyal, almost cult-like following. It is a beverage thought by Kentuckians to be highly addictive, and it is associated with local tradition and folklore. The people of Winchester possess a particularly unique loyalty to their native soft drink, unrivaled by any national soft drink brand sold in the local area. Some convenience stores devote more shelf space to Mountain Ale than to Coke and Pepsi products. With fifty employees and around 56-5 million in gross sales, BBC ships one million cases per year. Ninety-five percent is sold within fifty miles of Winchester; a small amount goes to Cincinnati, Louisville, and other regional markets. Depending on the-outlet, Mountain Ale's price is substantially higherthan othersoft drinks, even though its core customer base has comparatively low income. Exhibit 1 Income, Ermloyrnent. and Educational Dan for Selected Kentucky Counties U.S. National Fayette Co. Clark Co. Menifee Co. Average [Lexington] (Winch ester] (Rural Area East of Wincheste r) Personal Income $52,029 $41,618 $28,206 _\"__ Unemployment 6.7% 3.8% 7.5% 12.5% _____ 96 of High School 78.4% 80.2% 65.1% 46% Graduates or Hiher Winchester is the county seat of Clark County, population 29,496. Clark County, and especially the counties east of Clark County, are primarily rural and characterized by light industry, agriculture, logging, and mining. The Appalachian Mountain region of eastern Kentucky is beset by poverty, illiteracy, chronic unemployment, and a lack of economic development (see Exhibit 1). Interstate 75 serves as a symbolic division between the rural areas of eastern Kentucky and the relatively prosperous areas of central Kentucky. In contrast to the economic hardship of eastern Kentucky, the rich culture is characterized by tradition, loyalty, and commitment to family and community. Local people take pride in local things, such as their county football team. BBC's product and brand image fit nicely in this mountain culture. Riley Rogers Walton, a BBC vice president and part owner, attributes much of the strong loyalty to "Kentucky chauvinism." Kentuckians believe Mountain Ale is special. Like horses and UK basketball, it's Kentucky. In Winchester, Mountain Ale is everywhere. One local intersection has a Mountain Ale vending machine on all four corners. "I'll bet you wouldn't go in a house in Winchester that doesn't have a Mountain Ale in it," proclaims Winchester Mayor Clyde Heflin. "The kids especially, they love it." Clark County High School students frequently carry the green-bottled drink into school in the mornings. The school janitor supplements his income by redeeming empty bottles at the BBC plant in Winchester at 20 cents each. This devoted clan of Mountain Ale drinkers has even found a way to compensate for the beverage's limited distribution. Parents mail cases of the soft drink to sons or daughters away at college. Military personnel from Kentucky had cases of Mountain Ale shipped to Vietnam and, more recently, to the Middle East during the Iraq war. History has shown that competitors who try to tap into BBC's market with imitations of the Kentucky ale do not stand much chance of succeeding. Coca-cola learned that lesson about 25 years ago. The Lexington, Kentucky, Coca- Cola Bottling Company introduced a new drink called "Boone Ale", tapping the imagery of the legendary Kentuckian Daniel Boone, for marketing only in Kentucky. Boone Ale was created to compete directly with Mountain Ale. It too was bottled in a green bottle and looked very similar. The taste of the drink was completely unsatisfactory to Mountain Ale drinkers and, despite its lower price, Boone Ale failed miserably. Coca-cola made only one batch of "Boone Ale" because there were no reorders. Even a giant in the soft drink industry could not capture the interest of Mountain Ale loyalists. The recipe for Mountain Ale is a closely guarded family secret created by G. L. Wainscot in 1926 and kept today in a Winchester bank safe-deposit box. Wainscott had been bottling several flavored soft drinks in Winchester since 1902. In 1906, he introduced Roxa-Kola that successfully competed with other colas then available. During the 1920s, Coca-cola systematically sued BBC, and other soft drink companies across America, over trademark infringement for using the word "cola." BBC was taken to court by Coca-cola onnumerous occasions, and although each time it successfully defended its right to the Roxa-Kola name, Wainscott ultimately decided to focus on a non-cola product to avoid further litigation. G. L. Wainscot: developed a taste for ginger-based drinks during a trip to northern Europe and thought folks back home would like the flavor too. After some experimentation with the recipes he had acquired from his travels, Wainscott developed the formula for Mountain Ale. After Wainscott's death in 1944, the bottling stock was divided equally between his wife and his employees. Jane Clark Wainscott inherited 50 percent of the stock, and the other half was divided among the company's employees. Upon her death in 1954, Wainscott's brother; Frank A. Clark, received her portion of the stock. In 1962, Clark bought out the othershareholders and incorporated the Bluegrass Bottling Company. The company has been under the complete guidance of the Clark family ever since, and Mountain Ale has experienced tremendous growth and success under its leadership. Frank A. Clark, Jr., came aboard the business as a manager in the 1965, was later named president, and is now the company's chairman. Production of Roxa-Kola was discontinued in 1964, and by 1974 the remaining 'Wainscott\" brands of fruit-flavored drinks were dropped in order to concentrate on Mountain Ale. The "flagship\" product already accounted for over 98 percent of sales and cost less to produce than the fruit flavors. At the same time, Frank A. Clark ||| [Buddy] joined the company's management. Today, at age 78, Frank Clark, Jr., remains active in the company as chairman of the board, and he still puts in some time on the bottling line as well. Buddy Clark now serves as president holds the majority interest ofstock. Another son, David Clark, and a daughter, Riley Clark Wilson, are also actively involved in the family business. STRUCTURE OF MANAGEMENT ACTIVITIES MANAGEMENT AND ADMINISTRATION Buddy Clark and his sister, Riley Clark Wilson (vice president of personnel] carry out most of the managerial and administrative activities of the company including finance, personnel, and external relations. Because it is a family business, the organizational structure of BBC lacks formality, and the duties of Riley and Buddy often overlap. As vice president of personnel, Wilson's responsibilities are varied and many. She is officially in charge of overseeing the profit-sharing plan and the investment advisers. She also helps to foster strong external relations by responding to all mail. Exhibit 2 Growth in Case Shipments 1950's 50,000-75,000 1960's 150,000-200,000 19 70's 300,000-35 0,000 19 80's 500,000-75 0,000 1990's 850,000 m 1.000.000 Illustration 1 BBC Organizational Chart Buddy Clark President Frank Clark II Chairman Carl Schneider Buddy Clark Riley Clark Wilson Sales and P d ct' Personnel and Vending ro u '0" Administation David Clark Vice President 4 Managers 2 Managers 4 Managers 1? Drivers 15 Employees 10 Employees Buddy and Riley are assisted by an ofce manager, a manager of the Mountain Ale boutique, and an executive secretary in an effort to operate in a more defined corporate manner. A comptroller was recently hired and reports to both Buddy and Riley. David Clark is also a vice president: however, he is not as involved with the business. Like the rest of the family members, he is a member of the Board of Directors and assists in setting company policy and planning overall strategy. PRODUCTION AND SOURCING OPERATIONS Based on cost and production criteria, the most crucial raw materials are sugar and glass. Sucrose purchases usually are done through long-term purchase contracts, while corn sugar is bought on spot markets unless weather threatens to disrupt prices and availability. Glass bottles, both returnable and non-returnable, come from Mexico. The initial cost of returnables is substantially higher {see Exhibit 5], as are variable costslforsorting, cleaning, and sanitizing. Cost effectiveness with returnable bottles depends on a high redemption rate, though BBC management is unsure about which bottle type is less expensive. The Winchester plant uses two 3,000-gallon stainless steel tanks to mix syrup. Once the syrup is ready, one tank feeds the bottling line for three days, while the other tank is used to mix the next batch. Using a continuous flow process, seven parts water are blended with one part syrup, carbonated, and delivered to a filling machine. In turn, the lling machine services the bottling line, filling bottles which are then capped, inspected, and packed for shipment. Seventeen employees run the bottling line on a four-day, forty-hour-perweek basis (three days in the winter, when demand is lower], filling an average of 5,000 bottles a day. As one million cases shipped in 2005, the plant is operating at about a 70 percent of capacity for a single shift. However Buddy estimates that the existing plant could ship 2.5 million cases per year if they went to two shifts. The Winchester plant does not have canning facilities. Mountain Ale is canned by the Coca-Cola Bottling company of Elizabethtown, Kentucky, along with 16-ounce nonreturnable bottles (see Exhibit 4]. This source accounts for about 12 96 of shipments and is used to service accounts outside the core territory, where returnable bottles are not practical. The arrangement with the Elizabethtown plant offers substantial flexibility in production and capacity. Buddy is ultimately responsible for production. The plant manager reports directly to him. The production manager oversees the mechanics and bottlers working on the plant floor and he reports to the plant manager. DISTRIBUTION Since most production is in BBC's single plant in Winchester, distribution is limited. Seventeen truck drivers worka 50-mile radius surrounding the plant. The Mountain Ale truck drivers have a dual responsibility: sales and delivery. Historically, Mountain Ale's distribution area has covered central and eastern Kentucky, with most sales to locally-owned \"mom and pop\" stores as well as small convenience stores east of Clark County. Recently, however, the small, family-owned stores that once proliferated in the area have been disappearing, and there has been a shift to large, chain supermarkets. This change within the retail environment has caused BBC to reevaluate its distribution strategy. Though concentrating somewhat more on supermarkets, where soft drink sales growth has been significant, BBC management is wary of the entry barriers to competing for grocery shelf space. BBC still puts most of its emphasis on single unit sales through vending and convenience stores. BBC has long contemplated the potential for increased sales through expanded distribution. However, expanding beyond 200 miles ca uses shipping costs to be a big problem, and nding a means of distribution has been difficult in some areas. For example, BBC brought in Brown Food Service, an independent distributor; to help increase the availability of their product in western Kentucky. The truck on which Mountain Ale was delivered was an 18-wheeler, and each time the truck stopped to make a delivery it cost $100. The truck would not stop unless weekly Mountain Ale sales generated at least a $100 prot at the retail outlet. In the mountains of eastern Kentucky, most of the retail stores are very small family-owned stores that do not generate enough sales to warrant a stop by the truck. Despite such distribution woes, BBC continues the effort to expand sales beyond its core area through the use of independent distributors. They are slowly expanding into Indiana, southwestern Ohio, and all of Kentucky. Crown Distributing Co. now supplies Louisville and western Kentucky stores with Winchester's soft drink. BBC also has enlisted the services ofindependent distributors in Indianapolis and Cincinnati. Exhibit 4 Mountain Ale: Peroentof Sales byConniner Type casesshipped Pencentorsales 12ozReturnable 595,000 59.5% S7.80+S4.80dep. 12 oz non- 187,000 18.7% $11.60 Winchester returnable 75.000 sues Elizabetmown returnable While such arrangements have enabled BBC to increase geographic coverage, the traditional market region still generates 95 percent of Mountain Ale sales. The distribution agreements hold no provision forjoint marketing efforts or any other resources for aggressive market development. Carl Schneider, vice president of sales and vending (the only "non-family" vice president within the organization), is responsible for market development, sales, and vending operations. Led by Schneider, BBC recently reformed its vending business practices. Typically, the company would sell, rent, or lend a vending machine to the merchant and sell the Mountain Ale product to the merchant as well. The merchant would then be responsible for loading the machine and collecting the money. With BBC's new \"Full Service Vending\" program, BBC retains ownership of the vending machine, places the machine in front of the merchant's store, stocks the machine, and collects the money. For providing the square footage, the merchant is paid 17 cents per container on sale. Full-service vending is more protable for the merchant, who incurs less investment and inventory cost. Full- service vending allows BBC to more accurately track sales and provides it with a direct, measurable return on its marketing dollars. Schneider oversees all the distribution activities of the company. He has three sales managers to help him supervise the truck drivers: one is responsible for the territory east of Winchester: another works with the central Kentucky area, particularly Lexington; and the third sales manager is responsible for working with supermarket management to arrange for shelf space and promotions. The vending manager has three people assisting with vending activities. MARKETING Several people play a role in BBC's marketing activities. As previously mentioned, Ca rl Schneider oversees sales-related activities and is responsible for the truck drivers who also act as sales representatives. Wilson assists with Mountain Ale promotions and directs merchandising in the shop. The shop sells clothing and other promotional merchandise featuring the Mountain Ale logo. In 2005 BBC retained Malone Marketing in Lexington to provide marketing services, mainly to develop and place radio and television advertising for its brand. Research shows that typical Mountain Ale drinkers are 18-34-year-old males from rural areas of Kentucky. In addition, the majority of Mountain Ale consumers live within the 50-mile radius of the Winchester plant. As shown in Exhibit 5, the demographics of the profiled Mountain Ale customer vary significantly from those of the general soft drink user. In contrast to colas, Mountain Ale seems to be markedly more favored by males than females. While Coke is popular with 35-49-year-olds, there is a clear youth skew for Mountain Ale. BBC'S PRODUCT MARKET STRATEGY The dominant business strategy in the soft drink industry is characterized by brand name promotion, advertising, market research, and aggressive distribution. In contrast, BBC caters only to a small pocket of the soft drink market and fails to keep up with industry norms of marketing and distribution, even within its own sales region. Partly this is due to resource constraints, but BBC management views its product as unique and believes that its product has no direct competition. Exhibits Demographics of Lexington, Kentucky, Soft Drink Users 5mm... MountainAIeUsers Agearnesponuent 1834mm E_E_ 3529mm :_ scandover __ IIEI_ _ __ BBC produces only one product, sold in four types of containers. There is no such thing as Diet Mountain Ale (although it is currently in the works), nor is there caffeine-free version. This strategy contrasts sharply with those of Coke and Pepsi, which both produce a wide array ofsoft drink products in several different types of containers. Mountain Ale has not changed its look in over 55 years. Mountain Ale's 12-ounce returnable green bottle, logo, and formula are unchanged since their inception in 1927. This link to the past ts and enhances the image ofa family-owned, traditional, |oca| product. Mountain Ale has a very distinct taste. It is not a cola, not does it taste like Sprite or 7-Up. It is similar to ginger ale, but heavier and sweeter. Buddy Rogers believes that the drink itself-not advertising and promotion-provides the explanation for Mountain Ale's popularity. Buddy calls it the best tasting soft drink in the world, and he really means it. Another distinctive aspect of the Mountain Ale product is packaging. Coke and Pepsi abandoned returnable bottles in favor of cans and 2 liter plastic bottles in the early 1980's. Mountain Ale, with nearly 70 percent of unit sales in the traditional 12- ounce returnable bottle, is the only firm in Kentucky producing soft drinks in returnable bottles, With Mountain Ale's sales dominance in Winchester, merchants are cooperative about bottle redemption. Chain grocers outside the core area, however; are less than enthusiastic about handling returnables, which tends to retard sales growth. As the point of sale moves farther away from Winchester, sales are dominated by non-returnable bottles and cans, which carry much higher prices. The traditional 12-ounce returnable is an important dimension of Mountain Ale's brand identity. A young man at work in Winchester, observed drinking a can of Coke, revealed that he drinks about 12 bottles of Mountain Ale each day, but he refuses to purchase the \"fake" (i.e. non-returnable] bottles sold in the workplace vending machine. A major concern for BBC management is the bottle return rate. Returnahles cost 30 cents each, and the deposit was 10 cents until 2001. Facing a return rate of only 92.5 percent, Mountain Ale raised the deposit to 20 cents. Despite widespread complaints from loyal consumers, the return rate quickly rose to 97 percent. Buddy observes that the roads in Clark County were remarkably litter free in 2002. The 20-cent deposit does, however, create some problems in pricing, as some customers view the deposit as part of the purchase price. For example, a 12 ounce can of Coke costs $1.25 in area convenience stores. A 12-ounce bottle of Mountain Ale is only $1.20, but with the 20 cent deposit, some consumers perceive Mountain Ale as the higher-priced product. Even when comparing shelf prices of Mountain Ale in different containers, the price of non-returnables is similarto that of returnables with the deposit cost included. Thus, for customers who wish to avoid the inconvenience of saving their bottles, there is no cost penalty for purchasing Mountain Ale in the returnable bottle and no incentive to buy non-returnables if the packaging is less appealing. The company notes that redemption rates rise signicantly toward the end of the month. This may be seen as the Mountain Ale savings plan. Cash-strapped Kentuckians are able to come up with $10 or 520 between paychecks by rounding up and cashing in their empty bottles. At 54.80 per case, the deposit value is substantial. Despite questions about cost and efciency, Buddy defends the returnable bottle as a classic case of serving the customer: \"Coke and Pepsi may tell their customers that the aluminum can is convenient for them, but mostly it is convenient for Coke and Pepsi's production needs.\" However, other factors contribute to the company's reliance on the returnable bottle. The inertia created by family business traditions is difficult to reverse. For one thing, plant operations revolve around the returnable bottle. Both bottle washing equipment and the existing bottling line are bought and paid for. The company has never determined which packaging type is least expensive, once all fixed and variable costs are considered. Moreover, all the bottles scattered across eastern Kentucky and not yet redeemed represent a huge contingent liability. Much like airline frequent flier accounts, if all consumers cashed in their credits at once, a serious drain on cash flow would arise. Thus BBC management is reluctant to even consider eliminating the returnable bottle. While Mountain Ale provides a unique taste, it also commands a premium price when purchased in volume at supermarkets. As shown in Exhibit 6, a case of Mountain Ale cans costs 57-58, compared to about 55-56 for a case of Coke or Pepsi. Moreover; Mountain Ale rarely offers promotional discounts, while Coke and Pepsi continuously engage in price wars. However, Exhibit 7 shows that the price of a single unit of Mountain Ale purchased in a convenience store is competitive with the prices of Coke and Pepsi. Thus Mountain Ale's pricing reflects the company's emphasis on single unit purchase. Exhibits Mountain Ale Container Cost per Unit Exhibit 6 Grocery Sales: Ale-8 versus National Brands Winchester was Alicea-cola All Pepsi Private Label As a local company, BBC relies heavily on local connections and word of mouth to promote its product. it emphasizes public relations work in central Kentucky such as working with area schools and sponsoring community events; Mountain Ale attempts to reach its young market by putting ads in local high school football programs and by sponsoring county fairs. In 2000, the Coca-Cola brand alone was supported in the region by $70 million in direct media dollars and Pepsi $73 million, which represents only a small fraction of Coke and Pepsi's corporate advertising budgets. In comparison, BBC's total advertising budget is $200,000 {roughly 3 percent of gross sales]. Coke and Pepsi advertise the most during June, July, and August which is the peak season for soft drink consumption. To avoid competing with the onslaught of new Coke and Pepsi ads, Mountain Ale runs radio ads heavily in March, April, and May when rates are lower, but soft drink demand is also lower. Exhibit? Convenience Stores: Single Unit Sales Winch este r Shelf Space Unit Price 12-oz Retu rnable 15-40% 1.20+.20 12-oz non Returnable 1.35 All Coca-Cola(12-oz.116-oz.] 1.25[1.75 All Pepsi {12-oz.l16-oz.] 1.25[1.75 Lexington shewspace 12-oz Returnable 1.20+.20 12-oznonneturname All Coca-Cola (12-02115on 12511.75 All Pepsi {12-02115-on E_ 12511.75 Exhibit 8 Prioe Comparisons: Side-by-side vending mad-lino: 12-oz Returnable $1.25 $1.25 Can of Coca-Cola $1.00 $1.25 BBC's marketing agency not only advises working to improve the quality of the Mountain Ale ads but suggests changing the brand image to appeal to a more universal market. More specically, the agency wants to increase product acceptance by making Mountain Ale more appealing to women, who do the majority of grocery shopping. Recent television commercials emphasize family values by showing the \"all-American family" drinking Mountain Ale. Ultimately, the marketing agency suggests striving to spruce up Mountain Ale's image as strictly a rural soft-drink consumed by people in the lower socioeconomic classes as this image is viewed as problematic for broader market expansion. As previously mentioned, most Mountain Ale sales are individual purchases from small convenience type stores or vending machines. BBC has 17 trucks that make deliveries to each retail outlet within 50 miles of the Winchester plant once a week. The BBC truck drivers have grown accustomed to serving the traditional BBC retailer- the small, family-owned store. There is certainly sufficient demand for Mountain Ale in these stores. Thus the truck drivers merely have to deliver the product to the store each week, and the manager makes certain that the soda is put on the shelf. Recently, Mountain Ale has sought to increase distribution and sales to large supermarket chains. But BBC's truck driversfsalespersons have been slow to develop the necessary relationships with the supermarket personnel to ensure the proper distribution of the product within the store. They simply have continued their practice of delivering the product to the loading area, assuming that the product would make it safely to the shelf. As a consequence, BBC has a reputation for not effectively servicing its supermarket accounts. The company is trying to counteract this problem by hiring a former Kroger employee to push the product through the supermarkets. Coke and Pepsi, on the other hand, have representatives that visit the supermarkets daily to arrange for shelfspace and promotional displays and to nurture their working relationship with store personnel. Theyservice their accounts on a regular basis and offer incentives to store managers to boost sales. BBC management believes that Coke and Pepsi have near complete control over grocery shelf space and that there is little that they can do about it. Exhibits 6 and 7 illustrate the stark contrast between the shelf space allotted To Coke and Pepsi and that to Mountain Ale. Coke, Pepsi, and other private labels dominate the shelf space in supermarkets and in Lexington convenience stores. In the supermarkets, and out in front of the convenience stores, Coke and Pepsi have extremely large and prominent promotional displays. In Winchester, however, Mountain Ale is award ed a signicantly large portion of the shelf space in both convenience stores and supermarkets. In some convenience stores in Winchester, Mountain Ale controls as much as 40 percent of shelf space, more than any national brand. Mountain Ale vending machines, despite a price premium of 25 cents, outsell all competitors in the region (see Exhibit 8). ALTERNATIVES FOR THE FUTURE Some outside observers and consultants see Mountain Ale as a sleeping giant - a marketer's dream. The product itself is good, the tradition and logo lend themselves to promotion, and the plant is capable of more than doubling production. To this way of thinking, key challenges include redening the brand's image to widen its appeal and solving a host of distribution problems, including packaging. The company might also need to increase the formalization of management structures and hire more managers with "p rofessional" training in business. Some suggest that the Clark family is content with its current level of success and is slow to respond to new opportunities. Buddy responds to this dilemma by underscoring the conservative values of the family company: [0n expansions] We could spend a million dollars or morejust getting established in Cincinnati or Louisville, We don't have that kind of money and, even if we did, I wouldn't risk a ninety-two year-old company and our fty employees on a roll of the dice like that. One of my favorite sayings is "You don't mess with success.\" [On 3305 marketing approach] We have never won customers by advertising and promotion. People learn about our product from their friends or their family members. We could put $100,000 into an ad campaign and never knowwhat came of it. But if we spend $100,000 on ten or twelve vending machines, we'll know exactly how much we sell, at what price, and what is the return on that investment. [0n Mountain Ale's brand image] Our brand image and logo are hokey, but our loyal customers like it that way. And for those that wouldn't try our product, you don't change their minds by advertising anyway