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Steinway and Sons

Presenters Team 02 MKTG 445-02


Ashley Sides Derek Moss Andrew Wyatt Lindsey Brooks Jason Bryant Lindsey Brooks

Table of Contents
Executive Summary 3 History Industry Trends 5 Industry Competition 6 Target Market 7 Marketing Strategies 8 SWOT Analysis 10 Conclusion

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Executive Summary Problem: As a result of the declination of sales in the piano industry, Steinway and Sons needs to find a way to uphold its historical brand reputation while gaining market share world wide and using innovative technology; particularly in the Asian Market Background: In late 1994, Steinway and Sons was yet again a company on the market to be sold. For their own personal reasoning, the Birmingham brothers decided to sell the piano manufacturer. On April 18, 1995 Kyle Kirkland and Dana Messina, already controlling multiple firms, decided to make the purchase. The investment bankers purchased the New York piano manufacturer for an incredible $100 million. Discussion: The piano industry has been in rapid decline over the past 2 decades and in particular, Steinway and Sons has taken a hard financial hit. Global sales of the industry have dropped 40% over the past 24 years and with the introduction of major industry competitors, Steinway and Sons have continued to struggle. In addition to the negative impact of these industry trends, Steinway and Sons introduced a new product line to address customer demand. They produced a more mid-priced product line; the Boston Piano. This step, breaking tradition, was taken with the intent to gain market share in Asia while increasing profits. Recommendations: Continue to produce the mid-priced Boston line of pianos to gain market share 3

Make grave attempts to take advantage of the Asian Market by attractively meeting demands; i.e. satisfying demands for free in hall tuning and delivery for pianists endorsements and establishing customer base with customer service

They should use quality and their reputable sophistication to market more to the institutional market which makes up only 10% of vertical piano sales and 20% of grand piano sales

History Steinway and Sons was established in New York City in 1853 by Henry Engelhard Steinway, an immigrant from Germany. The business excelled because of it technical brilliance and shortly, a year later, the company won a gold medal at the Metropolitan Fair in Washington D.C. The following year, Steinway and Sons introduced the cross-stringing technique in a piano with a cast iron frame, an innovation that is now universal in all grand pianos. Due to the companys innovative ability and technical supremacy, orders grew rapidly and a new larger factory was constructed in 1860. For the next 140 years, Steinway and Sons would be recognized as the leader in the market for high quality pianos (Gourville). Over the past 25 years, Steinway and Sons have been somewhat tumultuous. After 120 years of being a closely held family operation, it was decided Steinway and Sons could no longer survive in this manner. The company was sold to the CBS Musical Instruments Division in 1972 for $21 million worth of CBS stock. The primary reasoning for the sale was associated with finances which hadnt changed in the following few years; the companys return on capital was only about 5% (Gourville).

In the beginning, CBS invested several million dollars in the first few years after purchasing the company. This may not seem like an exceptionally large amount; however the Steinway family had never before invested more than $150,000 per year in capital improvements. In addition, to ease the transition and to ensure quality focus, CBS employed Henry Steinway as president of Steinway and Sons for five (Gourville). Looking for a reasonable return on investment, CBS wanted to increase revenue and decrease manufacturing costs by increasing production. Their first step was to increase dealers by almost 40%. While these changes did in fact increase sales volume and profits, it damaged the reputation of Steinway and Sons. Critics and buyers began to challenge the quality of Steinway and Sons pianos. Over the next 10 years, Henry Steinway is replaced by several CEOs, only to worsen the calls from critics challenging the quality of Steinway and Sons pianos. In November of 1984, CBS announced the sale of Steinway and Sons for $50 million to John and Robert Birmingham (Gourville). Although the Birmingham brothers had no experience in the musical business, they set out to re-establish Steinway and Sons as the maker of the highest quality pianos in the world. CEO Bruce Stevens set out to assure everyone, customers, employees, and dealers, that the new owners were highly committed to quality. The company now became refocused and returned to what had made them so successful. Aside from the newfound focus on quality, the Birmingham brothers expanded Steinway and Sons product line. It now included the Boston Piano line introduced in 1992, the Steinway Limited Edition pianos introduced 1993, and the Crown Jewel Collection of Steinway pianos introduced in 1994. Despite these positive changes by Stevens and his team, the running of 5

Steinway and Sons was once again constrained by limited financial resources. The company was again sold on April 18, 1995 to Dana Messina and Kyle Kirkland for $100 million (Gourville). Messina and Kirkland had already acquired the Selmer Company, a meat processing and a paper company, and felt as though Steinway and Sons was a well run organization which could reap the benefits of their financial expertise (Gourville). Industry Trends Over the years, piano sales have increasingly dropped from as high as 223,000 units in the 1980s to nearly 100,000 in 1994 (Gourville). People have different arguments of why piano sales dropped so dramatically over the past 2030 years. The first of these arguments includes the idea that the decrease in sales is simply a trend and that it is predicted that in the future piano sales will once again rise significantly. In addition, computer home entertainment and electronic devices such as keyboards were being sold more than traditional pianos. A second observation is that the piano industry has become a consolidation of many of the top piano manufacturers. Many of the industries in the United States and Europe have been going through consolidation efforts. In the early 1900s there were several hundreds of piano makers whereas in 1992, there were only eight (Gourville). A third trend is that many Asian piano manufacturers arose. Four Asian companies including Yamaha, Kawai, Young Chang and Samick accounted for 75% of global sales in the 1990s. Asian imports achieved a 35% unit share of the vertical pianos market and an 80% unit share of the grand piano market by 1994, (Gourville) 6

The fourth trend in the industry market was the change in market size. With countries such as South Korea, Japan, and China representing a very large portion of the market, the United States and Western Europe were no longer the industry leader in sales (Gourville). A fifth and final issue that faces the piano industry is that these high-priced, high end pianos may limit piano sales. Owning a Steinway and Sons piano may be viewed by some musicians as a symbolic representation of high status. Only a small percentage of people who are looking to purchase a piano can afford a product of Steinway and Sons. In 1995, Steinway and Sons grand pianos were priced from $26,000 to over $70,000, verticals were priced from $11,900 to over $17,000, and Boston pianos were priced from $6,395 to over $30,000 (Gourville). The Boston models are around half as expensive, however they continue to be out of the price range of the average customer. The majority of the public is just not willing to pay that kind of money on a discretionary item such as a piano. The recession of the early 1990s can also be linked to the decrease in piano sales in recent history (Gourville). Industry Competition Steinway and Sons had only a few competitors that were considered threats to their market share. After the industrys consolidation of manufacturers from hundreds of makers to a mere eight companies that were considered major competition, their high volume manufacturing competitors included Kawia, Yamaha, and Baldwin. Their competition in the low volume, high quality market was Bsendorfer and Fazioli. Baldwin Piano and Oregon Company was the only remaining competitive large scale producer of grand and vertical pianos in the US in 1995 aside from 7

Steinway and Sons. Baldwin sold many varieties of pianos ranging from factory manufactured vertical and baby grand pianos, to expensive hand made grand pianos. Baldwin was seen as a major competitor in 1994 selling 20,000 pianos worldwide and generating $122 million in sales (Gourville). Yamaha Corporation, a 100 year old company, was the largest producer of pianos in the world. Yamaha had $1 billion in sales in 1994 with 35% world market share and 50% Japanese market share. In 1994 Yamaha produced 175,000 pianos using highly automated, assembly techniques (Gourville). Yamaha also produced high concert end grand pianos using traditional craft methods with the goal of producing the best grand piano in the world. Yamaha would often seek new strategies to compete with Steinway and Sons in the grand piano market. Yamaha claimed that the wood used in Yamaha pianos was from the same wood mill as Steinway and Sons. Yamaha also would purchase Steinway and Sons pianos, disassemble them, and try to recreate a better piano that Steinway and Sons model. Yamaha marketed their pianos to major universities, in order to gain on Steinway and Sons. They would often loan pianos to universities for students to use and to be considered for purchase later. Kawai was a competitor from Japan which produced 90,000 vertical pianos and 10,000 small grand pianos a year (Gourville). Much like Yamaha, Kawia wanted to special in a high quality concert grand piano. Kawai was not a major competitor of Steinway and Sons since their materials used in their pianos were considered low quality by many critics. Bsendorfer and Fazioli were two companies that competed with Steinway and Sons in the top-quality grand piano market. Bsendorfer from Austria produced 400 grand pianos in 1994 to Faziolis 40 (Gourville). These two 8

companies used the same handcrafted techniques as Steinway and Sons and were considered top notch among customers for being made in low volumes.

Target Market Steinway and Sons two major markets to sell their pianos in were the home or private market and the institutional market. These two markets were grounds for selling Steinway and Sons vertical and grand pianos. Vertical pianos have their strings mounted vertically while grand pianos have their string mounted horizontally. The home market, often called the private market made up most of Steinway and Sons sales buying 90% of its vertical pianos and 80% of its grand pianos. The home market generally was 45 years old and had over $100,000 incomes a year. To find their market, Steinway and Sons had to figure out who the music lovers were and who had enough money to purchase their pianos (Gourville). The institutional market accounted for 10% vertical piano sales and 20% grand piano sales. This market included universities, music institutes, hotels and performance halls (Gourville). Steinway and Sons wanted to get their pianos in these institutions so that it would lead to more sales in the home market. Marketing Strategies Steinway and Sons have shown a decline in recent years on the sale of Grand Pianos. Some of the reasons that for the decline is price, new technology, new markets, and the fact that people that have pianos have had them for a while and will not need to refurbish a piano that often. The first question that needs to be asked does Steinway want to continue is strategy as the world premier grand piano or does it want to take more aggressive marketing strategy and give up that title for a better profit margins and market share. Steinway needs to take advantage of the different marketing strategies and use the Asian market to their

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advantage. They also need to look at price and technology to enhance their profits in the piano industry. Steinway decided to relive the fact that people are not spending the money on 70,000 dollar grand pianos they decided to introduce a new more affordable piano called the Boston Piano. The Boston piano which is produced by Kawai in Japan enables Steinway to sell a mid priced piano with through the Steinway name. Since the introduction of the Boston piano in 1992 the sales increased from 2.7 million in 1992 to 16.7 million in 1994 (Gourville). This piano gains some of the market share that has not been tapped by Steinway before because of the cost of their pianos. Steinway also introduced a Limited Edition piano which sold out to dealers within hours of being made available. Steinway needs to continue to look at different ways and new marketing strategies to counter the price issue it has with the Steinway grand being highly expensive. Another marketing aspect that Steinway needs to focus on is how to tap into the Asian market which is the fastest growing market. Steinway can capture this market by introducing the Boston piano to rival that of the Yamaha and Kawai that are produced in Japan. The more affordable Boston Piano will enable Asian people to purchase a Steinway without going broke. By expanding overseas Steinway would make up for some of the lost revenue in the United States market. Steinway and Sons is known for their impeccable brand image and traditional quality and durability. Due to their immaculate products, the concept of repeat buyers is virtually non-existent. As a result, the used piano industry has flourished. For every new Steinway and Sons piano that is sold, about five used Steinway and Sons pianos are also traded. These used products hold their value extremely well and most are sold for about 75% of their purchased price. 11

Steinway needs to focus on developing new technologies and might want to expand into electronic keyboards which are now becoming popular with the younger generations. By creating a keyboard with the Steinway name that could gain market shares in the growing music industry of electronics. They could also reach younger people earlier and begin to make them aware of the Steinway name. Steinway and Sons Concert and Artist program has become an ever successful marketing strategy. The program allows for a bank of over 330 pianos in which gifted artists may choose from for their performances. The performers have their preferences regarding tones and sounds which are satisfied by master technicians. In exchange for their performance, Steinway and Sons is granted exclusive use of the artists names for their own publicity purposes. With the use of artists names, Steinway and Sons is able to better appeal to the industry. In addition to the new product lines, the utilization of artists, new and used pianos, technology and innovation, and the Asian market share, Steinway and Sons also takes advantage of the use of independent dealers. Approximately 1000 independent dealers are responsible for selling over 95% of new pianos. The dealers carry Steinway, or Yamaha, as their primary brand along with entry level brands with lower retail margins. These independent dealers are effective and efficient for the sale of Steinway and Sons pianos. Steinway must focus on many different marketing strategies and need to begin to increase the sales of their pianos without losing the high quality that the Steinway and sons piano brings. Focuses need to be shift if they want to continue their great music tradition. 12

SWOT Analysis Strengths Steinway and Sons have an established brand reputation of quality and durability There are minute differences between the sound of each crafted piano which allows for differentiation and customization of the product The Steinway Concert and Artist program has around 850 artists whom choose the Steinway and Sons piano Weaknesses The durability and quality of their products limits the concept of repeat buyers and brand loyalty The average customer is over 45 years old and earns in excess of $100,000/year With the introduction of the Boston piano line, Steinway and Sons image took a step away from tradition Growing technology and innovation has taken toll on traditional pianos; they have been replaced by keyboards and other computer technology Opportunities Establish a larger customer base in Asia to increase market share Steinway and Sons could increase their industrial market by offering discounts to universities or concert halls and/or being more customer service oriented

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Using innovative technology, Steinway and Sons could potentially increase markets by appealing to lower and middle class purchasers with low to midpriced products

Threats With the expansion of Asian manufacturers, global market share is no longer being controlled by American manufacturers There are levels of inexperience of the current younger owners/CEOs

Conclusion As a result of their decline in sales due to the rapid change of the piano industry, technology, expansion of new markets and foreign competitors, Steinway and Sons will need to make some drastic changes to utilize these industry trends. In order to expand market share and gain profits, Steinway and Sons need to take steps towards using technology to enhance their products while maintaining their traditional brand reputation. While continuing with their high-end products as well as introducing a mid-priced line, Steinway and Sons will be able to reach more of the markets demand. Concentrations should also be made towards reaching new customers all over the world. Their products remain of high quality and durability which allows for less company loyalty. Establishing a customer base is vital for their success. In order to restore their historical success while implementing changes and preparing for growth, Steinway and Sons will have to use this declination of the piano industry to their advantage.

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References
Gourville and Lassiter. Steinway & Sons: Buying a Legend (A). Marketing Management: Case Analysis by Teams: pg 147-166.
Steinway & Sons: Buying a Legend

. Statement of Problems and Issues

Summary For 140 years, Steinway & Sons has set the standard for the quality manufacture of pianos. Why is Steinway legend? What made it so a great master? After first step into piano industry Steinway and the word piano are almost synonymous. Working a long-term C and still going- technical and market strategy that emphasized quality is to say, since the first Steinway family members arrived in New York from Germany in the middle of the 19th century, the company has pursued a strategy of making high-end quality product, selling them through its own sumptuous outlets and through a network of dealers, and gaining exposure by encouraging premier performing artists to use the pianos.

In the early 1970s, Steinway encountered competition from low-cost producers based on in Japan. While Steinways fine image and reputation was unquestioned, the business wasnt particularly profitable. In addition to it, due to some stockholders who were unwilling to invest but mainly interested in income, Steinways financial conditions became worse, so the family company came to an end, was sold to CBS. CBS recognized that the business didnt fit its corporate strategy. In 1985, CBS sold the company to John and Robert Birmingham, Boston-based investors. Under Birmingham, Steinway returned to its former stature, stressing quality and focusing on the high-end market. But ten years later, Steinway is also sold two investors, Kyle Kirkland and Dana Messina because of financial problems.

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Problems and Issues Now, the two young entrepreneurs have some questions and need to decide something important. Whether Steinway would continue its high-end quality piano or alternatively, pursue some bolder, more aggressive plan? Also they should decide what to do with the recently introduced line of Boston pianos. Did it make sense for Steinway to sell mid-priced pianos and how can they leverage the Steinway brand name to further enhance revenues? Finally, what role should they play in the running of Steinway?

We will mainly focus our analysis on the market share, financial problem and brand strategy. Now we start our analysis to choose the right creative to solve dilemmas which Kyle Kirkland and Dana Messina are facing.

. Analysis of Current Situation 1. External analysis: Market & competitor, Consumer behavior Description Market Industry Trends1. Sustaining downturn in the piano industry (global sales dropping by 40% since 1980)2. Consolidation of the piano manufacturing industries in US & EU3. Emergence of several Asian manufacturersThe Used Piano Market1. The impact by an active market for used pianos is considerable2. Because of the extremely long life, duration of piano threat to the piano industry seriouslyThe proportion of Steinways marketUnited States (58%), Germany (8.6%), Japan (7.3%), England (6.1%),Switzerland (2.9%)Decreasing unit sale of Steinway grand piano from 1990 to 1994The unit sale of grand piano was decreased by 24.5% Competition Yamaha1. The largest producer of pianos in the world2. Using highly automated, assembly-line techniques3. Traditional craft methods also used for making grand piano4. Strategies for improvement and promotion its grand piano- used noticeably higher quality raw materials- effort to duplicate the techniques of Steinway- employees high degreed skills and limit of worker discretion- launching an Artist ProgramBaldwin1. High-quality grand piano manufacturer2. Respected by trained musicians, choice by big artists and official piano of organizationsKawai1. Manufactured on highly automated assembly lines2. Produced good quality verticals and small grand piano3. Manufactured Boston piano on behalf of Steinway Consumer behavior Brand choice is driven by product quality, prompt delivery and competitive pricing

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As shown in the table above, the unit sale of Steinway grand piano was decreased by 24.5%, while the sale of grand piano in USA was increased by 4.5%(27,742 28,999 units). This result indicates that Steinway should do any action to recover its market, if not, its formidable competitors may waste Steinways life.

Unit Sales of piano producers in 1994 Producer Model Unit Sales Dollar Sales Market share Yamaha VerticalSmall grand 157,50017,500 $1.0B 35% Baldwin Grand 20,000 $122M 4.36% Steinway VerticalGrandBoston 6002,6982,300 $101M 3.61% Kawai VerticalSmall grand 90,00010,000 - Bosendorfer Grand 400 - Fazioli Grand 60 - -

Market share Yamaha has a far greater share of the overall piano market than Steinway and even has more diversity of grand piano price. (Steinway grand pianos range from $26,400 to $68,800 otherwise, Yamaha grand piano range from $15,090 to $87,990) Steinway, to broaden its market share, should diversify own product because brand choice is driven by product quality, prompt delivery and competitive price. As shown in the proportion of Steinways market, Steinway needs to reinforce marketing activities into Asian market, so more competitive priced product is material to it.

Mid-priced & lower priced piano The Boston piano is a mid-priced instrument made by Kawai in Japan to Steinway specifications. Although Boston piano line represented a significant break with tradition, this mid-price is for customers who were not yet ready to acquire a Steinway. Moreover, Boston made big revenue over 600% from 1992 to 1994. This is saying about Steinway should take in the future. In other words, to make more money Steinway needs lower price of piano than

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Boston. So we suggest that Steinway should introduce new lower-priced brand through cooperation with other Asian manufacturer except for Kawai for technology protection. 2. Internal analysis: Strength and Weakness based on the internal analysis Strength Weakness Product Brandthe pre-eminent brand name Quality the highest quality grand pianotraditional craft methodsusing the highest grade raw materialsthe legendry sound durability ManufacturingUpgrading and modernizing facilities To sustain high quality, too much cost is consuming(i.e. discard half of lumber) Cost management is needed through the Production control Pricing Steinway mainly focuses on higher quality along with the high prices. They have price competitiveness in comparison with other high quality brand as yet. Lack of diversity Organization(dealer network,work force) Downsizing the dealer networkDuring the Birmingham years they reduced the size of the dealer network for eliminating question about their quality Managing and caring the dealersThrough this method, sense of responsiveness is built.Highly skilled work forceHighly skilled and dedicated, technical excellence continued to be emphasized To market aggressively, expanding dealer network in Asia is needed

Financial problems Steinway was attacked from limited dollars many times and it caused owner changed. However, not only Steinway but also Selmer is not good condition. Although both companys EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) is working as yet, but as shown in the below table post-merger companys debt ratio is extremely high(2,217%) and it influenced times interest earned ratio(185%) directly. High debt ratio, like this company, means there is but little existence capability when low economics activity comes. So if we make them a proposition, they should endeavor to repay their debt preferentially for reducing interest expense. Thats why they need to market and launch lower priced piano aggressively. Selmer & Steinway, Financial Information Post-Merger (%) Selmer Steinway Post-Merger Debt Ratio 783 557 2,217

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Current Ratio 371 212 336 Times interest earned Ratio 291 407 185

. Evaluation for alternatives Pros Cons Option 1:Continue high-end niche strategy High-quality is its biggest strength Grand pianos sales is decreasing Option 2:Market more aggressively Economic conditions is improving and more focus on growing Asian market will cause higher profits The piano industry is going downturn and the impact of the used piano market is strong Option 3:Mid-priced Boston Boston made big revenue over 600% from 1992 to 1994. Damaging the Steinway image

Brand strategy Nowadays, one of companys valuable assets is their brand. Otherwise, how many brands does Steinway have? We suppose that the shortage of brands is a main cause of Steinways sales reduction. This is the time Steinway should implement brand extension strategy. Steinway has strong power of brand itself, so with a brand extension, consumers can make inferences and form expectation as to the performance of a new product based on what they already know about the parent brand itself.

Brand portfolios Different brands may be designed and marketed to appeal to different market segments. So the important point to design a brand portfolio is to maximize market coverage, in other words each brand should be clearly differentiated. The typical buyer of a Steinway piano was over 45 years old, had an annual income in excess of $100,000 and that of a Boston piano was 5 to 10 years younger and was slightly less affluent. This data may tell us how they should carry out market segmentation. They should focus on growing sales through maintaining high quality niche market, reinforcing mid-priced Boston and introducing new lower-priced piano to Asian market as a flanker to compete against low-price competitors.

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. Conclusion & Recommendation Piano is in a stagnant industry and the used piano market threats to the piano industry seriously. What is more, the young ferocious competitors are threatening aged Steinway. How can Steinway overcome these trials?

For Steinways survival, we suggest that: u Steinway should maintain its high quality niche market for reputation of great master and keep going mid-priced Boston line. v To reinforce marketing activities into Asian market, Steinway should introduce new lower-priced piano to Asian market as a flanker to compete against low-price competitors. w As an individual brand, Steinway should make good use of The Crown Jewel Collection. Because it represented almost 30% of Steinway unit sales by 1995, in spite of price premiums. This is helpful for Steinways high quality strategy, maybe. Finally, the two young entrepreneurs should divide their roles into marketing and finance section. It is because more aggressive marketing and retrenchment in finance is needed.

We think, when a company is in a stagnant industry, the most important points are seeking out a strong niche, continually monitors its position, and finds new ways to differentiate itself

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