Executive Summary
The Vanguard Group described by Marketing at the Vanguard Group (HBS 9-504-001) was undergoing a business model transformation that started in 2002 and was still on-going in 2003. It was faced with diminishing prospects due to a maturing market[a], market-segment convergence[b], and shifting customer needs[c], and must choose creative-destruction based growth. Vanguard was challenged by the need to structure and execute this transformation and to manage positive brand recognition. Vanguard’s transformation included redefining its customers and the value proposition that Vanguard offers its customers. It also included changing its strategy from asset-led to market-led[d] marketing and migrating from an operations-excellence[e] model to a product- and service-excellence model with ensuing organizational[f] and pricing restructuring. This report outlines the transformation.
Brand
The Vanguard brand could be described by the following:
Low cost[g]
“Mutual Mutual Fund” customer-owned[h]
Long-term investment[i]
Redemption-averse arrogance[j]
Image negativity[k]
Vanguard clearly had a challenge in remaking its brand. Low cost was its main brand equity. But cost could, at best, be lowered to zero. Brennan said so himself[l], “The better we perform, the lower our revenue become.” The following brand changes may be more productive:
High returns at low cost
Too profitable to redeem
Customer
The Vanguard retail products customer was well described by Norris as “people who are seeking value in anything they buy.”[m] This resulted from the fact that Vanguard had targeted retail customers who were “a substantial, cost-conscious investor with a long-term investment horizon” and had turned aside active traders.[n] The given reason was that “Short-term investors … muck up the game at the expense of the long-term investor.”
Vanguard also had institutional services customers for both defined-contribution and defined-benefits management.
Growth Strategy
Vanguard must keep its existing products and services in order to retain its existing customer base. And, a possible growth strategy for Vanguard was introduced in the section on branding that was based on two key elements, which were:
To offer additional products and services that had high returns and was priced to produce associated revenue growth. As indicated earlier, the existing cost-cutting, operational-excellence approach could only reach a natural dead-end because cost could not decrease to below zero. And, long before cost reached zero, Vanguard would have starved to death by the vicious cycle. Conversely, by focusing on producing higher returns for the customers and increasing revenue with new products and services, Vanguard could afford to re-invest in marketing and development. It would be able to create a virtuous cycle of growth. Some possible opportunities for Vanguard to consider could be found in the emerging markets and emerging industries.
To expand its customer base by replacing the current redemption-aversion philosophy with a investment-retention approach. Vanguard certainly could not afford and should not have “issued a stern warning” and humiliate and lose its customers. Vanguard needed to keep in mind that all investments were made to be redeemed. Redemption rate could not decrease below zero. And, long before Vanguard were to succeed in reducing its redemption rate to near zero, its customers would have stopped investing in Vanguard. Furthermore, Peter Drucker wrote that “management need to set aside time in which to discuss unexpected successes … and to think through how it could be exploited.”[o] Rather than treating the “institutional investor that had redeemed $25 million” and “turned down a similar $40 million investment,”[p] Perhaps the first investor had redeemed because Vanguard had successfully helped him/her meet the investment goals earlier than expected? And, why would the second investor wish to invest in