Good Year Tire and Rubber Company Case Anaylsis
Business and Management
Submitted By tdewitte
Goodyear Tire and Rubber Company – Case Analysis
Goodyear Tire and Rubber Company, headquartered in Akron, Ohio, was founded by Frank and Charles Seiberling in 1898. Goodyear’s principal business is the development, manufacture, distribution and sale of tires throughout the world. In addition to Goodyear brands tires, the company owns the Kelly-Springfield Tire Company, Lee Tire and Rubber Company, Delta Tire and they manufacture private-label tires. Goodyear was the world leader in tire production until November, 1990, when Groupe Michelin acquired the Uniroyal Goodrich Tire Company.
Goodyear controls 20 to 25 percent of the world’s tire manufacturing capacity and about 37 percent of the U.S. tire-making capacity. The Goodyear brand is the market share leader in North America and Latin America, number two in Asia outside Japan behind Bridgestone, and third in market share in Europe behind Michelin and Pirelli.
World tire production in 1991 was approximately 850 million tires, of which 29 percent were produced in North America, 28 percent in Asia, and 23 percent in Western Europe. Ten tire manufacturers’ account for 75 percent of worldwide production. The three largest tire manufacturers account for almost 60 percent of all tires sold worldwide. Groupe Michelin, headquartered in France, is the world’s largest producer, Goodyear is the second-largest producer and Bridgestone Corporation, a Japanese firm, is the third-largest tire producer.
The tire industry is divided into two end-use markets:
1) The Original Equipment Tire Market. The original equipment tire is sold by the tire manufacturers directly to the automobile and truck manufacturers and account for 25 to 30 percent of the tire unit production volume each year. Demand for original equipment tires is derived; it is directly related to automobile and truck production.
2) The Replacement Tire Market. The replacement tire market accounts for 70 to 75 percent of tires sold annually, with 75 percent of annual sales from passenger car tires. Demand for replacement tires is affected by the average mileage driven per vehicle. The worldwide unit shipments for replacement tires are “flat” due in part to the longer tread life of new tires.
Goodyear is the market share leader for original equipment tire market with 38 percent of the market and in the replacement tire market with 15 percent of passenger car tires, 11 percent of light-truck tires and 23 percent of the highway-truck tires in 1991.
Approximately 60 percent of Goodyear worldwide sales were in the tire replacement market and 40 percent were to the original equipment market. In 1991, Goodyear’s tires and tubes represented 83 percent of the corporate sales of $10.9 billion.
2. Case Problem:
Between 1987 and 1991, Goodyear brand tires recorded a 3.2 percent decline in market share for passenger car replacement tires in the United States, approximately 4.9 million tire units. The decline was attributed to two factors, 1) market erosion from the growth of warehouse membership club stores and discount tire retail chains coupled with multi-branding among mass merchandisers and 2) nearly 2 million worn-out Goodyear brand tires were being replaced annually at some 850 Sears Auto Centers in the United States because the loyalty of customers led them to buy the best available tire at Sears, which did not include Goodyear brands.
Sears management had approached Goodyear about selling the company’s popular Eagle brand tire in 1989. The proposal was declined by top management because they believed this would undermine the tire sales of company-owned Goodyear Auto Service Centers and franchised Goodyear Tire Dealers, which were the principal retail source for Goodyear brand tires. In 1991, after a $38 million loss in 1990, Goodyear changed its top management and the Sears proposal resurfaced for consideration.
A decision to sell Goodyear brand passenger car tires through Sears would represent a significant change in distribution policy and could create conflict with its franchised dealers.
3. Major Issue:
1) Should Goodyear accept the Sears proposal to sell the Eagle brand tire at Sears Auto Service Centers?
2) If the Sears proposal was accepted, should the arrangement include: a. only the Goodyear Eagle brand, or; b. all of the Goodyear brands?
4. Case Issues/Application of Theory:
Product – Goodyear produces tires for virtually every type of vehicle with the broadest line of tire products of any manufacturer. Goodyear currently produces 12 different brands of passenger car tires, not including the 16 tire brands produced by the Goodyear subsidiaries, Kelly-Springfield and Lee Tire and Rubber Company. Sears proposed to sell the Eagle brand at its automotive centers and stores because of its popularity.
Price – Goodyear brands are generally considered premium tires and priced higher, being highly price elastic, where customers would easily switch to competitors brands.
Place – Goodyear operates about 1,000 company-owned Goodyear auto Service Centers and sells through 2,500 franchised Goodyear Tire Dealers in the U.S. As of 1992, the company did not typically sell Goodyear brand tires through discount multi-brand dealers, mass-merchandise chain stores, or warehouse clubs. The industry uses “retail points of sale” to gauge the retail coverage of tire manufacturers and their brands. Goodyear has the broadest retail coverage with almost 8,000 retail points of sale.
Promotion – Goodyear is one of the leading national advertisers in the U.S. The company also maintains a high profile in auto racing to emphasize the high-performance capabilities of its tires and the company’s commitment to product innovation. The Goodyear name is prominently featured on the company’s well-known blimps frequently seen at special events in communities throughout the US. The company slogan, “The best tires in the world have Goodyear written all over them,” communicates their positioning as a high-quality, worldwide tire manufacturer and marketer. Dealer-sponsored private-label tires accounted for 15 to 20 percent of total replacement tire sales in the U.S in 1991. Surveys showed dealers were able to influence a care owner’s choice of replacement tires, both as to brand and type of tire. Retailers advertised extensively in newspapers, on outdoor billboards, and occasionally on local TV to establish and maintain their market shares. Price was the dominate competitive appeal.
People – Goodyear distributes its tire products through almost 8,000 retail points of sale in the U.S. and some 25,000 retail outlets worldwide. Goodyear sustains a large population of employees and partners to maintain this presence in the retail channel.
Customer – Consumers have become more price conscious and less brand loyal, eroding the importance of securing replacement sales though original equipment sales. It was often difficult for care owners to comparison shop on the basis of tire quality and thread durability because of the proliferation of brands, lie grades, and performance features. Car and light truck owners were often confused by the number of choices they had; few buyers were really knowledgeable about tires and made choices based on the recommendation of the local dealer or made a choice based on price.
Competition – Goodyear’s main competition is Groupe Michelin, who is headquartered in France and leads the European market and Bridgestone, headquartered in Japan, leading the Asian market. Goodyear, headquartered in Akron, Ohio, leads the market share in North America and Latin America.
Company – Goodyear competes on the basis of quality and is known as a premium brand of tires and therefore is more expensive. Goodyear brand is traditionally positioned as one of the best known brand names in the world of premium quality tires.
5. Analysis of Issues:
* Broadest line of tire products of any tire manufacturer. * They are the second largest producer of tires in the world. * Market share leader in U.S. for original equipment tires and replacement tires. * 8,000 retail points of sale in the U.S. and 25,000 retail outlets worldwide.
* Goodyear has not sold through a mass merchandiser since the 1920’s. * Growth of discount multi-brand independent dealers increased from 7 percent in 1982 to 15 percent in 1992. * Goodyear brand tires recorded a 3.2 percent decline in market share for passenger car replacement tires in the US. * Goodyear sustained a $38 million loss and change in top management in 1991.
* Tire dealers run frequent price promotion ads in the local newspapers. * The growing want for full service stations by consumers. * Independent tire dealers indicated that 45.8 percent of earnings came from automobile service. * Sears customers will buy the Eagle brand due to being Sears loyal and more price-sensitive.
* Independent tire dealers carry several different brands for replacement buyers. * Department stores focus on marketing their own private label brands. * Consumers have become more price conscious and less brand loyal. * Replacement tire sales do not rely on the original equipment tire market as much as it used to. * Cannibalization of Goodyear Auto Centers and franchised Goodyear tire dealers if they accept Sears’ offer.
1)Accept the Sears proposal and change the distribution channel by offering the Eagle brand exclusively to Sears. Develop indirect channel. Pro’s – * Increased market share for replacement tires sales. * Deferred promotion cost to Sears. * Increased revenues. * Sears will benefit from carrying the Goodyear brand of tires.
Con’s * Cannibalization of company-owned Auto Service Centers and franchised Tire Dealers. * Tire dealers will start to carry competitive brands. * Franchise Dealer reaction to broadened distribution. * Conflict with Sears policy and control of distribution.
2) Decline the Sears proposal and develop a market penetration strategy to increase usage. Maintain Direct Channel. Pro’s * Higher success rates in market penetration. * Well established brand name. * Familiar with target market and customer requirement.
* Customer loyalty changing to price conscious. * Worldwide unit shipments have been flat.
3)Decline the Sears proposal and develop a new market offering – Augmentation – increasing the types of service provided at the Goodyear Service Centers. Maintain Direct Channel. Pro’s * Greater earning potential for increase automotive services. * 8,000 retail locations that could be potential multiple service centers. * 25,000 potential locations worldwide. Con’s * Much higher risk and cost involved. * Conflict with franchise stores not wanting to augment.
I would recommend both channels 1 and 3, direct and indirect channel for distribution, using the Sears proposal to exclusively distribute the Eagle tire brand and the augmentation of services with franchise dealers. This will allow:
1) the best coverage of the target market, replacement tire sales;
2) the best solution to satisfy the buying requirements of the target market, giving more service and automotive knowledge base for the customer, and;
3) will be most profitable due to increasing the market share of replacement tire sales and simultaneously increasing the franchise store earnings with the increased services provided.
Initially the franchise tire dealers will be concerned with cannibalization and loss of sales with the new distribution channel through Sears. The increase in earnings from the additional services will move the feeling of loss to a feeling of expansion and growing, and will replace and surpass any loss that would be incurred by the new distribution channel of the Eagle brand.
I would implement #1 by creating a joint venture with Sears for distributing the Eagle brand and one other specialty brand that would be less priced, so we could capture both customers looking for quality in brand name and quality in price. The advertising and promotion cost for Sears carrying the Eagle brand would be Sears alone, as they will also benefit by the addition of the Goodyear product and reputation. I would implement #3 by upgrading the franchise dealers to additional service using the currently established retail stores, saving the cost of new property and refit the work areas used for installation of tires for oil change, front end alignment, brake and muffler service. The current warehouse for storage of tires can be used for the additional materials needed for repairs. I would first target the franchise dealers that would be most directly affected by the channel distribution change, having the greatest loss to cannibalization. These dealers would be first in the re-fitting to promote the increase in income from other services. I would also direct advertising to these franchise areas after the re-fit to announce the increased services, in addition to reliable history of full tire service.
This will reduce the channel conflict, where the franchise dealers would be concerned about the loss of income. This will also allow Sears to have more direction and control in the distribution of the new Eagle brand, and target their advertising to areas they are currently familiar with the target markets they are trying to reach with the Eagle brand. Each process will meet the intermediary requirements for each channel. The Sears channel will have increased sales with the popular Eagle brand and the franchise dealers will have increased earning with the new services provided. Overall, the change will improve the coverage of the target markets for both intermediaries’. The distribution channel and service change will increase the customer satisfaction, meeting the needs for more locations for easier access to routine automotive repair and using a known brand name service center. The resources for the increased services are easily brought into the current automotive tire station, and the franchise locations are currently structured for service of vehicles, including parking, waiting area and repair space. The effect will have little change on the other channel, as the Sears locations are serving a very loyal group to their segment. The effect on the long range organizational objectives will be met, to increase customer satisfaction and access, the increase in earnings from both increased market share in replacement tire sales and in additional automotive services, and having the same organizational goal of customer service.