MKTG 208 Vanguard Group marketing Case Study analysis Read a case and follow the instruction to write 600words case analysis Please read all instructio

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REV: JULY 20, 2004
Marketing at the Vanguard Group
We think our clients are really smart, so we cannot just promote our way to success. Instead, we pride
ourselves on how quickly we get statements to your home. We want you to see that Vanguard is a little faster.
That is more important than running good ads.
— John J. Brennan, Chairman and CEO
We were in the right market at the right time. But there is still more growth out there. Mutual funds now
account for an even higher percentage of investors’ liquid assets, and Vanguard should expect to pick up a third
of any increase in mutual fund assets.
— James Norris, Principal, Institutional Investor Group
Assets drive this business, and we are still subject to a lot of churn. About $50 billion in assets leave
Vanguard every year. If we did nothing to attract new business, we would be out of business pretty quickly.
— Sean Hagerty, Principal, Head of Marketing
Vanguard, the mutual fund industry’s growth leader, sold mutual funds to customers interested
in low-cost, long-term investing in mutual funds. Vanguard funds were no-load1 and purchased
directly by investors. In 2002, Vanguard’s 118 mutual funds accounted for 10% of all U.S. mutual
fund assets ($557 billion),2 and attracted $38 billion in net inflows in a very challenging market.3 With
almost 10,000 staff, Valley Forge, Pennsylvania-based Vanguard seemed set to become the world’s
largest mutual fund group. Over 60 percent of assets were held by retail consumers, the remainder
by institutions on behalf of their employee pension plans. Shareholder accounts rose from 16.6
million in 2001 to 17.4 million in 2002.
Vanguard boasted the industry’s lowest average expense ratio (defined as operating costs as a
percentage of average net assets). In 2002, Vanguard’s costs were 26 basis points (0.26% of assets) for
1 Load referred to an extra fee charged by some mutual funds to cover promotion, distribution, marketing expenses, and
sometimes commissions to brokers. Load funds were typically sold by a sales force. Some specialized Vanguard funds did
have early withdrawal penalties.
2 Money market funds are excluded from this figure.
3 Net inflows refer to funds being deposited with Vanguard less funds redeemed out of Vanguard during a particular period
(excluding reinvested dividends). The ratio of these two numbers was the “redemption ratio”.
Professor John Quelch and Carin-Isabel Knoop, Executive Director, Global Research Group, prepared this case. Confidential data have been
disguised. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary
data, or illustrations of effective or ineffective management.
Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
This document is authorized for use only in Marketing Management S1, 2014 by Prof Scott Koslow at Macquarie
University from March 2014 to September 2014.
Marketing at the Vanguard Group
equity funds and 17 basis points for bond funds, compared with the industry averages of 136 and 111
basis points respectively (see Exhibit 1). In 2001, 74% of Vanguard funds earned returns above peer
fund averages (see Exhibit 2). Vanguard thus offered one of the highest-quality product lines at the
lowest possible cost. Adding to Vanguard’s cost efficiency, over 40% of customer transactions were
conducted on the Internet.
Vanguard funds had ranked first or second in net cash inflows for eight of the previous ten years.
Cash inflows were balanced across asset classes—stock and balanced funds (38%), bond funds (39%),
and money market funds (23%). Redemptions from Vanguard funds in 2002 were about 10% of
assets held, a rate that was half the industry average.
The Vanguard brand enjoyed a good reputation in an increasingly cluttered market (see Exhibit 3)
despite extremely low advertising spending and no large-scale sales force. Vanguard spent about 20
cents out of every $10,000 invested to drum up new business, a fraction of industry norms. When it
advertised Vanguard emphasized its long-term investment philosophy rather than the recent
performance of its best funds.
In early 2003, however, Vanguard reorganized to improve its customer management,
consolidating disparate marketing resources and elevating the marketing function. Vanguard had
also commissioned a major client segmentation study to help identify potential new segments and
devise new approaches to market more effectively to existing Vanguard customers. Some Vanguard
managers, however, were concerned that too much emphasis on customer segmentation and
marketing would significantly complicate Vanguard’s operations and take it away from its roots.
“The risk in segmentation is thinking people can be accurately classified into smaller and smaller
boxes,” Brennan cautioned. “A person living in a zip code with four houses worth several million
dollars and 30 houses below $300,000 may be categorized as a millionaire in the making. Marketing
data can sometimes overwhelm intuition.” However, maturation in the mutual fund market and
Vanguard’s growth made finer client segmentation both necessary and feasible.
The Vanguard Way
Organization and Values
Vanguard referred to itself as a “mutual mutual funds” organization, meaning that it was “owned
by its clients.”4 The Vanguard Group was owned by the Vanguard Funds, which were in turn owned
by their shareholders. CEO and Chairman John J. Brennan explained: “Having our clients/owners as
our single point of focus makes us more efficient, more disciplined and more committed than other
financial institutions can be, given their multiple points of loyalty. This client focus also gives rise to
a very clear set of leadership standards.”5 “In the future, nothing about Vanguard’s values will
change,” said Brennan, “but everything about the way we do business must change.”6
“A consultant once described us as a Midwest company caught on the East Coast. We have oldfashioned values. We grow our people via training and job rotation,” noted 16-year veteran Kathy
Gubanich, one of 10 Vanguard managing directors, who first joined the firm as a part-time recruiter.
4 This structure eliminated the distribution of profits to management company shareholders.
5 Brennan speech reproduced in , accessed April 4, 2003.
6 Frederick F. Reichheld, Loyalty Rules! (Boston, MA: Harvard Business School Press, 2001), p. 28.
This document is authorized for use only in Marketing Management S1, 2014 by Prof Scott Koslow at Macquarie
University from March 2014 to September 2014.
Marketing at the Vanguard Group
Another officer started in the mailroom. Employee turnover was below industry average. Named
after Lord Horatio Nelson’s command ship, the HMS Vanguard,7 the company featured a gym called
“Shipshape.” Employees were referred to as “crew members” (see Exhibit 4 for firm principles).
Brennan encouraged employees to identify bureaucratic procedures that decreased productivity.
An employee or team would then be assigned to propose a solution. Vanguard made extensive use of
multifunctional teams working on specific initiatives under very tight deadlines. Such an approach
allowed Vanguard to grow to over 11,000 crew members and 183 officers with relatively few
organizational levels.8
Brennan was allegedly always dissatisfied with the status quo and the level of value delivered to
customers: “As the mutual fund prospectus always says, past performance is no guarantee of future
results. We remind ourselves of that fact on a daily basis.”9 The CEO’s day typically started with a 6
a.m. review of customer service statistics. He regularly fielded customer calls to the call center. When
not on a six-mile run around the Vanguard campus, he had lunch with employee groups in the
company cafeteria, known as “the Galley.”10
Vanguard’s approach to compensation reflected and reinforced its values. Between 1985 and 1995,
Vanguard reduced the number of employees per $1 billion in assets from 55 to 22. To reward
employees for this productivity increase, the company devised a partnership plan based significantly
on Vanguard fund returns against competitor returns. Brennan said:
Employees don’t start at above-market compensation. Partnership [into the plan] must be
earned through performance and length of service. Most employee bonuses are capped at 30%
[of salary]. Since we have been outperforming competitors by such a wide margin, the plan
payout has increased every year since its inception.11
Each employee’s share of the pool of excess value was based on his or her own performance and
tenure with the firm. The average payout had been 20% of base pay but could rise as high as 40% for
veteran employees. By delivering superior value to their customers (scorekeeping at mutual fund
companies was based on a company’s funds’ returns versus the industry average), participating
Vanguard employees could earn 20% to 40% above market.12 “We have to perform over a long period
of time to be rewarded; that’s different from stock options,” Gubanich noted. Vanguard leaders were
also evaluated on how well they developed their crews, which Brennan regarded as his “internal
client. One of the pitches we make to crew members is ‘one Vanguard’—one Vanguard crew member
and one Vanguard client.”
7 In his greatest battle Lord Nelson led an undermanned fleet of ships against Napoleon’s French Armada. Arranged in the
shape of a ship, most of the buildings on Vanguard’s main campus bore the name of ships in Nelson’s fleet. The HMS
Vanguard’s motto was “We Lead.”
8 Reichheld, p. 116.
9 Brennan speech reproduced in , accessed April 4, 2003.
10 To attend, each employee had to contribute a serious question or issue. Brennan would then respond to each item, detailing
actions that had been or would be taken.
11 Reichheld, p. 27.
12 Reichheld, p. 130.
This document is authorized for use only in Marketing Management S1, 2014 by Prof Scott Koslow at Macquarie
University from March 2014 to September 2014.
Marketing at the Vanguard Group
Discipline, Data, Intuition, and Focus
Focus and discipline were dear to Brennan’s heart: “If you are going to be the high-value vendor,
you have to apply discipline.” In seven years, Vanguard cut $320 million out of annual shareholder
expenses and cut its expense ratio 17%. To achieve such results Brennan and his team used Six Sigma
(known internally as Vanguard Unmatchable Excellence or VUE) and a system of dashboards.13 VUE
was intended to “institutionalize a drive for perfection,” Brennan explained:
In 1989, although the market told us we were fabulous, we felt we were not as good as we
could be. First came a total quality management project—the Vanguard Quality Partnership.
Leading this project, we could see the power in this disciplined approach. It delivered a stepfunction improvement in terms of the quality and processes in the organization. Then the
curve started to level out. We had to find a way to institutionalize this change to get the slope
of the line to move back up. To do some homework on Six Sigma, we visited GE Capital’s
mortgage operations. Their trajectory, discipline, and common language were very impressive.
We committed serious resources led by a senior officer and made it a Vanguard program.
Selected managers rotated through the VUE Center for Excellence, spending 18 to 24 months
working on quality initiatives before returning to their business units. These rotations trained new
leaders and spread the VUE gospel. In 2001, a VUE team found that by putting some client forms
online and revamping processes, Vanguard could cut the number of steps needed for certain
transactions by 75%, reduce processing times, improve accuracy, and save $400,000 per year. “Our
motto is, ‘Do not ask who, ask why,’” a manager said. “That has been central to rolling out this
approach throughout Vanguard.” This became known at Vanguard as “DAWAW,” which became
a rallying cry to encourage people to focus on the data and not the individual.
With the dashboard, Brennan explained:
We wanted to create the opportunity for better data-based decisions. Best decisions are
always driven by intuition. Better ones are also based on fact. You cannot run a business
strictly by the numbers; life is too unpredictable. The risk is to run a business mechanically; we
need judgment and experience at all times. Balancing the dashboard and the disciplined
approach that comes from VUE with judgment, intuition, and experience is the challenge. This
combination is hard to communicate down into the organization. Some people want to lean on
the numbers. Others want to use them as an excuse. We overcame such challenges because our
culture was a hospitable host. Leaders who survived the quality program were ready for this.
Piloting Vanguard
In 1996, Ralph Packard, managing director and chief financial officer, was charged with leading a
team to develop a balanced scorecard that would later evolve into a system of companywide
dashboards. “We recognized how important a measurement system could be to align everyone in the
company,” said Packard. “We actually started at the board level. We did some homework and then
had a daylong session with the board.” At the end of 1997, Packard updated the board on the results,
and they decided to use the scorecard to evaluate company performance in 1998. That year,
managers’ annual bonuses were tied to results. The balanced scorecard was seen then as a one-off
evaluation of how Vanguard was doing. The dashboard tracked trends. Some of the balanced
scorecard measures were part of the dashboard. The approach was introduced gradually to the rest of
13 A process had reached Six Sigma quality when there were no more than 3.4 errors per 1 million opportunities.
This document is authorized for use only in Marketing Management S1, 2014 by Prof Scott Koslow at Macquarie
University from March 2014 to September 2014.
Marketing at the Vanguard Group
the organization, and managers were trained to set goals and identify and implement the measures to
reach them. (The Vanguard corporate dashboard, along with two sample dashboards that fed into it,
is reproduced in Exhibit 5.) Since 1998, Brennan personally presented the results from the balanced
scorecard and dashboard each quarter at board meetings.
Dashboard Weightings
Brennan set the weightings attached to each dashboard measure. Specific weightings were not
widely discussed or broadcast, but the strategy priorities they implied were communicated clearly to
the business units early in each calendar year. “The whole concept of the dashboard is that a balance
is necessary because all elements are related,” a manager explained. “The weightings may change
over time, and these changes send messages to the organization, but rarely do the weightings change
dramatically from one year to the next.” Brennan added:
People know that investment performance accounts for about half the total weighting. If we
underperform by one percentage point, that is what it costs to run the company. The rest of the
measures are about even. We tell corporate officers when we change the weighting, but we do
not want people to play the system and try to second-guess the scoring. It is amazing how well
that works. Some said we should be more explicit, but that would distract people. People just
need to know the priorities. Knowing the five drivers and three outcomes that we measure in
our corporate dashboard is more important than knowing the weights.
The corporate dashboard included measurements of relative fund performance, operational
excellence, crew satisfaction and effectiveness, net expenses, and net cash flow. In addition, measures
of sales and marketing effectiveness (in equal measure client satisfaction, net new households, and
institutional sales-win ratio) represented 5% of the total dashboard.
Product, service, and market development accounted for 6% of the dashboard weightings. This
category measured the impact of new investment programs as well as new service introductions (e.g.,
how quickly an initiative came to market and how well it was received).
Client loyalty accounted for 18% of the dashboard weightings. Client loyalty measures included
Vanguard’s market share of net assets in the mutual fund industry, average balance per client,
rollover,14 crossover,15 and the result of direct client satisfaction surveys. “We have good voice of the
client metrics, defined as the frequency and nature of client compliments or criticisms,” a manager
said. These results were raised at the chairman’s level quarterly and discussed at the business unit
level monthly.
The most important component (7.5%) in the client loyalty category was Vanguard’s all-important
redemption ratio. In the 2000 dashboard, the weighting on this ratio rose from 5% to 7.5% because
redemption rates had risen from 11% to 13%, partly because of the technology boom. Richard
Carpenter, principal of Corporate Financial Services, explained: “Jack Brennan set out in 2001 to
lower redemption rates by two percentage points. If we did, everyone would get two days off. We
got partly there.” One way was to actively ask clients specifically why they were redeeming their
funds and taking appropriate remedial actions.
14 Rollover referred to a tax-free reinvestment of a distribution from a qualified retirement plan into an IRA or other qualified
plan within a specific time frame, usually 60 days. These transfers could occur when an employee was leaving a company that
offered a retirement plan such as a 401(k).
15 In this context, crossover referred to the cross-selling of Vanguard products to existing Vanguard clients.
This document is authorized for use only in Marketing Management S1, 2014 by Prof Scott Koslow at Macquarie
University from March 2014 to September 2014.
Marketing at the Vanguard Group
Using the Dashboard
Crew members had personal dashboards that featured a metric or two that linked into their
respective business unit dashboard. Each was given a set of performance targets and coaching on
how to reach them. Each was then evaluated relative to peers in similar positions. “I can walk into
any department and ask what is important,” Brennan said, “and they hand me their dashboard. If
what you are working on does not feed into at least one of the key drivers, you are not working on
anything important. It is disappointing if a crew member cannot figure out how their work fits in the
big picture.” However, “taking the dashboard concept to the crew was a challenge,” noted Carpenter,
“because the typical crew member cannot really impact fund performance.”
Other challenges arose from the fact that a measure that worsened might not relate to the element
of performance being measured. For example, recruiting performance decreased in 2002 not because
the quality of recruiting decreased but because the number of hires fell from 6,000 to 1,000. Data
collection remained onerous. “We embraced the culture of …
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