z i=) = o el n THE STRATEGIC MARKETING PROCESS 1 Overview of Marketing Strategy and the Strategic Marketing Process Before examining the strategic marketing problem-solving framework that is the core of this book, itis useful to understand the role of marketing strategy in the firm and to specify exactly what a marketing strategy is. In this note we specify what a strategy should include—that is, what elements make up a complete and effective marketing strategy—and we define the range or universe of all possible marketing strategies. Its, also important to understand why a customer-orientation is beneficial and why align- ing the strategic activities of the firm around the customers’ needs is both efficient and effective—that is, itis important to understand the “marketing concept”—so this chap- ter will begin by clarifying the marketing concept and its value. Marketing strategy is about the “big picture”—“the view from 30,000 feet.” It is about whether the firm (or produet or business unit) is: + Moving in the right direction; * Setting appropriate objectives; * Competing for the right customers (and avoiding those it should avoid); and + Developing the right skills, resources, and capabilities for success. If specific marketing tactics are the “trees,” so to speak, then marketing strategy is the “forest.” It is easy for busy managers to “lose sight of the forest for the trees,” to get caught up in the details, and to forget that those details are worthwhile only if they are part of a coherent, overarching strategy.2 Section 1 * ‘The Strategic Marketing Process WHAT IS A MARKETING STRATEGY? “Marketing strategy” may refer to a process or to its outcome. This book addresses both. The majority of the first section of the book deals with the process of formulating, implementing, and maintaining a mar- keting strategy. Before digging into that process, however, we should know where it leads. What should the outcome of the process be? What is a “marketing strategy”? ‘A comprehensive marketing strategy specifies the who, what, when, where, why, and how of the business: 1. Who the firm will serve—the customers and segments the business will serves 2. When the firm will serve those customers and those needs—that is, what “occasion(s)” the firm will target; Where the firm will do business—the geo- graphic markets the firm will serves ‘What needs the firm will meet; How the firm will serve those customers and needs—the means (resources and distinctive competencies) the firm will bring to bear to serve those customers and their needs better than the competition; and 6. Why the firm will do these things—the com- pelling business model that specifies how long- term revenues will exceed costs by a reasonable rate of return on the capital employed. 4, 5. ‘A complete marketing strategy will stipulate each of these essential aspects of the way the company goes to market, A sound strategy must, eventually, reduce to ‘meeting some specific needs of some specific customers better than the competition within profitable relation- ships. That is, the six questions above define a customer-driven strategy and can be summarized as three high-level decisions: + Target Segments. Questions about who the firm serves, when the firm meets those needs (ie., on what occasions), where it does these things (i.e., geographic markets) and, espe~ cially, what needs the firm meets are all essen- tially about what segments the business serves. Where's the pain? + Competitive Advantages. Questions about how the firm serves those target segments and their needs better than the competition, and why the firm does that (the business model or profit logic), are all really about what competi- tive advantages (resources or capabilities) the firm has or will build. Where's the magic? + Singularity. The idea that a strategy must specify how the firm meets some set of cus- tomer needs better than the competition does- nit mean that the firm has to be better than the competition on all elements of the offering. Rather, the firm’s offering must, in the end, be different from the competition's in some way that some segment of customers will value. The strat- egy must be unique or singular and not in an inconsequential way. It does no good to be ‘ust like” the competition—copycats may or may not survive, but they won't triumph. It also does no good to be better than the compe- tition on attributes customers don’t value. Michael Porter, the renowned strategy expert, summarized this requirement: “Competitive strategy is about being different. It means deliberately choosing a different set of acti to deliver a unique mix of value.”* THE MARKETING CONCEPT AND A CUSTOMER FOCUS At its core, strategic marketing involves crucial deci- sions about which customers and what needs the firm will serve and what means the firm will employ to serve those needs. In other words, strategic market- ing is the creation and maintenance of a market- oriented strategy, focusing the organization on the customers it serves and the needs it meets. This is the essence of the “marketing concept.” Peter Drucker famously summarized this idea: “There is only one valid definition of business purpose: to create a customer [emphasis added]... Itis the cus- tomer who determines what a business is... . He alone gives employment.” This simple statement is sometimes misunderstood; it does not mean that a company should try to meet the needs of all cus- fomersor try to meet all of the needs of any customer. It doesn’t mean that “the customer is always right,” or that serving a customer is disconnected from gen- erating profits. Drucker”s advice and “the marketingChapter 1 * Overview of Marketing Strategy and the Strategic Marketing Process. 3 concept” it summarizes are best understood as focusing the business on meeting some specific needs of some specific customers better than the competition within profitable relationships. The crux of this message is incontrovertible: the customer and the customer’s needs should be primary in defining the purpose and strategy of the business. Customer needs come first. That is not some abstract theory or altruistic philosophy—companies should be driven by the customers they serve and the needs they meet be- cause that is the most effective approach. The market- ing concept suggests that if we take good care of our customer, everything else, such as sales and profits, will follow. Extensive research has linked a market orientation to higher long-term profits but, while this is certainly true, it is true in the long term. Unfortunately, most firms and most managers are measured in the short term, and therein lies a con- flict. Balancing the short term with the long term is one of the tough parts of being a strategic marketing manager. “GENERIC” FRAMEWORKS OF MARKETING STRATEGIES Answers to the these basic questions that drive a marketing strategy—what customers and customer needs to serve, and how to profitably serve those needs better and differently than the competition— can result in countless, almost literally infinite specific strategies across products, companies, and industries. There are, however, a few universal char- acteristics and distinctions that serve to describe all possible strategies, creating general taxonomies. ‘These taxonomies organize the infinite specific strategies that could possibly come out of the basic strategic questions into a summary set of “strategy types.” One fundamental way to distinguish and or- ganize generic marketing strategies is by competitive advantage and competitive scope.’ Competitive ad- vantages or “bases of competition” can be broadly categorized as either some form of differentiation or as cost leadership. Differentiation means that the product or brand offers some characteristic, quality, or attribute that alternatives cannot or do not offer, the characteristics which some segment of customers value—things like performance (which can mean many different things across product categories and even within a product category), conformance (invariability across units), image, service, reliability, convenience, or unique combinations of these differ- entiating attributes. Because differentiating charac- teristics almost always cost money to deliver, it is generally true that a firm can't pursue both differen- tiation and cost leadership simultaneously. Cost leadership—which is “price leadership” from the customers’ perspectives—means developing the low- est cost structure in order to offer the lowest price or garner higher margins (or both). Competitive scope includes segment scope (the breadth of customers and customer needs served) and the extent to which value-creating activ- ities are performed by the firm itself versus being outsourced (that is, the degree of forward and back- ward integration). In general, competitive scope can range from mass marketing (targeting very large markets or market segments or even treating the whole world as a target market in a “global” strategy) to niche or focused strategies that identify relatively small segments of customers and serve their needs very specifically (a “customer intimacy” strategy). Because scale is so closely associated with cost advan- tage, a focused or niche cost-leadership strategy may be the most difficult to implement and sustain, but there are instances of firms serving niches that re- spond to an absolute low cost/low price in markets where the large-scale entrants, the entrants that could pursue a lowest-cost strategy, do not offer a “barebones” lowest-possible-cost alternative. These two dimensions—competitive advan- tage and competitive scope—correspond with the two components of a marketing strategy specified above: “target segments” and “competitive advan- tages” (see Table 1-1, above). By simplifying the two attributes of generic strategies, competitive advan- tage and competitive scope, to two broad alternatives each (differentiation versus cost and narrow versus broad, respectively), itis easy to organize the result- ing possibilities as shown in Figure 1-1. A firm can differentiate its offerings or compete on price (over- all cost), and it can do that at a broad or “mass” scope or at a narrow or “niche” scope. It is unusual for a price strategy to succeed at a narrow/niche scope because competing on costs usually necessitates4 Section | + The Strategic Marketing Process Basic Elements “5Ws and 1H” Target Segments Who? The customers and Where's the pain? segments the business will serve Where? The geographic markets the firm will serve When? The occasions the firm will serve What? The needs that the firm will meet. Competitive Advantages How? The means (resources Where's the magic? and distinctive competencies) the firm will use ‘Why? The compelling business model that specifies how long-term revenues will exceed costs by a reasonable rate of return on the capital employed Porter, 1985 Strategic Target or Competitive Scope Strategic Advantage or Competitive Advantage "A Niche/ Customer intimacy FIGURE 1-1 Generic Strategies—Competitive Advantage and Competitive ScopeChapter 1 * Overview of Marketing Strategy and the Strategic Marketing Process 5 achieving high scale in production, but itis feasible in certain circumstances.* Another general framework organizing all pos- sible strategies is the “value map” or “value frontier.” “Value” is defined as what the customer gets (per- formance or quality) adjusted for what the customer sives (price): Relative Performance Value z Relative Price ‘The value-map framework plots performance and price as the axes of the two-dimensional space as shown in Figure 1-2. These are customer perceptions of performance and price, making this one type of perceptual map,” and these are relative dimensions; price and performance are perceived as high or low relative to other offerings in the marketplace “offering” refers to a specific bundle of performance or “give” and price or “get”). Products in a market will tend to form a frontier within this space along which there is equilibrium between changes in performance and changes in price. People are willing to pay more for higher performance (better quality) but the market will punish firms charging more or offering less for the same price. This two dimensional space highlights three potentially effective strategies—premium (high price/high performance), high-customer-value (lower prices/high performance), and economy (low prices/low performance)—and one unsustainable strategy: inferior customer value (higher prices/lower quality). Within this framework, successful innova- tions can be viewed as the creation of ways either to offer the same performance for a lower price or to offer more performance for the same price. In fact, innovation, shown as arrows in Figure 1-2, is con- stantly shifting the value frontier and its underlying equilibrium toward the right. A third framework organizes “growth strate- gies”—strategies specifically seen as expanding sales—based on their relationship with existing com- pany offerings and existing markets. At any given time a firm is selling its existing products to its existing High Relative Performance (Relative Quality) FIGURE 1-2. Value Fror6 Section 1 * ‘The Strategic Marketing Process Markets New Existing Existing New Products FIGURE 1-3 Product-Market Growth Strategies® markets. Logically, growth can come from selling more of the firm’s existing products to its existing markets (market penetration), selling existing prod- ucts to new markets (market development), selling new products to existing markets (product develop- ment), or selling new products to new markets (diver- sification; Figure 1-3). This logic was first spelled out by Professor Igor Ansoff.? The product-market growth framework suggests the concept of “adjacen- cies” and core competencies—the idea that strategic growth is best found by identifying new markets or new products for which the firm can parlay existing core strengths into growth. Thus, an important ques- tion is how portable or transferable are the firm’s strengths, and where are they transferable to? For example, at one time, ‘Toys- f-Us achieved nearly a 25 percent share of the US retail toy market. Further gains (market penetration) seemed likely to cannibalize existing outlets, so the company turned to market development. It took its product—a 35,000 square foot toy supermarket with 15,000 SKUs: (‘‘stock-keeping units” or individual items) of toys and games to a new market—Canada, and subsequently to Europe and eventually to Asia. Later, it developed a new product, Kids-A-Us, a category killer retail con- cept for kids clothing, and it located the Kids--Us stores next to its Toys-A-Us outlets. This was product development, offering a new product to existing cus- tomers. Still ater, they followed with Babies-A-Us RECOGNIZING A STRATEGIC DECISION As important as it is to know what constitutes a “marketing strategy” and what a strategic “marketing orientation” entails, it is just as important to under- stand what a “strategic decision” is—and how to ree- ognize a strategic decision when faced with one, A strategic decision is a decision you make today that impacts your ability to compete at some point in the future. It is nota future decision. There are two kinds, of strategic decisions—those we know are strategic when we make them and those which are ad hocand only recognized as strategic later in the game. Perhaps the most famous example of the latter was IBM's entry into personal computers. IBM intro- duced the original IBM PG, legitimizing the PC as a real business tool, in 1982. The company did two things differently with the PC than it had done with any product before it. First, IBM effectively “out- sourced” the operating system to a small company (at that time) called Microsoft, ceding ownership of DOS (disk operating system) to Bill Gates’ young firm. Never before had IBM done that—all previous products had operating systems proprietary to IBM. Second, IBM also outsourced the “brains” of the PC—the “central processing unit” or CPU—to a struggling spin-off of the Fairchild Camera ‘Company which had some microprocessor expertise. ‘That company was Intel. Once again, this was a first for IBM, as all previous products had proprietary CPUs. Today, the IBM PC platform has become the dominant standard for personal computers world: wide. However, that standard isn’t really IBM’s; it’s Microsoft’s and Intel’s—sometimes referred to as “Wintel” (Windows-and-Intel). In the end, IBM it- self sold the last remnants of its PC business (ThinkPad) to the Chinese company Lenovo in 2004. Apparently, IBM did not view the PC as a strategic product at the time—looking at it more through “mainframe goggles.” Many have wondered what IBM would do differently if it had those decisions back to do over again,Chapter 1 * Overview of Marketing Strategy and the Strategic Marketing Process 7 OVERVIEW OF THE STRATEGIC MARKETING PROCESS Effective marketing strategy is all about the marketer ‘maintaining a high-level strategic perspective while at the same time dealing with the never ending ur- sgencies of day-to-day management. Making that per- spective more difficult is the fact that strategic ques- tions don't arrive neatly labeled—this is a product development opportunity.” “this is a distribution problem,” or “this is a competitive threat”—market- ing managers must first figure out what the question is before they can analyze it, address it, exploit it, or fixit. We have now established a general definition of a marketing strategy, reviewed the marketing con- cept, and considered some universal frameworks of possible strategies. In the next chapters we introduce a general framework for gaining a high-level per- spective, figuring out what the important questions are, and then formulating, implementing, and assess- inga marketing strategy. Situation Assessment Strategy Formation Implementation: Positioning and the Marketing Mix Documentation, ‘Assessment and ‘Adjustment An assessment of the various strategic plan- ning and management practices at firms that do these tasks well suggests that there are certain things that all effective approaches have in common. The framework we present integrates and organizes those shared elements. This model is not revolution- ary or complicated. It can be applied easily and often, and it should become second nature to successful mar- keters. There are four essential stages to this process (diagramed in Figure 1-4 1, Situation Assessment; 2. Strategy Formations 3. Implementation (Positioning and the Marketing Mix); and, 4, Documentation, Assessment, and Adjustment, ‘The remainder of this first section—Section I, Chapters 1-3 through I-6—presents that framework and links the process to the more specific tools and frameworks required to drill down into specific mar- keting situations and opportunities. FIGURE 1-4. The Strategic Marketing Analysis and Planning Process8 Section 1 + The Strategic Marketing Process Endnotes 1. Michael E. Porter “What is Strategy,” Harvard Business Review (November-December, 1996): 61-78: 64. 2. Peter Drucker, Management (New York: Harper & Row, 1973), 61. Emphasis original. 3. See Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980); and Michael Treacy and Fred Wiersema, The Discipline of Market Leaders: Choose your customers, narrow your focus, dominate your market (New York: Perseus Publishing, 1995). . Ibid. . H. Igor Ansoff, “Strategies for Diversification,” Harvard Business Review 35, no. 5 (September October, 1957): 113-124. ‘igure is from H. Igor Ansoff, “Strategies for Diversification,” Harvard Business Review 35, no. 5 (September-October, 1957): 113-124; figure is at page 114.2 Situation Assessment: The External Environment “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” Wave Grevzxy! Situation assessment involves monitoring the environment (external forces) while also scrutinizing the company itself (internal factors), including its core competencies, resources, and strategic directions. Understanding external and internal factors at a given time and, importantly, anticipating future events, trends, and conditions is critical to creat- ing and advancing effective strategies. Situation assessment can be divided into these two basic categories, external and internal, and can be further organized into the four Cs (Customers; Competition; Context, and the Company; Figure 2-1). External assessment also includes the analysis of the dynamics of the specific industry within which the firm operates and the understanding of some prominent and powerful regularities or “laws of marketing’; by laws of marketing we refer toto fixed patterns that are observed across sit- uations and across time in the marketplace, such as changes in the market as it evolves, the cost benefits of economies of scale, or the profitability advantages of market share. Before any situation analysis can be done effectively, itis crucial to carefully and strategically define the market the firm competes in or may choose to compete in—that is,to define what situation should be assessed. This chapter first explains that crucial step of market definition and then focuses on external situation assessment and those laws ‘of marketing strategy; the next chapter explains internal analysis of the situation within the company itself. FIGURE 2-1 Situation Assessment10 Section 1 * The Strategic Marketing Process MARKET DEFINITION Before assessing “the situation” it is necessary to first specify exactly what situation should be assessed. In what market does the firm participate? Who are its competi- tors? Who are its customers? How the market or the submarket as defined is critical to all marketing activi- ties? If we define the market too broadly, our market- ing activities lose focus. If we define the market too narrowly, we risk missing opportunities. Market defi- nition is the basis upon which we measure our partici- pation, or market share, Even the labeling of the mar- ket tends to define the boundaries of the firm’s efforts and its vision. Because all markets are constantly evolv- ing, market definition is also important to understand the dynamics in the market. Is the market growing or declining, and how do these dynamics relate to cus- tomer needs, wants, expectations, and requirements? FIGURE 2-2 Concentric Markets Product Form (Mid-size Sedans) Product Category (Automobiles) Generic Competition (Transportation) Budget Competition (Large asset expenditures) ‘Managers usually have a routine answer to the question “In what market does your business com pete?” Unfortunately, the familiar answer is often narrow, reflecting the target of the latest marketing mix rather than a strategic perspective. Often, it is backward looking—describing where the firm has been, not where it is headed. Irrespective of whether that answer is accurate or inaccurate, itis useful to periodically reexamine the boundaries of the firm's markets and to consider the ways those boundaries influence strategy. The market definition becomes the optics with which the firm determines who its customers are, who the competitors are, and a lot about the company itself. Thus, thorough and accu rate market definition is a critical precondition to strategic thinking and strategic planning, ‘Markets can be thought of as having concentric boundaries (Figure 2-2), beginning at the core withProduct form (small sedans, for example) and mov- ing outward to product category (cars), generic com- petition (transportation), and finally, at the broadest level, to budget competition (money spent on a car could be spent on a number of other things, from a vacation to home improvements). Traditional approaches to market definition have been “supply side” perspectives, often based on the industry or product (e.g., “railroads,” “automobiles’,“airlines"). These definitions are limiting; while they may help identify traditional competitors, they may obscure opportunities, potential competitors, and substi- tutes. A second, complimentary approach is to define markets from the customers’ perspectives —that is, the “demand side” perspective: Which consumers (segments and/or occasions) does the product serve? What needs does the product meet? Who else and what else (competitors; alternative products) could meet those same needs? The scope of a market definition should be flexible, adjusting to the purpose at hand. For some purposes, a relatively narrow market definition is appropriate: Who are our customers and competitors today? Other tasks require a broader view and may include nearby and potential customers or competi- tors: Who is likely to buy our existing offerings but is not currently buying them? For long-term planning and growth, the broadest outlook is appropriat Where can we find long-term growth and profitability? What needs do (or could) our strengths meet? What needs could they meet? What technologies might supplant our strengths? COMPETITIVE INTELLIGENCE “Rommel, you magnificent bastard! I read your book!” George S. Patton? Knowing the plans, intentions, and capabilities of ing and potential competitors is essential to understanding your own organization and to antici- Pating the future of the market. Understanding your competitors is necessarily imperfect. Even the most transparent firm with the most inept security has activities and plans that the competition cannot detect. There are several areas that are important to understand about competitors: corporate level mi sions and objectives; current marketing strategies; Chapter 2 * Situation Assessment: The External Environment 14 strengths and weaknesses along the value chain; current tactics; and the directions those missions, strategies, and tactics might take. Finally, one should also try to understand how competitors act and react, for example, will they grimly defend their Position, will they aggressively attack, or will they inconspicuously capture market share? Table 2-1 outlines these areas of inquiry, emphasizing the need to anticipate future strategies and tactics, The marketing strategist, in a real sense, “chooses” the competition, deciding where to direct strategic energies and scarce marketing resources, Early in the product lifecycle, you may choose to target alternative products or technologies; in a mature market, competition often comes in direct, same-product forms. For example, satellite television providers such as Sky in Europe and DirecTV in America focus a large share of their strategic efforts against alternative technologies (cable television, and terrestrial services). Later in the lifecycle, as satellite television matures, it is likely that these firms will compete more directly and more intensely against other satellite television services (such as UPC in Europe and Dish Network in the US). TABLE 2-1 Questions in Competitive Assessment ‘ eh es? Strategic Questions *+ Who are the competitors? * What are their corporate Missions, goals, and strategies? * What are their marketing strategies and objectives? ‘* What are their objectives (at each business leve)? ‘* What are the firm's operational strengths and weaknesses? * How badly do they want to play this game? Tactical Questions * What does their marketing plan look like? * What are their attribute-level product strengths and weaknesses? What are their product line strengths and weaknesses? * Can they execute? Do they have (or can they acquire) the skills? SSS12 Section 1 * ‘The Strategic Marketing Process Political/Regulatory Context Marketers operate in powerful, complex regulatory and legal environments that are shaped by political processes. These include tax codes, liability structures, operating rules, product-labeling regulations, purity and conformance requirements as well as government subsidies, and government procurement itself. Some firms also operate under nongovernment requlations and even informal quidelines (equipment rules in golf and informal bans on television advertising in the liquor industry) Economic Context Economic variables such as interest rates, unemployment rates, currency exchange rates, and inflation impact, marketing strategies in substantial and complex ways. Social/Cultural Context Social and cultural values, attitudes, norms, manners, and tastes all affect customer needs and thereby must be considered in developing marketing strategies and tactics. Demographics and lifestyles of the population (for example, age, education, and social class) are important components of the social/cultural context that change across time. Technological/Physical Context Technology, innovation, and technological progress impact strategies in many ways. New technologies can replace or become direct or indirect substitutes for a product form or product category. Technological changes can alter the way a product is distributed and/or consumed. The physical environment includes the natural environment, population density, physical infrastructure, and commercial infrastructure, CONTEXT ‘The general “context” or environment within which a firm, product, or brand operates has pervasive and complex effects on strategy and results. It is useful to begin with a succinct classification of the environ ‘mental factors that influence strategy. This classifica- tion imposes discipline on the assessment, stimulates brainstorming, and assures completeness. The mnemonic “PEST,” for Political/ Regulatory, Economic, Social/Cultural, and Technical/ Physical (see Table 2-2) is a good, comprehensive partitioning of the “big pic- ture” macro-level business environment. Changes in the general context are often the fundamental cause of problems and also the root of important opportu- nities. Failure to relate symptoms such as sales declines to underlying causes can blur strategic decision making, For example, declining sales due to an economic recession can be expected to rebound; declining sales tied to deep-seated changes in social values or fundamental technological changes related to demand may not rebound so quickly or so surely. CUSTOMER ASSESSMENT The tasks and considerations associated with customer assessment as well as segmentation (within strategy formulation), marketing research (at the cen- ter of positioning with the marketing mix) and, finally, strategic assessment (within assessment and adjustment) all emphasize keen attention to and deep understandings of customers and their responses to marketing actions (differentiated in Table 2-3 and highlighted in Figure 2-3). The perva- sive role of customer understandings and research in our strategic marketing framework is no accident. As we have argued, effective and efficient strategies begin with and are continuously aligned with a customer focus or “market orientation.” Organizing Customer-Focused Research Throughout this book we use “customers” to refer to both direct customer—that is, business-to-business customers, distributors, or retailers—and the ultimateChapter 2 * Situation Assessment: The External Environment 13 The broad, exploratory, and inductive study of Customers in general to identify a) trends in needs and demand, and (b) customer insights Focused research indentifying meaningful differences across customers/consumers with regard to needs and descriptive characteristics Focused research to pretest and hone tactics, including Price, promotions, advertising, new products or product modifications, and merchandising programs. Ongoing data collections tied to specific accounts, customers, or consumers that serves to tailor offerings (personalize or customize offerings) and direct investments and efforts toward the “right” customers and segments. Situation Customer Assessment Assessment g Strategy Segmentation { Formation and @ | Implementation 3 Marketing Mix E Development and 2 Testing 2 Customer - Relationship $ Management (CRM) 3 z q g | Assessment & Customer. and Adjustment Market-Oriented Metrics Focused and ongoing research collecting information (on custamer responses to the marketing mix, including measures of satisfaction, loyalty, profitabllty, and revenues. customer or consumer of a product. The term “con- sumers” is reserved for the ultimate user of a final product. We use customer assessment to refer to broad exploration for macro trends and customer insights. We reserve “marketing research” for issue- focused research that is directly and deliberately linked with specific marketing decisions and prob- lems. The ongoing collection of customer-related data for targeting and for assessment (Customer Relationship Management [CRM] systems) falls under marketing research. Others may use these labels differently—all of these activities do require gathering and processing information about cus- tomers—but customer assessment and marketing research have different priorities, each requires dif. ferent types of information, and each relies on differ- ent methods. Customer assessment, which is part of situation assessment, is the broadest consideration of the firm’s current customers, the competitors’ cus- tomers, and customers not yet in the market (poten- It draws on both secondary and pri- mary data to: identify emerging trends in the market, understand how products deliver value and how customers consume the products, and, especially, anticipate future patterns of customer needs and consumption. IDENTIFYING CUSTOMER TRENDS. Trends are broad-based changes in the marketplace that occur over time. Trends represent significant marketing opportunities that are grounded on substantive transformations such as changes in values, lifestyles, or technology, and are accessible to the “mainstream” or the majority of the market.> Monitoring the envi- ronment for trends can be highly quantitative and can include traditional, statistical methods for ‘econometric forecasting as well as emerging methods of “data mining.” Data mining involves the analysis of large databases using diverse analytic methods to identify patterns, associations, and emerging trends.14 Section 1 * The Strategic Marketing Process Context Industry FIGURE 2-3 Customer Knowledge throughout Strategic Marketing Management Research firms such as ACNeilsen, Information Resources Inc. (IRI), and Catalina Marketing and mega-retailers like Wal-Mart collect multi-terabytes of data across billions of transactions. These data create new opportunities for insights but also ever- increase the possibility that strategic marketers will be swamped by them. Searching for trends also en- tails scanning across media and across settings. That broad and subjective search for trends is sometimes called “trendspotting” or “coolhunting”’” it should be wide ranging, inclusive, and unstructured. Uncertain trends and indefinite patterns of future customer needs can be included in the factors that define “possible futures” in scenario planning (dis- cussed in more detail below). DISCOVERING CUSTOMER INSIGHTS. Gary Hamel and C. K. Prahalad have argued that “to realize the potential that core competencies create, a company must also have the imagination to envision markets, that do not yet exist and the ability to stake them out ahead of the completion.” The realization of excep- tional returns often means disregarding mature, competitive markets for truly new ones. Finding markets that do “not yet exist” often begins with a “customer insight.” A customer insight is a penetrat- ing, discerning understanding of customer needs, the ways that customers derive value from products, and the ways customers might derive value from prod: ucts; it is an insight that unlocks an opportunity.® Customer insights should be fresh, relevant, endur- ing, and inspiring.” “If I had asked people what they wanted, they would have said faster horses,” Henry Ford once said.® Identifying customer insights requires more than painstakingly asking customers what they know or think they want—insights often necessitatecustomer intimacy with an eye toward discovering solutions customers could not have envisioned or articulated. Customer assessment includes “deep dives” required to understand the customers’ per- spective and to identify unmet and even unrecog- nized customer needs. Toward that end, customer assessment draws on. qualitative methods, including depth interviews, anthropological methods such as ethnographies, and “total immersion sessions.”” ‘These are inductive research methods—they let observations shape conclusions, rather than impos- ing preconceived structure on the research or the findings. These methods also produce rich but not very generalizable findings—the results are specific ‘to the customers observed. INDUSTRY ANALYSIS An analysis of the industry or industries within which the firm operates is a more specific “micro” perspective embedded within the broader, “macro” setting of situation assessment and the four Cs, There are five forces that drive industry analysis (Figure 2-4); the bargaining power of suppliers and the bargaining power of customers, the threat of sub- stitute products, and the threat of new entrants, The fifth force that influences industry competitiveness is the intensity of the rivalry among existing competitors in the industry. The five forces together influence industry profitability. FIGURE 2-4. Five Forces Industry Analysis ‘Chapter 2 * Situation Assessment: The External Environment 15 LAWS OF STRATEGIC MARKETING Physicists know that an object will stay at rest or con- tinue at a constant velocity unless acted upon by an external, unbalanced force and that the total energy in a system remains constant over time. These ob- served regularities are the “laws of physics” (Newton’s First Law of Motion and the Law of Conservation of Energy, respectively); they're “truths” that describe underlying realities that do not change.” In strategic marketing there are similar “truths"—the “laws of marketing strategy,” so to speak—that describe es- sential regularities in the way things work and the way things relate. These generalizations include: the product lifecycle (product-market evolution), scale effects (cost leverage), and market share effects (share leverage). Managers may choose a strategy that builds directly on one of these generalizations, or they may choose a strategy that is less directly tied toa given generalization, but they can’t change the re- ality. For example, Toyota builds its strategy on the benefits of scale effects; they produce more cars than anyone else in the world based on a set of common core processes. Although another car company, such as Porsche, may choose to forego scale to compete on high performance using small-scale production, it can't change the reality of scale effects. Product Lifecycle All products and all markets are in a constant state of, evolution. Some evolve in fairly smooth and ex- pected patterns while others evolve less predictably, such as when “disruptive technologies” cause unex- pected, sharp declines. Nevertheless, the biological analogy of birth, growth, maturity, and decline is generally reliable, The S-shape of the product lifecycle (see Figure 2-5) describes this market evolution—the vertical axis is the percent of the total market and the horizontal axis is time; but distinct lifecycles exist for industries, products, and product forms. ‘Markets behave differently at different stages: competitors compete differently, sales are more prof- itable or less profitable, customers buy differently, and different customers buy. Different strategies and tac- tics work better than others at various stages in the16 Section 1 * The Strategic Marketing Process FIGURE 2-5 The Product Lifecycle product lifecycle, Most major strategic gains and losses occur in the growth phase of a market. Share gains while all competitors are growing can fre- quently be achieved without significant competitive reaction. Share building in mature markets is tougher and frequently results in rapid competitive reaction, often in the form of price competition. ‘Those who have achieved lower costs have an advantage at this stage. Thus, understanding where a product and an industry are in the lifecycle facilitates better predic- tion of competitor actions, of customer responses, and of sales trends and will inform considerations about what strategies are typically effective. Recognizing when the market is evolving from one “stage” to another—that is, anticipating “inflection” points—can create a significant advantage; missing such a shift can be a substantial disadvantage. Scale Effects/Cost Leverage Cost leverage can be achieved by both scale and experience. Scale is related to volume and time. It is axiomatic that as volume in a given time period in- creases, fixed expenses as a percentage of sales de~ cline. This effect is referred to as economies of scale. Similarly, the more units a company produces of anything, the lower per-unit costs will be. With each doubling of accumulated volume, costs decline by a determinable percentage. That is, experience effects are generally expressed as a percentage (e.g. 10%, 15%, 179) decline in costs realized with every dou- Profits bling of units produced (i.e., moving from 1 to 2, 2 to 4,4 to 8. . . 16 million to 3.2 million, etc.); that re- lationship between unit costs and volume produced forms the experience effects curve, shown in Figure 2-6. This percentage decline varies from industry to in- dustry, but, regardless of the industry, significant cost advantage can be achieved by the competitor who moves down the experience curve faster. We can visu- alize that advantage as the “distance” between one competitor's position on the experience curve and another's. Too often, any reduction in cost as units-pro- duced increases is mislabeled as an “economy of scale.” In fact, at least four distinct sets of forces with differing implications for strategy can drive scale ef- Cumulative Production (units) FIGURE 2-6 Experience CurveLeaming Curve Effects or Experience Curve Effects efficiently. Economies Diseconomies of Scale Economies of Scope Synergies Network Effects Virtuous Circles exacerbating problems, fects: learning- or experience-curve effects, economies and diseconomies of scale, economies of Scope and synergies, and network effects and virtu- us circles (these distinct sources of benefits from scale are clarified in Table 2-4), These different sources of scale effects are important in that they have different bases. They respond differently to ‘Managerial actions, and they are more or less endur- ing. For example, learning curve effects can con- tribute to both lower unit costs and higher quality (especially reliability and conformance quality), They endure across time, and can be increased by en- hancing institutional learning and knowledge reten- tion. Economies of scale, on the other hand, lower Costs but do not relate to quality, are less enduring, and are increased by one thing: higher units of pro. duction in a given time period. Market Share Effects/Share Leverage One of the best known observations in the strategy literature is that firms with higher market share Chapter 2 * Situation Assessment: The External Environment 17 The effects of the organization, its suppliers, and its employees literally learning— becoming more knowledgeable and more skilled and thereby doing things more The lowering of per-unit costs as the number of units produced increases via the spreading of fixed costs across units Diseconomies of scale are the realization of inefficiencies, that is, of increases in unit costs as production increases. Zhe lowering of unit costs realized when producing more than one product lowers the cost of production of all products, Synergies are two (or more) inputs or activities (“factors”) coming together or acting together to result in output that is greater than the sum of the two factors taken separately (i.e, (141) > 2) When a product provides more value to each customer when more overall customers owm it or use it Systems of factors that provide feedback on themselves. For example, the more People buy a product, the more retailers will want to stock the product, leading to higher sales. A “vicious circle” is the Opposite—the feedback of negative factors tend to be more profitable. This share-profitability association is real it has been replicated empirically ‘many times in well known pooled-business data, such as the “PIMS” data (the Profit Impact of Marketing Strategy database! ), The share-profitability asso- ciation is also logical; market share will correlate with advantages of scale, discussed above. Scale generally leads to lower unit costs, and lower unit costs should lead to higher profits (firms with lower unit costs can lower price and gain sales vol- ume or maintain price and realize higher per un margins). Nevertheless, shaping strategy around market share ignores the ambiguity in the share- ROI findings: The causal direction of the relation ship is unclear and the relationship is undoubtedly complex. For example, many other factors such as product quality and managerial skill should lead to both market share and profitability, rendering mar- ket share a dubious starting point for strategy. Still, share building activities in the market growth Phase do pay off in superior competitive position during maturity.18 Section 1 * The Strategic Marketing Process Summary Marketing strategy involves developing an effective matket- ing mix for a given marketplace reality and then adapting that mix to changes in those environmental forces Therefore, marketing strategy demands a thorough analysis of the context, the competition, and the customers. If mar- keting strategy is marketing mix evolution in response to the environment, really good marketing strategy is marketing mix evolution in anticipation of changes in those forces— that is, anticipating future configurations of the forces in the environment and developing effective marketing mixes in Endnotes 1. Wess Moss, Make More, Worry Less (Upper Saddle River, NJ FT Press 2008), 160, 2. As portrayed by George C. Scott in Franklin J. Schaffner (Producer), Francis Ford Coppola and Edmund H. North (screenplay), Patton [Motion Picture], USA, 20" Century Fox, 1970. 3. Irma Zand), “How to Separate Trends from Fads,” Brandweek 41, no, 41 (23 October, 2000): 30-35. 4. Jiawei Han and Micheline Kamber have defined data mining as “uncovering interesting data patterns hidden in large data sets” (page 1) and have noted that, in the past several years, available data have grown “irom terabytes to petabytes,” in Data Mining: Concepts and Techniques, 2 ed. (San Prancisco: Morgan Kaufmann Publishers, 2006). 5. Peter A. Gloor and Scott M. Cooper, Coolhunting: ‘Chasing Down the Next Big Thing (AMACOM, a di- vision of American Management Association, 2007); Malcolm Gladwell, “The Coolhunt” The New Yorker (March 17, 1997): 78-88, advance of those future realities (which underscores Wayne Gretzky's notion of skating to “where the puck is going to be”). This chapter has organized and explained tools and frameworks for analyzing the environment—the external situation—and anticipating where it may be headed. The next chapter deals with analyzing the internal situation—that is, analyzing the company itself, including its missions and visions, strengths and weaknesses, and competitive advantages. 6. David Taylor, “Drilling for Nuggets: How to use in- sight to inspire innovation,” Brand Strategy (March 24,2000), 7. Ibid. 8. Quoted in James G. Barnes, Build Your Customer ‘Strategy (New York: John Wiley and Sons, 2006), 106 9. See, for example, Research, “Total Immersion: Researchers can be wary of them, but businesses seem to love them. Essential Research's Stuart Knapman investigates customer immersion sessions and clients tell us how they have made them work,’ June, 2008, \wwwitesearch-live.com/features/total-immersion/ 2002001 article. Last accessed June 19, 2010 10. See, for example, Steven Holzner, Physics for Dummies (Hoboken, NJ: Wiley Publishing, 2006). 11. See Paul Fartis, Michael J. Moore, and Robert Dow Buzzell, The Profit Impact of Marketing Strategy Project: Retrospect and Prospects (New York: ‘Cambridge University Press, 2004)3 Situation Assessment: The Company “Knowing others is intelligence; knowing yourself is true wisdom. Mastering others is strength; mastering yourself is true power” Lao Tzu, circa Sixt Century BCE! In the simplest terms, marketing strategy is about matching external opportunities with internal strengths and competitive advantages. The previous chapter developed ideas about analyzing the external situation, the environment within which the firm and the strategy compete. The obvious complement to that external analysis is the development of a thorough and honest understanding of the firm itself. Strategies and tactics must be developed within an understanding of the overarching organizational context and, eventually, should contribute to the overall mission and goals. Company assessment in- cludes four related considerations: + Using Guidance Statements: Missions and Values; + Assessing Past Performance and Current Strategy; + Establishing Preliminary Objectives and Targets; and *+ Identifying Strategic Gap(s) or Planning Gaps. USING GUIDANCE STATEMENTS: MISSIONS AND VISIONS Corporations have unique values and cultures, as well as distinctive resources and competitive advantages; any marketing strategy is supported by and constrained by those parameters. Most firms and business units begin their strategy formulation process with some sort of guidance statement—sometimes called a mission or a vision statement. Some organizations have both. Most corporations have a mission that es- es purpose and values that shape their vision. Vision statements, which are sometimes included within mission statements, are the forward-looking part of the 1920 Section 1 * ‘The Strategic Marketing Process mission—"“the desired future state of the organiza- tion”? Mission/vision statements clarify the firm’s identity and purpose and should include at least four elements: + The core purpose of the company; + The core values of the company; * The visionary goal (as noted, vision is some- times pulled out on its own); and + A vivid description of the envisioned future (specification of goals). Mission and vision statements, therefore, should be important documentation of the higher-level corpo- rate context within which the product and business unit operate and to which they should contribute. Unfortunately, mission statements often fail to clar- iffy much at all, as one critic observed: “The idea—of boiling down a com- pany’s essential purpose and character into a short paragraph which can be in- stantly understood by shareholders, workers and customers—sounds like a useful one. . . . But what emerges on to page one of the annual statement is all too often the worst kind of committee drafting, topped and tailed by syntacti- cally-challenged PR copywriters. ...The typical British mission statement crams so many power-words into one sentence as to be at best inelegant, at worst virtu- ally unreadable.”* Nevertheless, despite common poor execution, mis- sion and vision statements should be the primary stipulations and records of what the organization is, why it exists, what its values are, how it does business, and what it intends to become. It isin the mission and vision that the company clarifies its goals. The words goal and objective are synonyms in the English lan- guage, but in the strategic management literature they are used to distinguish desired results and conditions that are longer-term and general (goals) from desired results or conditions that are short-term and specific (objectives). Goals are specified in mission and vision statements; objectives, discussed below, are related to marketing plans, to specified time periods, and to specific marketing mixes. USING GUIDANCE STATEMENTS: CORPORATE SOCIAL RESPONSIBILITY As noted, marketing strategies should be anchored in overarching corporate strategies which themselves are tied to and are intended to advance corporate-level missions and visions. Corporate missions and visions ‘may or may not embrace purposes and goals beyond shareholder value and means to that end, but it is nevertheless important that marketing strategists at least consider the broader issues of corporate social responsibility (CSR). Even if the executive and the firm reject broader obligations, that rejection should be deliberate and explicit, especially, given contem- porary social and regulatory scrutiny of corporate behavior. Corporate social responsibility has been defined broadly as involving a firm taking “actions that appear to further some social good, beyond the interests of the firm and that which is required by law” or as concerns about how businesses should deal with social and public policy matters.® Corporate Social Responsibility subsumes concerns for social and environmental outcomes. The term sustainabil- ity—“meeting the needs of the present without com- promising the ability of future generations to meet their own needs”’—also applies to both social and environmental matters but is generally understood to focus on sustainable treatment of the natural envi- ronment (or the “planet”). Attitudes about the appropriate role of busi- ness in pursuing social and environmental goals have changed across time, but some broad frameworks may be valuable across trends in framing how firms, marketing strategies, and marketing strategists inte- grate broader social and public policy concerns into strategy formation and day-to-day decis ‘Those include “doing well by doing good,” the idea that acting in a socially and environmentally respon- sible way may also enhance profitability, stakeholder theory, the triple bottom line, or the three pillars framework. CHANGING SENTIMENT TOWARD CORPORATE SOCIAL RESPONSIBILITY. Henry Ford, the indus- ist and founder of Ford Motor Company, was once sued by his shareholders for putting expansive employment ahead of dividends to shareholders.Ford was an advocate of and even created, within the Ford Motor Company, a “Sociology Department” He had justified foregoing a dividend payment in order “to employ still more men; to spread the benefits of thisindividual system to the greatest number, to help them build up their lives and their homes.” The Michigan Supreme Court ruled that “A business or- ganization is organized and carried on primarily for the profit of the shareholders. Directors cannot shape and conduct the affairs of a corporation for the mere incidental benefit of shareholders and for the primary purpose of benefiting others.” Later in the twentieth century, Henry Ford Il, the founder's grandson and Ford chairman at the time, in apparent appreciation of the Court’s ruling against his grandfather, asserted that “The corpora~ tion is not an all purpose mechanism. It isa sophi cated instrument designed to serve the economic needs of society and is not well equipped to serve so- cial needs unrelated to its business operations.” More recently, Henry I’s own grandson, William Ford Jr. argued “I believe very strongly that corporations can and should be major forces for resolving social and environmental concerns in the twenty-first century. Not only do I think this is the right thing to do, I be- lieve it is the best thing to do to achieve profitable, sustainable growth.”* Clearly, attitudes toward corporate social re- sponsibility and the scope of “legitimate” commer- «ial interests have evolved and continue to evolve. ‘The Ford family’s changing views parallel broader sentiments, including the notion widely held today that the best approach to corporate social and envi- ronmental responsibility may be to recognize that doing good—acting in socially responsible and envi- tonmentally sustainable ways—can also lead to doing well (realizing profits and sustainable growth). DOING WELL BY DOING GOOD. This means searching for opportunities to do business in socially and environmentally responsible ways that also en- hance profitability and shareholder value, An impor- tant point is that shareholder value may not be a short-term outcome, although equity markets may act as if it were. A longer-term perspective on share- holder value is more likely to recognize the merit, in tangible terms of shareholder value and profits or Chapter 3 * Situation Assessment: The Company 21 doing “well,” of a broad perspective on corporate re- sponsibility or doing “good.” There is evidence that fair treatment of workers, attention to the commu- nity and society, and producing “green” products all contribute to increased profitability.” Bob Willard and John Elkington have organized the various pos- sible benefits of social and environmental responsi- bility into seven categories: 1, Easier hiring of the best talent; 2. Higher retention of top talent; 3. Increasing employee productivity; 4. Reduced expenses in manufacturing; 5, Reduced expenses at commercial sites; 6. Increased revenue/market share; and 7. Reduced risk, easier financing.'° STAKEHOLDER THEORY. Milton Freedman fa- mously said “there is one and only one social responsi- bility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, en- ‘gages in open and free competition without deception or fraud”—he later restated that sentiment in a New York Times article titled “The Social Responsibility of Business Is to Increase Its Profits.”"' Freedman’s words have become emblematic of the extreme position that businesses need consider no consequences of their ac- tions beyond maximizing shareholder value, although his book and essay are more nuanced, asserting that return maximization is moral because profits and the accompanying jobs and well-suited products are valuable contributions to society in themselves and be- cause maximizing returns on assets is itself a moral obligation (to the equity holders). In contrast to Freedman’s narrow “shareholder” centered view of the firm's obligations and legitimate concerns, “stakeholder theory” broadens the under- standing of the firm’s legitimate audiences and re- sponsibilities. It asks two questions: What is the firm's purpose? And what is the firm's obligations to its stake- holders?" Stakeholders are various groups of people or organizations that have an interest (a““stake”) in the actions and the success of the firm, Stakeholders can be internal (employees, managers, debt holders, and shareholders) or external (including the community and society, regulators, customers, vendors and22 Section 1 * The Strategic Marketing Process suppliers), Stakeholders vary in their interest in the ‘outcomes of the firm's operations and in its success as well as in their power or influence over the firms ac- tions. The fundamental premise of stakeholder analy- sis is not a proposal, but, rather, a recognition that firms have always had broader groups of interested parties than just shareholders, and that those stake holders have varying degrees of legitimate claims on the capabilities and resources of the firm and legiti- mate power to influence the firm's missions, visions, strategies, and actions. Stakeholder theory also asserts that firms will benefit—do well—by taking into ac- count the interests of a broader array of stakeholders. THE TRIPLE BOTTOM LINE. Profits, people, and the planet (the “three pillars”) or economic, social, and environmental concerns have been integrated into “the triple bottom line” (“3BL” or “TBL;” Figure 3-1). This framework highlights three clusters of legitimate concerns for any business, and it is certainly useful for sorting out and clarifying otherwise disorganized con- siderations and stakeholders. As originally proposed, the triple bottom line was proposed as literally imply- ing multiple reports: Just as firms generate financial statements, the triple bottom line asserted that they should also produce environmental and social impact “statements,” Challenges with this framework include the development of valid metrics for nonfinancial outcomes—social and environmental impact met- rics—as well as the question of how performance against those diverse metrics will be motivated and regulated. That is, how will social and environmental performance be measured, and what will happen if the firm performs well or poorly on those measures? ASSESSING PAST PERFORMANCE AND CURRENT STRATEGY The strategy formulation process must be grounded ina thorough analysis of past performance. Which ob- jectives over the most recent period have been met? Which ones have been missed? Why? What are the firm’s current strengths and weaknesses? Challenge the present strategy, assessing its current competitive- ness, and looking for areas of leverage are essential in developing the next strategies. Several factors are inte- grated into assessment of past performance. One is re- view of ongoing financial and operating performance; another is the review of data from marketing informa- tion systems; a third category of factors involves the understanding of the firm’s existing competitive ad- vantages (and disadvantages) vis-a-vis the competi- ‘n, Financial and operating results include firm, business-unit, product-level and account-level data on prices realized and revenues, margins, and profitabil- ity as well as operating results such as units shipped, ea FIGURE 3-1 The Triple Bottom Line!?inventory, and defects/reworks. Marketing in- ‘ation systems collect data on an ongoing basis re- ing such customer-level measures as customer ction, customer profitability, complaints, and ‘customer loyalty. Satisfaction, profitability, and loyalty “ate essential markers of quality front the customers’ _perspectiveand have been shown to mediate the effects ‘of quality—of both goods and services—on corporate “outcomes such as profitability and stock p: Marketing information system data address the ques- tion “How well are we doing in our customers’ eyes?” and are invaluable in troubleshooting malfunctions and failures, gauging the effects of various product at- tributes and marketing initiatives, and setting cogent, ‘motivating objectives for the organization, Understanding the company’s strengths and ‘weaknesses, or “competitive advantages,” is another crucial company-related consideration in creating and maintaining effective strategies. The firm must know the competition. That is, strengths and weak- nesses are only strengths or weaknesses in compari- son to the competition, those assessments require valuation of competitors’ strengths, too. Identifying the company’s strengths, weaknesses, and competi tive advantages and matching them with opportuni ties is the essence of strategy formation, the next sage of the planning model described below. ESTABLISHING PRELIMINARY OBJECTIVES AND TARGETS A marketing strategy without specific objectives is like a ship without a compass. It can sail, but it can- not be sure whether it sails in the right direction or [Tasue 3-1. SMART Marketing lan Objectives _ SMART Description Chapter 3 * Situation Assessment: The Company 23 whether it ever reaches its destination. Having clear marketing objectives enables a company to: (1) focus and organize its efforts; (2) direct day-to-day activities and achieve consistency in decisions; (3) motivate people to strive for excellence; and, most impor- tantly, (4) provide a basis for assessment and control. A simple mnemonic for weighing effective and useful marketing objectives is “SMART. which denotes that objectives should be: Specific, Measureable, Achievable, Relevant, and Time-specific. In order to facilitate assessment and adjustment, objectives should have these five qualities (Table 3-1). ‘Two distinct kinds of objectives are usefull and common in developing marketing strategies, marketing- related objectives, and financial objectives, Some typical marketing objectives, which are often measured both at the market and the segment level, include * Sales volume and market share (in units and/or dollars); + Customer readiness variables (for example, awareness, interest); * Customer behaviors and attitudes (satisfaction, brand attitudes, repeat-purchase intention, rec- ‘ommendations/word-of- mouth, complaints); and * Accounts and distribution (retailers stocking, SKUs or facings, business-to-business customer accounts opened, approved-vendor lists). These market-related objectives highlight the need, discussed earlier, to first clearly demarcate what mar- ket is being targeted and measured. Metrics like mar- ket share and customer satisfaction are meaningless unless the market to be shared and the customers to Example Specific What exactly is to be achieved? Measureable What quantitative or quantifiable methods and metrics wil define the objective? Achievable Is the objective realistic and demanding/challenging? Relevant Js the objective under the control of the people or unit for whom it is established? Timed or When should these objectives be achieved Time-Specific Dollar sales to new accounts in Italy Dollars of shipped merchandise as reported to management by logistics on report X¥Z123 20% increase over last year and the firm has an enhanced product offering This sales team for the new enhanced line alls on new accounts in Italy Calendar-year 2010 and when will these objectives be assessed?24 Section 1 * The Strategic Marketing Process be satisfied have first been spelled out clearly. Typical financial objectives include + Profits (overall profits, contribution, margins, and contributions by units, products, and lines) and return-on-investment; * Costs of Marketing (sales costs; costs of goods sold); + Inventory and logistics (inventory levels and turns, fulfillment time, stock-outs).. In setting objectives there is an important ten- sion between investing in long-term strengths—such as in innovation and new product development, building customer loyalty, and the like—and “harvesting” short- term profits. Whether or not the strategy isto invest or harvest, that decision must be made deliberately and in the context of a clear understanding of the business model and of consumer responses (for instance, cus- tomer stickiness, customer profitability (customer life- time value], and purchase rates). IDENTIFYING STRATEGIC GAP(S) OR PLANNING GAPS One way to think about strategy is to think about the gap that exists between where we areand where we want to be. Figure 3-2 depicts what has often been referred to as the strategic gap or the planning gap. The horizontal axis represents time, divided into the past and the future. The vertical axis represents performance. As noted above, there are two types of performance meas- ures and objectives that are important to marketing strategists: market performance and financial perform- ance, Market performance is often measured as sales or market share. Financial performance usually relates to profitability or return on something, such as sales, as- sets, or capital Figure 3-2 is divided into the past and the future, where past performance is past sales or share or past profitability (return). Going into the future we have our marketing and financial objectives (generally heading in an upward direction). Below the objectives we have a momentum forecast of our current strategy; this is where our current course (strategy and programs) will take us if we just keep doing what we have been doing. If there is a difference between the objectives and the mo- mentum of the present strategy, we have a planning or strategic gap. The bigger the gap is, the more strategic change is needed in order to reach the objectives. Closing the Gap Let us think about the situation in which the organ- ization has a sales gap—that is, the planning gap in Figure 3-2 is between the sales objectives and the mo- mentum of the present strategy with respect to sales. What are the possible ways to close such a sales gap? One way to think about this would be based on the relation- ship with existing company offerings and existing mar- kets, as discussed earlier in Chapter 2 as Product/Market Paning Gap Momentum of Present Strategies. FIGURE 3-2. The Planning or Strategic GapStrategies. As discussed above, there are a lim- set of possible “growth strategies.” At any given a firm is selling its existing products to its exist- g markets. Logically, growth (closing the gap) can come from selling more of the firm’s existing products tots existing markets (market penetration); selling isting products to new markets (market develop- ‘ment); selling new products to existing markets (prod development); or selling new products to new thes (diversification). One other possible way to sales would be to forward integrate—an op- tion open to manufacturers but not to retailers as they already as forward integrated as possible. If the gap is a profitability gap, that is, if the gap sen objectives and momentum in Figure 3-2 is een profitability objectives and the momentum ‘of profits, then another set of generic strategies is ed. These include the following: 1. Increasing the yield, ‘This can be done, per- haps, by improving the sales mix, increasing the price, or reducing distribution margins. 2. Reducing costs. This can be achieved through economies of scale, better capacity utilization, Chapter 3 * Situation Assessment: The Company 25 systems and process efficiencies, or out-and- out cost cutting. 3. Backward Integration. This implies undertak- ing value-added activities that had been out- sourced to suppliers; that is, making or doing things “in house” that had been purchased. “Backward” refers to integrating toward the source in the channels of distribution. 4. Reducing Investment Intensity. This can be achieved perhaps by reducing inventories, fac- toring accounts receivable, or the sale and lease back of property, plant, and equipment. 5. Selectivity and Focus. Abandoning segments we can't win in or rationalizing the product line or the channels of distribution (“rational- izing” generally refers to narrowing the scope by concentrating on the most profitable and effective and cutting inefficient or ineffective products or channels). Figure 3-3 shows these generic profitability- improvement strategies. There are ten generic strate- gies. In other words, ata high level there isa finite set of, available strategies—some relate to sales or marketing Improve Sales Mix Increase Price Reduce Distribution Margins Economies of Scale Capacity Utilization ‘Systems/Process Efficiency Cost Cutting Segment Rationalization Product Line Rationalization Distribution Rationalization FIGURE 3-3 Alternatives for Improving Profitability26 Section 1 + ‘The Strategic Marketing Process improvement and some relate to profitability im- provement. A company might employ several of these strategies simultaneously. For example, we might be pursuing a market penetration and product development strategy along with cost reduction at the same time. INTEGRATING SITUATION ASSESSMENT Situation assessments should be wide-ranging and descriptive in the sense that these assessments seek to understand what is going on in the environment and within the firm. But, situation assessments are also analytical in the sense that they assess, inte- grate, and organize vast and potentially overwhelm- ing data into organized information that can be used to drive decision making and action. Figure 3-4 emphasizes the need to sort vast amounts of messy data into organized, useable information which then supports decision making and strategic action. Situation assessment establishes the foundations for planning and strategy formulation. There are at least a couple of straightforward tools for systemati- cally managing and integrating situation assessment and to structure the product of that assessment in ways that facilitate strategic thinking, First, there is FIGURE 3-4. From Data to Information to Decisions to Action a pervasive “relevance test” that should be applied to all assessments. Second, scenario analysis is an invaluable tool for integrating situation assessment and uncertain possible future trends and events into strategic planning. RELEVANCE TEST. It is worthwhile to highlight the fact that not everything in the environment is mean- ingful, at least not to every decision or strategy. To avoid “paralysis by analysis,” the first job of the strategist is to cull through the tremendous amount ‘of noise to focus on substantive and important infor- mation, Because every situation is complex and there are overwhelming amounts of data that could be considered, itis important at the outset to emphasize a “relevance test” before assessing the situation. This is the “so what?” of strategic marketing analysis. The manager must constantly ask: “Is this important and relevant to this firm and to this strategy? In fact, the first job of a manager is to filter the available data down to useable information. Time, energy, and at- tention should be reserved for information that di- rectly affects strategy and ties to decisions. SCENARIO ANALYSIS. An effective tool for bring- ing together situation assessment and for planning for future uncertainties is “scenario analysis.” When Coca-Cola introduced “New Coke” in the mid- 1980s, public response was mixed. Contrary to leg- end, sales actually went up, but there was also a back- lash from consumers who demanded their old Coke back. Coca-Cola responded quickly by reintroducing, the old formula as “Coca-Cola Classic” while main- taining New Coke. In the end, Coca-Cola (across both products) had more shelf space in grocers and higher overall sales. Donald Keogh, president of Coca-Cola at the time, said “Some critics will say Coca-Cola made a marketing mistake. Some cynics will say that we planned the whole thing, The truth is we are not that dumb, and we are not that smart?"* He meant that the company was not smart enough to foresee that introducing New Coke and having cus- tomers reject it and then having to reintroduce Old Coke (Classic) was the way to gain market share. He also meant the company was not so dumb as to launch New Coke without a contingency plan to fall back on in the event it wasn’t accepted. Coca-ColaSituation ‘Assessment Strategy Formation Inplementation: Positioning anc ‘the Markating Mix Documentation, Assessment and ‘Adjustment had planned for uncertainty by thinking through responses to multiple “possible futures” or “scenarios” Scenario analysis is essentially an elaborate “if. . . then” planning tool—maybe more accurately de- scribed as an “if... and if... and if. ..,then...” Endnotes 1. Lao Tou, (trans, Stephen Mitchell) Tao Te Ching: An illustrated journey (London: Frances Lincoln Limited, 1999), 34 2, Michael E. Raynor, “That vision thing: Do we need it?” Long Range Planning 31, no. 3 (June 1998): 368-376 (definition is from page 371), 3. James C. Collins and Jerry I, Porras, “Building your company’s vision,” Harvard Business Review (September-October, 1996): 65-77. 4. Martin Vander Weyer, “Mission Improvable: For Cliched Syntactically-Challenged Copy Mission Chapter 3 * Situation Assessment: The Company 27 ‘Note 1: Matkat Dfiton Noto 2 Cont (PEST) Note Cursemor Assosoment— “ones ano iraign's Note 4: Consumer nd (rganzatonat Buyer Bchawer Noi: Compete Analysio— Compete Ineigence Nolo: Company Assessment ‘Micsions, and Vise Noto 7° Company Assossmont— The value Chain Noto 8: Industry Anais Note 9: Product eco Note 10: Experience Curve Eels cn Cost Reducton Note 11: Economies ad Diseconomigs of Sale Note 12: Economies of Scope! Syorgioe and Vituous Chaos Noo 18: Maret Share fects Noo 14: Seonaro Anas Linking Situation Assessment to Relevant Tools and Frameworks tool, because it considers multiple factors evolving to shape possible futures or scenarios. It is a powerful method for formalizing situation assessment, for clarifying possible futures, and for preparing the firm’s preferred responses to those possibilities. Statements Are Hard to Beat,” Management Today (September 1994): 66-68. 5. Abagail McWilliams and, Donald Siegel, “Corporate Social Responsibility: A Theory of the Firm Perspective,” Academy of Management Review 26, no. 1, (January 2001): 117-127 (definition is from age 117); also see A. McWilliams, D. Siegel, and P. Wright, “Corporate Social Responsibility: Strategic Implications,’ fournal of Management Studies 43, n0. 1 (January 2006): 1-188 Section 1 * The Strategic Marketing Process 5. Duane Windsor, “Corporate Social Responsibility Three Key Approaches,” Journal of Management Studies 43, no. 1 (January 2006): 93-114. . GH, Brundtland, Qur Common Future (Brussels ‘World Commission on Environment and Develop- ment, 1987), 43 (published as annex to General Assembly document 4/42/427). ‘These quotes, this reasoning, and the juxtaposition- ing of the latter two quotes (Henry I's and William Jr's), are found in Subhabrata Bobby Banerjee, Corporate Social Responsibility: The Good, the Bad and the Ugly (Northampton, MA: Edward Elgar Publishing, 2007), 13, 51. Banerjee cites Henry Ford (1919) for the first quote, Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668 (Mich, 1919), for the second (to the court), Regan, 1998 for the second and Ford 2000 for the third. ). Oliver Falck and Stephan Heblich, “Corporate Social Responsibility: Doing Well by Doing Good,” Business Horizons 50, no. 3 (May-June, 2007)), 247-254; A, Hillman and G. Keim, “Shareholder Value, Stakeholder Management and Social Issues: What's the Bottom Line?” Strategic Management Journal 22, no, 2 (February 2001): 125-139; and H. Ozeelik, N. Langton, and H. Aldrich, “Doing Well and Doing Good: The Relationship between Leadership Practices that Facilitate a Positive Emotional Climate 10. LL. 12. 13. M4, and Organizational Performance,” Journal of ‘Managerial Psychology 23, no. 2 (2008): 186-203. Bob Willard and John Elkington, The Sustainability, ‘Advantage: Seven Business Case Benefits of a Triple Bottom Line (Gabriola Island, BC, Canada: New Society Publishers). Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,” The New York Times ‘Magazine (September 13, 1970): 32-33, 122-126. Freeman, R. Edward, Strategic management : A stakeholder approach (Boston: Pitman 1984); see also T. Donaldson and L. Preston, “The Stakeholder ‘Theory of the Modern Corporation: Concepts, evi- dence and implications,” Academy of Management Review 20, no. 1, (January 1995): 65-91; and R. Edward Freeman, Andrew C. Wicks, Bidhan Parmar, “Stakeholder ‘Theory and “The Corporate Objective Revisited?” Organization Science 15, no. 3 (May-June, 2004): 364-369. Rodrigo Lozano, “Envisioning sustainability three- dimensionally” Journal of Gleaner Production 16,n0. 17 (November 2008): 1838-1846 (this figure is adapted from Figure 1, page 1839). Mark Pendergeast, For God, country and Coca-Cola: ‘The definitive history ofthe great American soft drink and the company that makes it, nd edition (New York: Basic Books, 2000), 358,4 Strategy Formation “And strategy must start with a different value proposition. A strategy delineates a territory in which ‘a. company seeks to be unique.” Micuaet Porter! Strategy formation is the heart of the strategic marketing process. The overarching ob- jective is to meet some specific needs of some specific customers better than the competition within enduring, profitable relationships. There are four substeps within strategy formu- lation, organized in Figure 4-1 + Identifying competitive advantages. What things does the firm do or could it do better than the competition and at a profit? + Segmenting the Market. What are the important differences across customers with regard to their needs and their responses to the marketing mix? How attractive are the various segments? * Targeting. Which specific customers and needs (segments) will be served utiliz- ing which specific competitive advantages? How well do segments fit or match ‘with the firm's competitive advantages?; and + Positioning. What is the unique position in the marketplace that the firm will claim? How will the firm claim that position? Positioning is the implementation of the strategy (targeting) into specific tactics (the marketing mix—price, prod- uct, place or distribution, people/service, and promotion or “integrated market- ing communications”). FIGURE 4-1 Strategy Formation 2930 Section 1 * ‘The Strategic Marketing Process IDENTIFYING COMPETITIVE ADVANTAGES For long-term viability, every firm must be better than the competition at something. Those things the firm is best at are its “competitive advantages” (sometimes referred to as “core competencies” or “sustainable competitive advantages”). A company has a competitive advantage if it possesses resources or capabilities that are: (1) valuable in the market (who wants to be best at something no one cares about?); (2) rare (competitors don't have the same resources or capabilities); (3) not imitable or substi- tutable (competitors cannot easily imitate or work- around them); and (4) transferable to other markets or products. In a strengths-and-weaknesses frame- work, competitive advantages are the strengths. The “value chain” offers a useful framework for identifying competitive advantages. McKinsey and Company developed a generic value chain consisting of six distinct activities that need to be carried out to bring a product onto the market: technology devel- ‘opment, product design, manufacturing, marketing, distribution, and service.’ Michael Porter offered a somewhat more detailed but similar version of the value chain that distinguishes “primary” value- adding activities the firm performs along the flow of goods from inputs (raw materials) to outputs (prod- ucts), marketing and sales, and support services as well as the essential “support” activities such as human resource management and research and de- velopment that facilitate those primary activities. The essential question is: How well does the firm per- ‘form the various activities of the value chain vis-a-vis the competition? Segmenting the Market “The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself” Peter Drucker* Because customers within a broadly defined market almost never have the same characteristics or the same needs and requirements, there is, as a rule, an opportunity to subdivide or segment the market. ‘The purpose of market segmentation is to identify subgroups (“segments”) of customers that are simi- lar to each other and different from the rest of the market with regard to needs, wants, and responses to the marketing mix. Marketing-mix-response dif- ferences are not just responses to product differ- ences; customers may respond differently to price, service levels, advertisements, and/or distribution channels, Differences in responses in regard to any of these marketing mix elements—which correspond to differences in underlying needs or wants—are meaningful segmentation differences and an oppor- tunity to gain advantage through targeted marketing mix development. The primary reason to differentiate customers into segments is to capture the strategic advantage of meeting differing needs with tailored mixes. The objective and the key to successful segmentation is to find differing needs that match the firm’s compet- itive advantages and thus can be served at a profit better than by the competition. If all customers re- spond to all elements of the marketing mix in the same way, then there is no reason to segment. The objective then would be to develop the single opti- mal marketing mix for all customers, and there would be only one “winner” Finding substantial dif- ferences that others have overlooked can constitute a “customer insight.” It can create a significant oppor- tunity for the firm. For example, in the late 1980s, ‘Toyota recognized that the automobile industry was treating younger luxury sedan buyers as a homoge- neous segment—whether or not they valued per- formance, reliability, comfort, or service—and BMW was dominating that market, Toyota launched ‘Lexus as a reliable, comfortable luxury sedan with terrific service, and BMW was forced to refocus on the performance luxury sedan buyers. There are two types of variables to be distin- guished in the segmentation process for both con- sumer (B2C) and business-to-business (B2B) mar- kets: segmentation bases and segment descriptors. The bases of segmentation—the underlying differences that warrant targeting with distinctive marketing programs—should be differing customer needs, dif- ferences in needs that underlie differences in re- sponses to elements of the product, and marketing program. Table 4-1 clarifies what a “customer need” is as well as what the related ideas “customer wants,”Needs, Wants, Benefits, and Demand Definitions ‘Needs: The underlying motivation or reason tving consumption. Conceptualized as the difference between customers’ perceived current state and their desired state, Needs include: basic physiological needs (food, shelter), safety (ecurity, property), social needs (belonging, affection), esteem (self-esteem, respect by others), and self-actualization (intellectual growth, self- ‘expresion).* Wants: The specific form that customers may desire to address needs, influenced by culture, experiences, situations, and marketing actions; wants are shaped by culture, experience, Situations, and individual factors. _ Benefit or “Benefit Sought”: An outcome of consuming a product that motivates purchase and "consumption. Benefits are the consequences of the consumption of the product and of product attributes. Demand: A want combined with the ability {including resources such as money and time, "and access) to purchase. Demand requires that consumers want the product and have the ability to-buy the product, “benefits sought,” and “demand?” are. All of these can be legitimate segmentation bases. Descriptors of seg- ‘ments are observable variables that correlate with the differences in needs/wants/benefits-sought and allow the segment to be identified and targeted. Descriptor ‘aiables include things like demographics (age, edu- ‘ation, income, etc.), geographics (the location of consumers), psychographics (lifestyles), and behav- iors (usage rate, stage in buying process or “readi- ness," loyalty, and profitability or “customer lifetime value”). In business-to-business markets, segments of organizations can be described on “firm demo- graphics” (size, ownership, etc.), behaviors (purchas- ing histories) and “B2B psychographics,” including purchasing processes (buy centers, bidding, etc.), ownership, and strategies Although it is important to descr in observable and actionable ways—yay8 that allow the marketer to identify and addre: GT he segnfifLLOTE CENTRAL Chapter 4 + Strategy Formation 31 Examples Hunger Filet Mignon Kung Pau Chicken Risotto al Gargonzola Nourishment/Nutrition Hunger satiation Taste sensations Hungry customers who want filet mignon, who can afford filet mignon, and who can access filet mignon it is still true that at the root of differences in the way customers respond to the marketing mix are differing customer needs. If a segment is, for exam- ple, more price conscious than other segments, that is the basis of the segmentation (the need for econ- omy). Such a segment may be described as older, retired consumers, or busy single-income parents, But age, family status, and employment (retired or full-time homemaker) don’t drive the segment dif- ferences—the need for economy is what differenti- ates the segment from other customers. Age, family status, and employment are all demographic vari- ables that correlate with the need for economy. They also describe the customers and the segment, and most importantly, allow the segments to be tar- -geted with tailored offerings. The distinction be- ‘Geen and intersection of segment descriptors and segnientation bases (underlying customer needs) ‘Cpe illustrated in Figure 4-2. BUcuREST! PF32 Section 1 + ‘The Strategic Marketing Proc: Descriptors Age Income Location | Loyalty [Profitability Prestige Quality Economy Bases (Needs) Performance Reliability Conformance FIGURE 4-2 Similarly, product-related behaviors, such as usage rate and loyalty, are important to strategic seg- mentation but they are, still, only correlates of the underlying needs that drive the segments’ behaviors. For example, it makes strategic sense to develop loyal customers and to target customers who have higher lifetime value, However, loyalty and customer life- time value are themselves driven by underlying needs, and efforts to build loyalty or target value customers will be most successful if they in- clude efforts to thoroughly understand those needs. SEGMENTATION SCOPE. Segmentation decisions include not only which segments to target but, simul- taneously, the scope of the targeted segments; that is, decisions about the number and size of the segments and the relationship amongst the segments to be tar- geted. Some firms target very broad segments with relatively homogeneous offerings; this is based on “global” and “mass” marketing strategies. Other firms target adjacent segments with somewhat dif- ferentiated offerings; this is a form of target market- ing. Finally, some firms target smaller segments of the market with extremely focused offerings; this is niche marketing. Figure 4-3 graphically presents these alternatives. DIFFERENTIATED MARKETING. Differentiated marketing means that a company develops individ- ual marketing programs for different individual tar- get segments (Figure 4-4). As it tailors products and marketing programs to the segments, it can better Example of Segmentation Bases and Descriptors meet the segment-specific needs and requirements, and it can, therefore, create superior value and de- mand price premiums. The downside is a higher complexity of the organization and the product portfolio, lower economies of scale (standardized products and marketing mixes optimize economies of scale, but economies of scope can still be achieved across products/programs), and, as a consequence, higher unit costs. Differentiated marketing can con- sist of + Selected specialization, The company selects and focuses on one or a few single segments (Case A in Figure 4-4). + Segment specialization. A producer decides to serve several different needs of one segment and develops many products and marketing pro- grams for this segment (Case B in Figure 4-4). + Product specialization. Focus on one product that is tailored to all market segments (Case C in Figure 4-4). + Full market coverage. A company decides to address all market segments and develops all products the segment wants (Case D in Figure 4-4) SEGMENTATION DYNAMICS. Segments are dy- namic. Segment preferences change—that is, a seg- ment’s ideal product can shift over time, sometimes quite rapidly. In addition, segments can split or merge. Groups of consumers that were reasonably treated as homogenous may develop important dif-FIGURE 4-3 Segmentation Scope ferences, and consumers who had differing response profiles may converge around common preferences and behaviors, For example, the luxury sedan market treated affluent professional Americans as relatively homogeneous—and BMW dominated the younger luxury sedan market in the mid-1980s. By the early 1990s, Lexus and other Japanese brands had split the Segment by recognizing and serving differing needs: S1 S2 $3 $4 $5 FIGURE 4-4 Differentiated Marketing Approaches? Customization’ Adjacent Personalized Segments Segment Differentiated Marketing c Chapter 4 + Strategy Formation 33 Matti. Small. Segment Narrow! Niche BMW retained the performance luxury drivers while Lexus carved out a large segment of reliability-com- fort luxury drivers, Targeting ‘Targeting—matching the firm’s competitive advan- tages with attractive market opportunities—is the34 Section | * The Strategic Marketing Process crux of the strategic marketing formulation (shown graphically in Figure 4-1 above). Targeting is the cru- ial junction in formulating strategy and translating strategy into tactics, matching external opportunities with internal strengths—strengths the firm has or strengths the firm can develop or acquire. Situation assessment and environmental scanning, scenario analysis, segmentation, and analysis of competitive advantages all feed into targeting. Positioning, the construction of the brand and deployment of a unique marketing mix, flows from and is determined by targeting. Targeting is where the strategy is spe fied and becomes concrete. The overarching objec- tive is to identify segments that will value offerings built upon the firm’s strengths; that is, to meet some specific needs of some specific customers better than the competition within enduring, profitable relationships. ‘There are several frameworks that help identify at- tractive markets to target with valuable offerings, the ‘two most powerful of which are: SWOT analysis and the application of strength/ attractiveness matrices to segments, SWOT ANALYSIS. SWOT analysis—Strengths, Weaknesses, Opportunities, and Threats analysis, (Figure 4-5)—is a powerful tool for targeting appro- priate markets with effective offerings. It summarizes the juncture of external analyses (situation assess- ment of customers, the context, and competitors) and internal analysis (strengths and weaknesses). We can think of the strengths and weaknesses as a sum- marization of the firm’s or offering’s competitive position; the opportunities and threats represent the market's attractiveness, The SWOT framework is one of the most familiar tools of strategic planning. An essential point to emphasize about SWOT analyses is that they are not merely descriptive—they are most useful as prescriptive tools. The SWOT framework ‘organizes strengths, weaknesses, opportunities, and threats to identify strategic actions to achieve desired ends, Table 4-5 summarizes the strategic implications of the range of possible SWOT outcomes, STRENGTH/ATTRACTIVENESS MATRICES. A sec- ond powerful tool for identifying exploitable EXTERNAL Opportunities Threats FIGURE 45 SWOT Analysis Strengths INTERNAL Weaknesses“matches between segments and competitive advan- s involves strength/attractiveness matrices, ‘such as the Boston Consulting Group’s (BCG) th/Share Matrix or the GE/McKinsey Portfolio Planning Grid.° These frameworks were originally loped to aid in prioritizing strategic business mnits (SBUs) and products within a company's portfolio” (see discussion of product portfolios in Chapter 5 at Product Strategies, below), but the e strength/attractiveness concepts are also effec- for targeting segments with strengths. Here, in geting applications, segments are assessed with to (a) their general attractiveness (How good ould it be to succeed in this segment if the firm ld?) and (b) the strength of the firm against the egment’s particular needs and dynamics (How aly or well-suited is the firm to succeed in this seg- “ment regardless of how attractive it is?). Some market ents are more attractive than others. Similarly, ‘afirm’s distinctive competitive advantages will be FIGURE 4-6 _Strengths/Attractiveness and Segmentation Chapter 4 * Strategy Formation 35 better suited to meet the needs of some segments than others—and some firms’ competitive advan- tages are a poor fit with some segments’ needs. A firm may, for example, have access to channels that serve a segment. It may have brands that are well liked by customers in a segment. It may have an in- stalled base in the segment, or production capabili- ties that make the firm's offering a good fit with the segment’s needs. Figure 4-6 illustrates the sorting and prioritizing of segments within a general strengths/attractiveness grid. TARGETING DISCIPLINE. In many situations it is as important to know who the firm is nov targeting as it is to know which segments it is targeting. No prod- uct offering can be right for everybody and a common trap is that, in trying to grow sales toward new cus- tomers and new segments, marketers lose their focus and their original advantage in their primary seg- ments. This may be termed “target drift,” the loss of High Attractiveness + Size Growth Rate Resources + Price Insensitivity tte Low High Strength Low + Market Sharo + Technology-Neods Fit + Brand Equity *Channel Access + Etc.36 Section 1 + The Strategic Marketing Process focus on the target segment in favor of broader or al- ternative segments, “Wiyou run after two rabbits, you won't catch ether one” ‘Traditional Armenian Proverb? Closely related to target drif isthe temptation tr aizget more than one segment with a single min; thats, to “straddle” segments or to squat between seg- iments ‘That strategy may work in the short run, par. ticularly in the early tages of the product lifecycle but itis unlikely to succeed for long and certain to fl the long term. The problem with trying to serve two or more segments with a single marketing mix is that the mix isnt exactly right for anyone—and a competitor will eventually, offer a mix that is exactly right. One Solution to straddling may be to revisit the segmenta, tion scheme looking for multiple segments where the Original segmentation solution had identified just one. Another alternative to straddling is to offer more than one marketing mix. That is, to focus tailored market. ing mixes for each segment. In any case, it usually Situation Assessment Strategy Formation Implementation: Postoning an Marketing Plants) the Marketing Mix ase Forecasts Documentation, Assessment and ‘Adjustment ‘Assessment and Adjusiment {urns out that the marketer who targets two segments With a single marketing mix doesn't catch either one, Posi We detine positioning as the deployment of the entire marketing mix (products, people, prices, Place/distribution, and promotion/integrated man’ keting communications) to claim a unique, valued, and defensible position in the marketplace. Many ex. Perts have highlighted the fact that a product's or brand's position is really something that resides 4p the consumers’ minds. That pestion is driven by the actions of the marketing firm or brander, and those actions are encapsulated in the “marketing mix: The mix is the totality of tactics and offerings that the firm can use to influence consumers’ perceptions of the offering’s position and to thereby meet customer needs. The next chapter elaborates on implementing ‘marketing strategy with the marketing mix to claim Position in consumers’ perceptions, ning Note 15: The harketng Coneopt Noe 1: Whats Making Statgy? Note 17: Genet Statogion Aaniage and Se2pe Noto 18;Geneve Sates ‘The Value Nap Note 18:oneric Sratepies— Product Maret Growth Statogios Stateiae Note 20: pocte maretag Starogies Note 21: Markt Segmentation Note 2: Loyaly-Based Marketing, Customer Acqueiton, 510 Customer Retertion oto 28:Customer Liste Van Noto 24 Compete ackantagos Note 25 SWOT Anayase Note 25: Target Note 27:Peetioning Linking Strategy Formation to Relevant Tools and FrameworksChapter 4 * Strategy Formation 37 Endnotes 1. Michael E. Porter, “Toward a Dynamic Theory of 5. Source: Adapted from Derek F. Abell, Defining the Strategy.” Strategic Management Journal 12, Special Business: The Starting Point for Stragic Planning Issue: Fundamental Research Issues in Strategy and (Upper Saddle River, New Jersey: Prentice Hall, Economics (Winter 1991): 95-117, 98, 1980). 2. See J. B. Barney and W. S. Hesterly, Strategic 6, Sce Amoldo C, Hax and Nicolas S. Majluf, “The Use Management and Competitive Advantage (Upper of the Industry Attractiveness-Business Strength Saddle River, New Jersey: Pearson Education, 2006). Matrix in Strategic Planning,” Interfaces 13, no. 2 3, Peter Drucker, Management (New York: Harper & (1983): 54-71. Row, 1973), 64. 7. Prentice-Hall Encyclopedia of World Proverbs 4. See Abraham H. Maslow, “A Theory of Human (Englewood Cliffs, New Jersey: Prentice-Hall, Motivation,” Psychological Review 50, no. 4 (1943): 1986), 399. 370, 396; and Abraham H. Maslow, Motivation and Personality (New York: Harper & Row, 1954).38 Ler Tehe-ig 5 Implementation “Some people try to find things in this game that don’t exist; but football is only two things—blocking and tackling.” ‘VINCE LOMBARDI, LEGENDARY AMERICAN FOOTBALL COACH? “Many companies want to leapfrog past the basic blocking and tackling of doing the everyday things right... . This just won't cut it. Ifa company can’t get the basics down in the delivery of its products and services, other effort will fall on the deaf ears of customers.” JEANNE BLISS, AUTHOR AND FORMER CHIEF CUSTOMER OFEICER AT LANDS’ END, MICROSOFT, ALLSTATE, COLDWELL BANKER AND MAZDA? Blocking and tackling are the basic skills of American football—the “building blocks” so to speak—all other plays and strategies are created by arranging and integrating blocking and tackling. Football coaches and fans too often focus on elaborate strategies and sophisticated techniques, but games are most often won or lost when players exe~ cute the basics well—that is, winning or losing is decided by the unglamorous but erucial ‘fundamentals of blocking and tackling! This book is about strategic marketing, and much of it focuses, appropriately, on the high-profile and “exciting” elements of strategy—but this section focuses on the implementation. As in football and as emphasized by Jeanne Bliss, the former chief cus- tomer officer at five iconic brands, ifthe tactics and day-to-day details of implementa tion aren’t done well, all the beautiful strategies in the world can't save the effort. Implementation starts with an understanding of the product or brand’s position in the marketplace—that is, the desired “positioning” in customers’ perceptions is the strategy at the implementation level. Positioning involves developing a tailored market- ing mix to target some specific set of customer needs in a unique way—a way that no competitor matches—and communicating that position to customers effectively. Positioning is something that, in reality, lives in the customers’ perceptions of the offer- ing. Customers wor’t see a brand manager's “positioning statement” or care what the marketing strategist thinks the products position is supposed to be; they'll rely on their own perceptions to decide where it’s positioned—and that will be the only product,n that matters. Nevertheless, those percep- tions are shaped by the marketing mix and its co- hherence. Thus, the objective of positioning is to “own” a valued place in customers’ perceptions. ‘Once the firm has determined which customers and ‘which needs it is targeting with which competitive advantages, it must identify and delineate exactly ‘what “position” those decisions equate to in the marketplace: In what territory does the product or trand seek to be unique? How does the marketing mix aim that territory? Segmentation is the tough job—positioning is the easy job. That is, if you understand the segment’s needs well-enough, the positioning challenge should be,if not easy, at least straightforward. If you believe you have a positioning problem, it is probably be- cause you are not sure which segment you are trying toserve or you are serving too many segments. Positioning aligns the myriad tactical decisions involved in going to market, as shown in Figure 5-1 Itis the implementation of strategy into specific brand-building marketing mix elements. These are all of the “details” and specific decisions about the firm’s products and services, brands, prices, places (channels arid distribution), and promotions (com- ‘munications with customers). It is important to re- ‘member that the fundamental objective of position- ing is not the marketing-mix activities themselves, but rather the resulting customer perceptions. Marketing research should lie at the heart of the marketing program and guide all of the tactical elements of the marketing mix (Figure 6-1). Brands FIGURE 5-1 Positioning Drives Tactics Chapter5 * Implementation 39 are the cumulative sum of all of the marketing tactics and messages across the history of the offering. Brands are the company’s and the consumer's short- hand for the overall offering and its position in the market. Therefore, this section on implementation begins with marketing research and then develops the concept of the brand before considering the vari- ous elements of the marketing mix and their strate- gic implications. MARKETING RESEARCH Marketing research is a very wide umbrella encom- passing an assortment of activities and objectives, including broad, inductive, and exploratory “cus- tomer assessment,” which is part of situation assess- ment, as well as issue- or decision-specific research that: (1) describes markets, segments, and customers; (2) guides strategies, programs and tactics; and/or (3) evaluates strategies, programs and tactics. This breadth is clarified in Table 5-1. Although all market- ing research is focused on understanding the cus- tomer and tying the firm’s actions to a customer orientation, broad customer assessment and issue- specific market research begin with different objec- tives, draw on different methods, and result in different sorts of information and guidance. As or- ganized in Table 5-1, market research includes a range of activities from exploring the environment for opportunities and insights to project-based re- search to hone specific elements of the marketing mix as well as Customer Relationship Management (CRM) systems, which entail the ongoing collection of marketing metrics and customer data for program assessment and customization/targeting. ‘Too frequently, managers take a “more is bet- ter” approach to marketing research and data collec- tion. They collect reams of ill-defined data and then sift through those voluminous data hoping to find useable information to support decision making. This is dysfunctional and contributes to “paralysis by analysis,” the tendency to over analyze and over re- search issues and the failure to make decisions and act. To avoid unfocused and ineffective research, the marketing research process stipulates that the deci- sion that will be guided by the research or the prob- lem to be solved by the research be clearly specified in40 Section 1 * The Strategic Marketing Process TABLE 5-1 Organizing Customer-Focused Research The broad, exploratory, and inductive study of customers in general to identify (a) trends in needs and demand, and (b) customer insights. Ongoing as well as focused research indentifying differences across customers/consumers with regard to needs and descriptive characteristics and linking those differences to existing or achievable competitive advantages. Focused research to pretest and refine tactics, including price, promotions, and advertising; new products or product modifications, and merchandising programs; and to gauge the effects of those tactics on achieving the desired positioning, Ongoing data collections tied to specific accounts, customers, or consumers that serves to tailor offerings (personalize or customize offerings) and direct investments and efforts toward the “right” customers and segments. Situation Customer Assessment Assessment Strategy Segmentation, Formation and | Targeting, and | implementation | Positioning 3 & @ P 3 Positioning and g the Marketing Mix 3 = 2 e = 9 Customer 2 Relationship 8 Management 3 (CRM) 3 Assessment & | Customer- and Adjustment Market-Oriented Metrics Focused and ongoing research collecting information on customer responses to the marketing mix, including measures of satisfaction, loyalty, profitability, and revenues. detail before the research is designed and well before any data are collected, Figure 5-2 shows the basic Marketing Research process,’ which emphasizes the necessity of early problem and objective specifica- tion. Some experts have even recommended actually outlining the “final report” first—before designing the study or collecting any data—in order to engage the manager early in the research process and focus efforts on the right questions and on guiding man- agerially-controllable outcomes.* Questions for Marketing Research In science there are two well-known types of errors: ‘Type I errors involve finding confirmatory results for hypotheses that are, in fact, not true (“false posi- tives”); Type IT errors are rejecting hypotheses that are, in fact, true (“false negatives”). A less well- known sort of error has been labeled “Type IIT Develop the Research Plan Collect the Information FIGURE 5-2 The Marketing Research Process®ror”: getting the right answers for the wrong ques- tions. Careful attention to framing the right ques- tions, even going so far as to draft the final report fist to emphasize the value of the research, is vital to effective and efficient marketing research. There are three broad categories of questions that marketing research can address: + Market Questions: + Demand forecasting: What is th market? + Needs identification and segmentation: What do customers need and care about, and how much do they care? How do cus- tomers differ in regards to those needs and “importance weightings”? + Mix/Program Questions: * The effect of various mix elements: What is the best product, message, channel, or price? + Assessment and Adjustment Questions: + Market Share: How are we doing vis-a-vis the competition? + Performance: How do our customers feel about us? How loyal are they? e of the Once the purpose of the research—the ques- tion or questions to be addressed—has been care- fally defined and delimited, itis useful to reexamine whether or not research is necessary at all. It may be that no research is necessary or justified. There are at Jeast two ways to think about whether investments in marketing research are warranted: 1, What are the ranges of actions that are possi- ble? If additional information won't change future decisions in meaningful ways, don’t do the research, A reality of marketing research is that, too often, managers know what they want to do, what they have to do, what they cannot do, or what they will never do, but they never- theless conduct research on the decision. That research is a waste of time and resources. 2. How much will information help? How much will the research reduce risk and uncertainty or improve accuracy in decision making? One study found, for example, that 92 percent of all new cereals failed despite rigorous marketing, research, It turned out to be cheaper to simply Chapter 5 + Implementation 41 launch new products and “test” them in the ac- tual marketplace. That is, sometimes the best course of action is to “fail fast, fail cheap, and move on?” This is, of course, a function of the cost of the research, the cost and potential con- sequences of failure, and the firm or manager's level of risk aversion, Marketing Research Designs Marketing research efforts can have several different types of designs, including exploratory (less unstruc- tured research intended to discover deeper under- standings and to generate specific issues for future research), descriptive (to characterize markets, seg- ‘ments, and even specific customers with regard to size, attitudes and preferences, behaviors, needs, etc,), and causal (intended to link variables, such as differences in price or advertising, to outcomes such as sales). We have pulled customer assessment, the prototypical exploratory research, out and dealt with it asa distinct activity with its own objectives, meth- ods, and outcomes. But, exploratory research is also used in more focused marketing research, most often at the front end of projects, to identify issues and ‘generate hypotheses for further study. Marketing Research Approaches and Data Many different approaches to marketing research can address certain questions. Marketing research approaches range from reference to existing census data or analysis of in-house archival sales records to highly structured surveys with forced-choice items collected in large, random samples of consumers. Different methods yield different types of data and different sorts of customer understandings. Data can be categorized in many ways, including “secondary” (gathered for some other purpose) and primary (gathered for the specific project at hand), and quali- tative versus quantitative, There are also many types of analyses that can be performed on those different data, ranging from the subjective interpretation of open-ended responses to extremely sophisticated statistical analysis of large databases of customer in- formation. Importantly, each sort of marketing re- search data collection method, data itself, and data42 Section 1 + The Strategic Marketing Process analysis yields different types of information which can clarify different sets of strategic issues. Understanding the appropriate research design and method for particular sorts of questions or purposes is a key to managing marketing research and incor- porating it into strategic marketing planning. BRANDS AND BRANDING Brands are the company’s customers’ “shorthand” for its product's position and its benefits. A collection of meanings, brands are represented by symbols such as names, logos, spokespeople, and other customers! consumers, packaging and colors, and imagery. Brands can have enormous value to the marketer. Facilitating choice and reducing search and evalua tion demands on customers, brands deliver value to customers as well. Brands also deliver assurance, meaning, and self-expressive value to customers and consumers. Drinking a Coca-Cola is very different from merely drinking the carbonated water and (se- ret) ingredients that make up the tangible core product. Drinking a Coca-Cola is an experience and has meanings that the substance and ingredients do not have'on their own, The brand can also have great economic value to the firm. The Coca-Cola brand, for example, was the most valuable brand in the world in 2007, estimated to be worth $ 65.3 bil lion. From a strategic perspective the importance of branding is that the brand embodies the goodwill or “equity” the firm has earned and can retain with its consumers. POSITIONING STATEMENTS Most good brand-building organizations require some summary documentation of what the brand is meant to be, what needs it is meant to serve, and for which specific customers/consumers on what spe- cific occasions. That is, for positioning strategies to be clear, actionable, and enduring they should be documented in “positioning statements.” Without working through the process of documenting the in- tentions of a positioning effort, members of the or- ganization and elements of the marketing mix can drift “off strategy” or “off message” With a pos ing statement, itis straightforward to go back to the statement and hold each action up against the origi- nal intent, Further, documenting the positioning in a statement facilitates getting people up-to-speed as, they join the marketing team and facilitates retention of knowledge when people depart. Positioning statements are not strategy state- ments; they're statements about how the strategy should come together in the perceptions of the cus- tomers. A complete positioning statement usually specifies: the brand/product to be positioned, the market (the “frame of reference”), the target seg- ment(s) and target needs (the “target”), at least one “point of difference” or “brand promise,” and the “reason to believe” that support those points of dif ference.* A positioning statement isn’t intended for ‘customers to see; it is an internal record of what the brand is meant to be. It serves to keep the various tac- tics “on strategy” and it fosters institutional memory of what the brand is and, often just as importantly, what it is not, Positions can change and migrate to fol- low customer preferences, but brands that change po- sition too frequently rarely succeed. In any case, a strong, concise, and clear positioning statement re- duces ambiguity, ensures “institutional memory” for the positioning decisions, and focuses tactics of the marketing effort discussed in the next sections. THE MARKETING MIX Our product, its price, our place (or channels of distribution), our promotion (communications), and our people and sales force are controllable ac tions that marketing managers direct. The best sales force in the world will have a tough time selling a product that is ill-conceived, ill-designed, or poorly manufactured, or a product with a price that is mis- aligned with what the customer thinks is good value, or a product that can’t be found in the places where the customer shop. These decision variables must be “mixed” correctly. We need the right prod- uct at the right price in the right place, and so forth, to serve our target segment in light of all the uncon- trollable forces—the situational factors such as the competition, technology, economic conditions, and the political, legal, and regulatory environments. And then, just when we've got the mix right, [stuff] happens”: things change and that mix mustevolve and adapt over time. Indeed, marketing strategy may be viewed, from this perspective, as simply mix evolution. ‘As emphasized above, the objective of position ingis to establish the offering’s place (position) in cus- tomers’ perceptions. The marketer does not directly control those customer perceptions, but those percep- tions are nevertheless influenced by controllable mar- keting actions, the “marketing mix.” The marketing mix includes all ofthe things that marketers can manage and deploy to meet customer needs and to claim a place in customers’ minds. The mix is often summarized as The Marketing Mix Chapter 5 * Implementation 43 the product, the price, the distribution of the prod- uct (place), the promotions or marketing communi- cations associated with the product and brand, and the people or personal selling effort of the offering (Table 5-2). These are the well-known “five Ps” of marketing, meant to memorably summarize the en- tire range of actions that a marketing organization can direct at customers to fulfill those customers’ needs. The strategic issues related to the mix, includ- ing changes in effective tactics across the product lifecycle (Table 5-3), are important to summarize briefly and connect to this strategic planning model. MixElement Definition Strategic Considerations Product The need satisfying offering of the firm or Product-level considerations: “customer solution,” includes physical Features and benefits “goods,” intangible “services,” and myriad Quality combinations of the tangible and intangible Versions and alternatives Level of technology Packaging Service Warranties Packaging Branding and image Assortment considerations: Product lines Product portfolios, Price From the firm's perspective, the money or Objectives and time horizons other value received for the product in an Business model (Profit and loss exchange. From the customers’ perspective considerations) price can include related costs (installation, List price(s) etc.) and other expenditures such as time, Flexibility effort, ete Discounts and allowances Margins to intermediaries (channels) Terms and financing Bundling Place Distribution of the product or service and the Length of distribution channel(s) location(s) of that distribution. How does the customer choose and receive the product? Number of distribution channels Channel members (types of intermediaries, including ownership and control) Channel control and channel conflict Functions (logistics, warranties, etc; demands of functions and location in the channel) Distribution intensity Support and training ee44 Section 1 * ‘The Strategic Marketing Process Mix Element Definition Strategic Considerations Promotion All communications directed toward Objectives customers and customers: Targets Advertising Reach Media Frequency Targets Promotion emphasis Content Media (television, print, etc.) Public relations Pull; Electronicfinternet communications Guerilla, Web sites Events Viral ‘Messages and meanings (Copy) Point-of-purchase Event marketing Publications, brochures, and materials Buzz Marketing (word-of-mouth encouragement) People Personal selling Objectives Consultative selling Targets Trade selling Desired behavior Missionary selling Promotional emphasis Technical selling Push Entrepreneurial selling Managerial activities Hybrid sales force Coaching Retail selling Counseling Evaluating Administrating Mix Element Introduction Growth Maturity Decline Product initially one; Increased number; Stable number Fewer Few Increasing available Commoditization features and alternatives, Price ‘Skimming and Competitive Price competition Deals and Penetration intensifies price cutting deepen Place Limited distribution; Building distribution; Intensive May be High support Moving toward reduced required intensive Communication, Build primary Build selective demand; Reminder; Communication Including both demand; Information Differentiation budgets reduced Promotion and People needs highProducts The first “P” in the marketing mix is products. Products include physical goods, intangible services, and all of the innumerable combinations of tangible "and intangible value. Strategically, products can be understood in layers, as shown in Figure 5-3, rang- ing from: * The core product (the essential need-fulfilling elements); * The expected and augmented products (the es- sential need-fulfilling elements augmented by the peripheral accessories, warranties, service, etc.);and * The potential product, the factors capable of en- gendering “Wow!” responses from customers — the unexpected factors that, nevertheless, de- light customers and lead to satisfaction, loyalty, and positive word-of-mouth—and that com mand margins. When attributes of the product that once were ‘new and unexpected become expected and even ubiq- uilous, and all products in a market offer those attrib- Utes, itis called “commoditization? Commoditization FIGURE 5-3 A Product Hierarchy Chapter5 * Implementation 45 in a product category often leads to price competition (what else is left to compete on?). Creative marketing strategists succeed in avoiding price competition by finding new “Wow!” attributes—exciting new options or services that augment the core product—thereby differentiating their offerings and avoiding the perils of commoditization. PRODUCT LINES. A “product line” is an assort- ment of products offered by the same business unit. Strategies related to product lines include: + Price lining—offering a product for different segments based on preferred price/qualit points; + Line/brand extensions—building on the strength of the existing products to add alter- natives to the line or brand, including trading- up or trading-down; and + “Product platforms”—common architectures or technologies underlying multiple products ina product line. Such platforms contribute to economies of scope. PRODUCT PORTFOLIOS. Product strategies in- clude not only decisions about specific products but also decisions about the firm's overall assortment or “portfolio” of products, how those multiple products relate to their markets, and how they relate to each other. Many firms manage multiple business units and products lines and must make strategic decisions about which products to invest in, which to harvest, and even whether or not to divest some products or business units, Product portfolios array discrete business units (strategic business units or SBUs) or prod- ucts/lines with regard to (a) their strength or com- petitive position and (b) the attractiveness of the markets they serve, The Growth/Share Matrix (originated by The Boston Consulting Group and often referred to as the BCG Matrix; shown in Figure 5-3) is grounded in the recognition of two fundamental market forces: one is the product life- cycle or product/market evolution, and the other is share leverage (scale effects, including economies of scale and learning curve effects): These are two46 Section 1 * ‘The Strategic Marketing Process of the fundamental regularities or “laws” of strate- gic marketing discussed above in Chapter I-3. The Growth/Share Matrix identifies four generic strate- gies for four product/market positions: + High share/high growth—the star, whose share should at least be maintained and which should continue to receive enough investment dollars to maintain or increase its distance from competitors. This quadrant is often to be cash-flow neutral, that is, not generating cash for investment elsewhere, because the com- pany is reinvesting the profits to maintain po- sition and growth + High shareflow growth—the cash cow, which should get just enough investment to maintain share and because of low growth, market ma- turity, and low cost (further down the cost curve) should throw off significant cash to fund either other stars or problem children. + Low share/high growth—the question mark or problem child, which either needs significant investment to improve position (build share) during market growth, or probably should be divested, Often, this quadrant can be viewed as cash flow negative. Relative Ss High ia Stars Question Marks o High ? = Dogs FIGURE 5-4 The Boston Consulting Group Growth/Share Portfolio Matrix? + Low shareflow growth—the dog, which should eventually die, it’s just a question of how fast, because it has neither leverage from cost or share nor the advantages of a growth market. ‘The Boston Consulting Group Growth/Share Matrix captures attractiveness and firm strength with just two variables (growth rate and relative market share). Most marketing strategists would recognize that many markets are attractive for reasons other than growth rate and that firms may have strengths that go beyond market share. Therefore, various alter- natives to the BCG Matrix have been proposed. One of the best known is the GE/McKinsey Portfolio Planning Grid—shown in Figure 5-5—which gener- alizes the two dimensions to “Business Strength” and “Industry Attractiveness,’ expanding the single vari- able chosen by The Boston Consulting Group (growth rate and relative market share) to include many more important drivers of strength and attrac- tiveness (Table 5-4). The GE/McKinsey Portfolio Planning Grid—sometimes called the “Stoplight Grid” due to its adoption of green, yellow, and red to emphasize its strategic implications—breaks the di- mensions in finer gradations (three levels each, cre- ating nine “cells”) and weights the multiple strength and attractiveness variables to develop scores for each axes. The strategic implications of strengths/ attractiveness analysis relate to investment and re- source allocation decisions, in particular, and also market-scope decisions. These frameworks guide decisions about what SBUs or products to invest in, and choosing “winnable” races. NEW PRODUCT DEVELOPMENT. New product development requires a keen focus on anticipating customer needs and even discovering unrecognized (latent) needs. Because it takes time to bring new products to market, there may be no task in the strate- gic planning process that requires more foresight. The consulting firm Boor, Allen, Hamilton set out a classic new product development model, identifying a flow of seven basic activities required for successful new prod- uct development, beginning with idea generation and culminating in commercialization, and involving increasing cumulative investments along the wayChapter3 * Implementation 47 Digestibe Rate ‘Concentrate Effort on ana * Invest Heavily in Most Atactve | Protect Existing Program Segments * Concentrate Investments in High Risk; Otherwise Minimize Buildup Ability to Counter ‘Segments Where Profitability is | Invostment and Rationalze Competition Good and iskis Relatively Low | Operations: Emphasize Proftabilty by Raising Productivity eae a ‘* Manage for Current + Protect Position in Most Earnings Profitable Segment Concentrate on Attractive _ | Upgrade Product Line ‘Segments + Minimize Ivesiment * Defend Strengths FIGURE 5-5 GE/McKinsey Portfolio Planning Grid"? [TABLE 5-4 Market Attractiveness and Firm Strength Factors g ae Market Attractiveness: Strength * Real Market Growth * Market Share/Relative Market Share * Industry Concentration * Market Share Rank * Product Lifecycle Stage © Relative Price * Market Differentiation * Relative Quality * Percent of Sales Accounted For by New Products © Relative Direct Costs * Served Market Concentration * Relative Percent Sales of New Products * Capital intensity * Patents/Proprietary Products = Patents/Proprietary Processes * Shared Production Facilities * Relative Employee Compensation * Labor Productivity [BOG Matrix factors are in bold italics.48 Section 1 The Strategic Marketing Process ustomer insights Customer Insights, FIGURE 5-6 The Booz, Allen, Hamilton New-Product-Development Process'? (Figure 5-6). New product development highlights the need for cross-functional as well as external (cus- tomers, vendors, and collaborators’) input into the process. Research shows that firms that build “innova- tion cultures”—cultures in which ideas are valued and failures tolerated—are more successful than their more conservative competitors."! ‘A critical strategic task is planning the “product pipeline,” anticipating needs and preparing to meet ‘future needs in the marketplace. In many industries, the lead time required to develop a new product is substantial. Differences across competitors in lead times required to launch new product can constitute a substantial driver of strategic success. It has been es- timated, for example, that each single day that a new car launch is delayed can cost the firm a million dol- lars in lost profits.'? Therefore, time-to-market and foresight are important considerations in new product development and anticipatory customer assessment, marketing research, and product planning are critical to strategic marketing success. PRODUCT INNOVATION. Economist Joseph Schumpeter famously equated innovation with “cre- ative destruction”; in effect, innovation and entre- prencurship function to “destroy” existing ways of doing things in favor of new, better ways. Peter Drucker expanded upon that idea: “Because the pur- pose of business is to create a customer, the business enterprise has two—and only two—basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.” Innovations can be seen as shifting “the Value Frontier” toward the right—that is, toward greater value for the same price or the same value for a lower price. Innovations do not always, or even usually, en- tail “high technology” or technological break- throughs. Often, innovation involves identifying la- tent customer needs or seeing customer needs differently than they had been understood before and drawing together existing technologies to meet those needs better than current solutions. Such mar- ket-oriented innovation entails identifying customer insights and understanding how innovations spread or “diffuse” through the market. Understanding the diffusion of innovations includes understanding dif- ferences across innovations themselves, understand- ing what aspects of those innovations accelerate or slow their diffusion, and understanding how differ- ent consumers respond to innovations: + Innovations can be distinguished with regard to their degree of newness to the firm and theirdegree of newness to the customer: Innovations range from “discontinuous” (“radical” or “truly-new;” changing the way customers con- sume and/or meet the target need) through “dynamically continuous” (noticeable but neg- ligible changes to consumption behaviors) to “continuous” (“incremental;” improving on ex- isting products with no impact or very low im- pact on consumption patterns and behaviors). Various characteristics of those innovations predict the rapidity of their diffusion into the target markets. Things like relative advantage (How much better is the innovation than exist- ing ways to meet the same needs?), “observabil- ity” (How easily can others see the innovation in use’), and compatibility with existing lifestyles and consumption patterns all accelerate diffu sion. On the other hand, characteristics like risk (physical risk or the risk of hurting someone, financial risk, and social risk or the risk of em- barrassment) and simple cost will all slow the diffusion of an innovation into the market. One well-known typology of segments of cus- tomers based on their propensity to adopt an innovation: innovators, early adopters, early and late majorities, and laggards. Promotions/Communications Strategies Promotions or “integrated marketing communica- tions” include all of the efforts to communicate to the customer. Traditionally, advertising and personal selling were the dominant tools in the communica- tions arsenal. Advertising effectively and efficiently reaches large numbers of consumers and is particu- larly effective at creating awareness and reminding large audiences about the product or brand. A focus on advertising is a “pull strategy”; it develops de- ‘mand at the level of the ultimate consumer, and that demand “pulls” sales though the channel, One reality of advertising in the new millen- nium is the “death of mass.” Media that used to reach truly mass audiences, such as television, radio, and ‘magazines have fragmented, There are now literally hundreds of television channels and almost infinite alternatives to television, ranging from video games and personal music players to the Internet. This Chapter 5 * Implementation 49 proliferation of media and of technologies that allow consumers to choose what they attend to and what they bypass or ignore has created challenges and op- portunities for marketers. On the one hand, it is now nearly impossible to quickly communicate with mass audiences. On the other hand, marketers can now target more defined and refined targets with mes- sages. An advertiser on the World Fishing Network, for example, can connect with many consumers in- terested in fishing, and will not waste the message on many people who do not. Changes in paid-for, controlled media and ad- vances in understandings of how markets work has led to an increased emphasis on other communication tools, from electronic to experiential, and to an increas- ing recognition of the importance of inter-consumer communications, o “word of mouth.” Some compa- nies are organizing networks of unpaid “opinion lead- ers” to stimulate word-of-mouth referral networks Proctor & Gamble (P&G) has enrolled more than half- a-million woman, mostly mothers and homemakers, into “Vocalpoint,” and more than a quarter-million teens into Tremor; these are organized panels of similar consumers who receive samples, news, and coupons from the firm. They are encouraged to offer feedback to the marketer and are expected to actas “brand evan- clists” spreading the word about and recommending P&G's products and brands. Such organized word-of- mouth programs raise some ethical issues (one critic called them the “commercialization of human rela tions”), but they also emphasize the growing emphasis on inter-consumer communications in the new con- text of fragmented and cluttered media."4 People People is the “fifth P” and refers to personal selling and service provision. Personal paid-for communi- cation is usually the most effective means of commu- nicating large amounts of information and “closing the deal” (moving customers from consideration to purchase). Nevertheless, the cost-per-contact of per- sonal selling is high and its ability to reach mass mar- kets is limited. A communication strategy emphasiz~ ing personal selling is a “push” strategy; it develops demand at the immediate next level of the distribu- ion system and, thereby, pushes demand through50 Section 1» The Strategic Marketing Process the channel. In practice, most marketing strategies employ a balance of “push” and “pull” ‘Managers make a serious mistake when they refer to what salespeople do as merely selling, as though the salesperson’s personality alone brings in the sale, Rather, the modern professional salesperson relies on analytic skills as much as on charm and ag- gressiveness. Getting the order is only the final stage of a complex set of activities involving many people within our own firm as well as within the customer's organization. Modern personal selling is consultative and has become a two-step process: (1) to determine and articulate for the customer the real problem he faces and (2) to present the product or service's benefits, as a partial or complete solution to that problem. By helping the customer to define his or her own needs, the salesperson enters the sale at the very beginning and, in this way, can often place his or her products at a considerable advantage. Consultative selling includes four main types of selling tasks: trade, missionary, technical, and entrepreneurial. Place/Distribution Strategies Place, or the channel(s) of distribution, involves several categories of decisions, including selecting, motivating, and controlling channel members. These decisions should be based on some basic market-oriented considerations: * Where, how, and when do customers shop for the product? + What level of support (service, information and training, maintenance, etc.) do customers require for the product? + What level of contro! does the distribution re- quire to insure quality and to satisfy customer needs? + How do different means of distribution relate, and how might they conflict? ‘These considerations change across the prod- uct lifecycle. Early in the lifecycle, customers require more information and training, especially for technologically-sophisticated products. Later in the product lifecycle, customers may need less hand-holding but may respond more to peripheral services and almost always become more price conscious. Distribution channels and channel intermedi- aries can add value for both the consumer and the ‘marketer by performing at least three types of “chan- nel functions.” + Transactional (buying, selling, holding inven- tory, and assuming inventory risks such as ob- solescence and spoilage), + Logistical (shipping, breaking bulk, assorting), and + Facilitating (information gathering and con- veyanee, including giving information to cus- tomers and giving information about customers to the marketer, financing). Understanding these functions and how and by whom they are performed in a particular distribu- tion system allows for strategic thinking about how those functions may change. If channel members stop adding value or the functions become unneces- sary, they will eventually be bypassed. For example, as technology changes (including Internet-based de- livery of product “help” information), it is becoming possible for manufacturers to deliver information di- rectly to customers, bypassing channel partners who specialized in facilitating/information functions. This will reduce the need for intermediaries to edu- cate and provide information and perhaps eventually result in channel reconfiguration. Pricing Strategies Viable pricing strategies are linked to the product life- cycle (see Table 5-3, row 2, above). Early in the product lifecycle, as products are being introduced, demand is riven by the value of the innovation—customers are attracted to the new benefits or relative advantage of the product in the new offerings. Pricing can take ad- vantage of that quality-focused demand by “skim- ming” charging a relatively high price to profit from that newness, A skimming strategy may, however, dampen overall demand, Alternatively, the firm can charge a lower “penetration” price intended to increase volume, Penetration pricing makes the most sense when customers are atleast somewhat “sticky” (i.,can be expected to stay with their initial brand selection due to loyalty or some other source of inertia) and when some benefits of scale can be expected as produc- tion increases. Later in the product lifecycle, pricing be- comes increasingly competitive.Profits Strategy is not successful unless it is profitable. This stipulation seems straightforward except for the ele- ‘ment of timing. Strategies can be developed with an emphasis on either short-term or long-term prof itability. Profitability in the long-term generally re- quires investment in the short-term; those invest- ments do not preclude short-term profitability but they do rule out maximizing short-term returns. Having growth aspirations is important, but it is also wise to remember that “growth for growth’s sake is the ideology of the cancer cell.”"> Growth or market share objectives should be set in the context of a specific business model with consideration given to long-term returns. Top-line growth (revenues) can come at the expense of the bottom-line (profits) and an strain the firm's cash flow and other resources. Targeting the “right” customers—customers who are Profitable in the long-run, who are relatively likely to (Unit ee | FIGURE 5-7 Cost-Volume-Profit Logic and Contrib Chapter S * Implementation 51 become loyal, and who will appreciate and benefit from the firm’s competitive advantages (that is, take value from the firm's unique points of differentiation and competitive advantages) are all at least as impor- tant as simple “growth,” and require a keen under- standing of “cost-volume-profit” logic in the particu- lar context of the firm’s business model, BASIC ECONOMIC LOGIC. Profits are the outcome of a logical combination of the components of rev- ‘enues and costs. Disaggregating these components helps thinking about strategy and the sources of profit. For example, distinguishing the components of sales (purchase rate times the number of cus- tomers times price per unit) highlights distinct ways to improve profits: raise prices, increase pur- chase rates, and acquire new customers. Figure 5-7 presents this cost-volume-profit logic and high- lights the unit-level contribution margin (the52 Section 1 * ‘The Strategic Marketing Process contribution of each individual sale toward cover- ing fixed expenses). BREAKEVEN ANALYSIS. The “breakeven point” is the point in sales growth at which revenues equal ex- penses. That milestone is an important computation in evaluating the feasibility of an endeavor, a marketing plan, ora strategy. Breakeven is defined at the point (in sales) where the sales revenues exactly cover all the expenses. Sales revenues are, of course, the unit price multiplied times the average price. Total costs can be divided into two parts: variable costs (the costs that go up with the sale of each unit) and fixed costs (the overhead and expenses that the firm commits to across a time period and that do not go up with each unit sold). This can be summarized simply in formulas: Revenue = Price * Quantity Total Costs = (Variable Costs * Quantity) + Fixed Costs Situation Assessment Strategy Formation Therefore, if breakeven is where revenues exactly equal expenses, we can set the two equations as equal: Revenue = Expenses or Variable Costs * Quantity) + Fixed Costs (Price * Quantity) Solving that equation for breakeven quantity (that is, setting quantity on one side and all other variables on the other) yields the formula for the number of units that must be sold to exactly cover expenses: Fixed Costs QuantityBreakeven = (price-Variable Costs) For example, if we are going into business sell- ing something, let's say ice-cream cones, and the vari- able costs (the cost of the scoop of ice cream, the cone, and the napkin) is $1, the selling price is $2, and we have to pay $150 for our ice-cream-cone-vending Implementation: Note 28: Customer—Oriented Poaloning end ee) Market Peewareh the Marketing Mix Fae Note 20 Band ar Baring Forecasts Product Deveooment ote a Products —inavatons Documentation, Nee 2: Products Product Assessment and Porto ‘Adjustment Neto 38 Pring Satages ete 34 Promotion and People —Intograted Marking Budgets ‘Communeabors Noto 35: Paco —Diebstion ‘Assessment and Adjustment. Linking Implementation to Relevant Tools and Frameworks‘art, we would be able to figure out pretty quickly t we need to sell 150 ice-cream cones to “breakeven.” That is because we make $1 on each sale (price minus variable costs; $2~$1—that is called contribution margin). We need to make $150 just topay for the vending cart. Once we've paid for the cart {Gold 150 cones), we're “in the black” (traditionally, red Endnotes 1. Vince Lombardi, famous American football coach, describing the role of “blocking and tackling,” the two most fundamental “building blocks” of the sport, quoted by Dan J. Sanders and Galen Walters, Equipped to Lead: Managing People, Partners, Processes, and Performance (New York: McGraw Hill, 2008), 90 2, Jeanne Bliss, Chief Customer Officer: Getting Past Lip Service to Passionate Action (San Francisco, CA: Jossey Bass, 2006), 80 3. Philip Kotler and Gary Armstong, Principles of Marketing, 11th ed. (Upper Saddle River, NJ: Pearson/Prentice Hall, 2009), 106. 4. Johnny K. Johansson and 1. Nonaka, “Market Research’ the Japanese Way,” Harvard Business Review 65, no. 3 (1987): 16-22. 5. Koiler and Armstong, Principles of Marketing, 106. 6, Allyn W. Kimball, “Errors of the Third Kind in Statistical Consulting,” Journal of the American Statistical Association 52, no. 278 (June 1957) 133-142, 7. |. Workman Jr, “The State of Multivariate Thinking for Scientists in Industry: 1980-2000," Chemometrics and Intelligent Laboratory Systems 60 (Elsevier Science BLV., 2002): 13-23. 8. See Alice M. Tybout and Brian Sternthal, “Brand Positioning,” in Kellogg on Branding, ed. Alice M. ‘Tybout and Tim Calkins (Hoboken, NJ: John Wiley & Sons, 2005), 11-26. 9. The BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group. Chapter5 © Implementation 53 ink was used to indicate a loss in ledgers and ac- counting ledgers—so “in the black” means we're profitable). In fact, we're making $1/cone—but what the bank that lent us the money to buy the cart would want to know is: “How many cones do they need to sell to “breakeven” (and pay us back our money)?” 10, See Arnoldo C. Hax and Nicolas S. Majluf, “The Use of the Industry Attractiveness-Business Strength Matrix in Strategic Planning,” Interfaces 13, no, 2 (1983): 54-71; S. Robinson, R. Hitch, and D. Wade, “The Directional Policy Matrix—Tool for Strategic Planning,” Long Range Planning 11, no. 3 (1978): 8-15; Michael G. Allen, “Diagramming GE's Planning for What’s Watt,” Strategy & Planning 5, 10. 5 (1977): 3-9, 11, See, for example, Kurt Mateler, Franz Bailom, and Dieter Tschemernjak, Enduring Success: What Top companies do differently (Basingstoke, Hampshire, RG21 6XS, England: Palgrave Macmillan, 2007). 12, Adapted from Simon Knox, “The Boardroom ‘Agenda: Developing the Innovative Organization,” Corporate Governance: International Journal of Business in Society 2, no, 1 (Emerald Group Publishing Limited, 2002): 27-36. 13, See K. Clark, “Project Scope and Project Performance: ‘The Effect of Parts Strategy and Supplier Involvement on Product Development.” Management Science 35, no. 5 (1989): 1247-1263. 14, Robert Berner, “I Sold It through the Grapevine: Not Even Small Talk Is Sacred Anymore. P&G Has Enlisted a Stealth Army of 600,000 Moms Who Chat up Its Products,” Business Week (May 29, 2006), ‘www. businessweek.com/magazine/content/06_22/ 'b3986060.htm. Last accessed June 23, 2010. 15. Edward Abbey, Voice Crying in the Wilderness (Vox Clamantis in Deserto): Notes from a Secret Journal (New York: St. Martin’s Press, 1990), 98,(erste 6 Planning, Assessment and Adjustment Strategic and tactical decisions should be documented in a marketing plan. A solid mar- keting plan translates the strategy into specific tactics, catalogues the risks, and estab- lishes forecasts, budgets, and measurable objectives for the marketing effort. Strategic ‘market plans pose and answer three fundamental questions: 1. Where are we now (situation assessment) 2. Where do we want to go? and 3. How do we get there? The marketing plan is essential to realizing all of marketing strategy’s benefits. These benefits include considering the broad perspective, strengthening a market-orientation, and aligning the many disparate tactics. The marketing plan compels thorough analysis, dlarifies and documents assumptions, and records decisions. It helps the marketing manager prioritize issues, goals, and activities, The marketing plan is also the means by which a marketing manager gains sup- port for her or his brand or product and claims resources. In larger companies, brand or product managers do not usually have authority to demand resources—they must persuade the organization to devote resources to their brands and products. In smaller companies the marketing planning process is often the only formal planning mecha- nism and, therefore, plays a central role in setting expectations, steering resources, and directing activities. Table 6-1 presents a generic outline for a marketing plan, Much of the marketing plan content derives directly from the strategic marketing process (the focus of this sec~ tion and the organizing framework of this book). After an executive summary, the mar- keting plan should proceed through a situation assessment, marketing strategy, and a detailed implementation plan. The marketing plan will present the marketing strategy, including the target segments and target needs (the pain) and competitive advantages to be relied upon (the magic). It will also specify the positioning and spell out the vari- ous tactics to be used in time-specific detail. The marketing plan should very clearly es- tablish the size of the target segments and translate the size of the segments, forecasts of market share and sales, and the costs of planned activities into detailed budgets. Finally, the marketing plan should specify the uncertainties and risks inherent to the proposed strategy—and flesh-out contingencies and hedges to those risks. ‘Much of the content of any marketing plan (outlined in Table 6-1) comes directly out of the strategic marketing process that organizes this book. That is, a good marketing6-1 Generic Marketing Plan Outline Beecutive Summary Target need—Where's the pain? Solution—Where’s the magic? I Situation Assessment 2. Market Definition b. Context (PEST) € Customers d. Competition i. Strengths ii. Weaknesses ii. Offerings and Target Segments € Industry Analysis Il Company a.Firm Mission, Vision, and Objectives b. Value Chain Sustainable Competitive Advantages (ie, strengths) 4. Weaknesses ll Strategy 2. Segmentation i. Basis ii. Description ii. Sizing and Valuation b. Basis af Competition (competitive advantages) c Targeting d Positioning(s) @. Strategy Summary 1M. Marketing Mix(s) a. Product b. Price c Place 4. Promotions \V. Projections 2. Risks b. Forecasts c Budgets d. Financial and Profit Model (pro formas) @. Objectives V1. Appendices (detailed support for plan) plan includes a thorough situation assessment (includ- ing the four Cs of context, customer, company, and competitors), the stipulation of the specific strategy including competitive advantages and target segments, the identification of the desired positioning, and then the details of the marketing mix—all of which are key steps in this strategic planning framework. A Chapter 6 * Planning, Assessment and Adjustment 55 good marketing plan will document these decisions and plans and will also: + Catalog and assess the risks and uncertainties inherent to the plans * Estimate forecasts of sales and market changes; * Establish budgets and pro forma financial state- ments; and * Specify measurable and motivating objectives. This section reviews these final steps in establishing the marketing plan and accomplishing the marketing strategy. Risks ‘The marketing manager should identify risks and develop contingency plans while working on the marketing plan. This application of scenario plan- ning is ongoing and should be a background activi throughout the strategic marketing process, Managers should be cataloging “possible futures,” different events and changes that could impact the strategy both in the environment and within the firm. Risk is not to be avoided at all cost; risk isto be managed. “Only those who will risk going too far can possibly find out how far one can go.” TS. Eliot ‘Managing risk is not simple risk minimization or risk avoidance. Managing risk is evaluating risk and choosing which risks to accept and which to avoid. Risk is an important part of learning what will work. For example, Rowland Macy failed four times in the dry goods business before his Macy’s Store in New York City succeeded. Babe Ruth struck out 1,330 times, but he also hit 714 home runs. For the marketing strategist, success will not come from only accepting sure choices, but failure will certainly come from imprudent or ill-considered choices. As the marketing mix is being developed, itis important to assess the risks and potential obstacles to its success, One important way to examine “possible fu- tures” or contingencies is to assess the impact that an event or trend would have on the plan, and the likelihood of that event/trend occurring, Figure 6-1 shows an Impact/Likelihood Matrix. The marketing56 Section 1 * The Strategic Marketing Process Moderate | Significant ‘Management ‘Attention Required Minor Accept, ‘but Monitor Medium Likelihood FIGURE 6-1 Impact/Lik strategist should spell out ll of the assumptions about the way the world will be during a marketing program and the way things might change, and then challenge those assumptions asking: How likely is X to happen? And what is the impact if X does/does not occur? New product development in the cereal indus- try is a good example of the recognition of “accept- able” risks, and of cost-benefit considerations in re- gard to reducing uncertainty. The well-known research and consulting firm A.D. Little & Company found that despite the best consumer research ef- forts, 92 percent of all new cereals introduced failed. In response to that failure rate, many companies re- duced their expenditures on consumer research and began to simply launch more new products, letting the market decide what would “stick” and what would not.! Forecasts Forecasts, objectives, and budgets are interdependent bout they must be done concurrently and interactivel The aim is to optimize the budget and the commit- ment of resources to maximize expected (forecast) and desired outcomes (objectives). Expectations about outcomes are necessarily based in part on what actions the firm will take, and those actions are contingent on budgeted resources. At the same time, budgets are based on expectations about their effects. ‘This may seem obvious but it highlights the fact that no forecast, budget, or marketing mix plan stands alone—each impacts the others and so they must be developed concurrently and interactively. In practice, a number of methods are avail- able for estimating future sales, including assess- ment of buyer’s intentions, sales force estimates, expert opinions, market tests, and time-series analysis. Quantitative methods can be complex but one quantitative tool, regression analysis, and its un- derlying logic are invaluable to strategic thinking, Regression logic is the idea that some outcome or “dependent” variable can be predicted by multiple inputs or “causes” (“independent” variables). For ex- ample, most marketing managers understand that sales are caused by, among other things, sales-force effort and advertising, as well as by the price of com- petitive products, and interest rates. Sales-force effort and advertising are controlled by the firm; the price of competitive products is an external factor con- trolled by the competition; interest rates are a macro- level environmental factor. In this way, the manager can think logically about the relationships andop sales forecasts based on multiple causal fac- forsin « formula that might look like this: 1 = BSSelling) + B($Advertising) ~ BlPriceys — Pricecomp) + B(AIntRate) + competitive intelligence and other inputs, and fore- ts changes in interest rates to forecasts sales, ‘The accuracy of a sales forecast as well as the ficity of objectives can be improved when those sand objectives are decomposed into the com- nts that influence future sales volume. One usefial is staircase analysis (Figure 6-2). Staircase analysis timates market potential, actual market, brand areness, brand image, purchase rate, share of wallet, the repurchase rate, and the cross-buying rate. After having accurate estimates of these factors, a company more precisely forecast its future sales by predict- the change in market potential, in the actual mar ket in the brand awareness, purchase rate, repurchase Potential Actual Brand Brand Market Market. Awareness Awareness Brand (Aided) (Unaided) Image Recall Recall FIGURE 6-2 Example of Staircase Analysis Positive Purchase Share of Chapter 6 * Planning, Assessment and Adjustment 57 rate, and so on, These numbers than can also be used to formulate specific marketing objectives. Budgets One of the crucial functions of the marketing plan is, to convert planned actions and forecasts into planned (“budgeted”) expenditures. A budget specifies the money to be spent by area and allocates scarce finan- cial resources across activities. Depending upon the available resources, the strategist can propose a cer- tain marketing mix, make assumptions about com- petitive and other uncontrollable environmental events, and forecast results. Depending on those forecasts, the objectives and budgets can be reformu- lated or the mix can be adjusted. Thus, budgeting is interactive with planning and forecasting; like a hy- draulic system, raising levels in one (plans, forecasts, or budgets) will change the constraints and outcomes of the others. For this reason, modeling planned ac- tions, forecasts, and budgets interdependently in “sensitivity analyses” is an invaluable exercise. Rate Wallet Customers Customers Selling58 Section | * The Strategic Marketing Process Budgeting has four defining inputs: 1, Timeframe. To be useful, a budget must have a specific timeframe. It would not be enough to determine how much would be spent with- out knowing when it will be spent, Quarter and annual budgets are common, with assess- ment happening more often and budget ad- justment occurring less frequently. 2. Allocations. Firms allocate financial and other resources to marketing organizations. Sometimes that allocation is as a percentage of past sales/profits, other times as a function of objectives and aspirations. This allocation sets a basic limit on budget expenditures. If allocations are based on objectives, it becomes paramount that the marketing organization influences the formation of those objectives with realistic fore- casts and well-grounded aspirations. 3. Forecasts. Sales forecasts are the expected out- comes of marketing actions and other factors such as market growth, competitor actions, etc. Marketing actions (ice. the elements of the mix) are based in part on these forecasts. Thus, forecasts and budgets are interactive. Specific forecasts about the effectiveness of the various marketing mix elements (ie., estimates of “Return on Marketing Investment” or ROMI by marketing mix tool) are basic inputs to budgeting. Regression analysis and “regression thinking” are important tools to determining ROMI coefficients. 4. Objectives. Realistic objectives take into ac- count budget constraints, so budgeting and objective-setting are also interactive. In the budgeting process, resources are allocated to maximize achievement of or progress towards the firm’s objectives. Factors to be considered in budgeting include corporate-level (mis- sions, goals, etc.) and_business-unit-level (profits, sales, growth, etc.) objectives. Based on forecasts and objectives, budgets are created that assign resources to the specific marketing mix elements (the five Ps) and support activities, including marketing research and research and devel- ‘opment (R&D or new product development). To fa- cilitate assessment and adjustment, budgets should be hierarchical; that is, budgets should summarize Marketing Communications Advertising Electronic Marketing Direct Marketing Public Relations Events Promotions Consumer Trade Merchandising Personal Selling Hiring Training Firing Sales Support and Channel Communications Marketing Administration Overhead Personnel Marketing Research Production Units Produced (units) Variable Costs (per unit) Cost of Goods Sold Inventory Holding Costs Inventory Disposal Costs expense categories at a high level but should also in- clude specific breakdowns of each high-level category into as much specific detail as is reasonable. For ex- ample, consumer-goods companies’ budgets are likely to make a distinction between moneys to be spent on selling/push-side efforts (personal selling, trade pro- motions, etc.) and consumer-oriented expenditures such as advertising, event marketing, and price-based promotions. It is also possible to categorize “advertis- ing” into television, print, and electronic. Budgets should be constructed so that strategic planners can readily understand that hierarchy from major cate- gories of expenditures down to detailed and specific expenses. Table 6-2 lists some common components or “lines” of marketing budget expenses. Establishing Specific Objectives Preliminary objectives are developed based on the cor- porate mission and vision and on the strategy. More specific objectives tied to detailed metrics and out- comes are developed interactively with forecasts andets, Exactly what does the strategy and the market- ‘plan mean to accomplish and how will we know if thse objectives have been achieved? Objectives should be “SMART”—Specific, Measureable, Achievable, nt, and Tinne-specific—and should be assessed appropriate behaviors and facilitate timely adjustment toperformance and changes in the environment. Three distinct sorts of objectives are useful and ‘common in developing marketing strategies: sales bjective, customer objectives, and financial or profit objectives. Sales and profit objectives are pretty straightforward; sales objectives have to do with ants sold, dollar sales, and market share. Customer objectives include things like customer readiness variables (c.g, awareness, and interest), customer sat isfaction and recommendation behaviors, and cus- ‘omer loyalty. Financial or profit objectives involve margins, total profits, and returns. ASSESSMENT AND ADJUSTMENT “However beautiful the strategy, you should occasionally look at the result.” Winston Churchill ‘Throughout the strategic marketing process a constant theme has been specificity in spelling out tactics, budg- ais, objectives, and forecasts. The specificity, measura- bilty/quantification, and time-specific nature of the plan facilitate assessment and adjustment. Recognizing variation from forecasts, objectives, and budgets is a ‘crucial input to assessment. The variables that should beassessed on an ongoing basis include financial, oper- ational, and market- or customer-related outcomes {these are, by design, the same metrics included in ob- jective setting and gap analysis). These various metrics «an be considered at the firm, business-unit, product, and account level. Table 6-3 presents some typical fi- nancial and operating metrics. Different industries and different firms use some or all of these along with other idiosyncratic markers of performance. Market-/Customer-Related Metrics Customer Relationship Management systems collect, ‘on an ongoing basis, data about customers and their responses to the firm’s marketing mix. Those data are sed to tailor the firm’s offerings and communications Chapter 6 * Planning, Assessment and Adjustment 59 TABLE 6-3 Typical Financial and Operating Metrics Operating __* Product quality Metrics © Inventory Turns + Fulfilment time * Stock-outs * Process capability + Labor productivity Financial © Overall Profits Metrics * Profit Growth Contribution and Margins * Revenue Growth * Total Operating Cost *# Cash-to-Cash cycle ‘* Return on Investment (RO!) + Gross-Margin Return on Investment (GMRO}) « Residual Income/EVA [Economic Value Added} toward profitable customers and to evaluate and ad- just ongoing efforts. In fact, market- and customer- related metrics are essential to assessing and adjusting marketing strategies. Customer-related metrics clude things like customer satisfaction, profitability, loyalty, and intention-to-recommend. They also in- clude gauges such as secret-shopper reports—which do not rely on surveying customers. THE VALUE OF MEASURING RECOMMENDATION INTENTION. Customer satisfaction, repeat-purchase intention, and intention-to-recommend are generally considered to be the three essential markers of how well customers are responding to their experiences with the firm and its offerings. Research efforts have focused on reducing those various customer responses to some more parsimonious measures that can be eas- ily collected and assessed. That is, too many customer- response metrics can be confusing, and it seems evi- dent that all of these things are, ata basic level, tapping into the same underlying customer evaluations Frederick Reichheld, an authority on strategy and a partner with Bain and Company, conducted research that began with roughly 20 items tapping various post-consumption responses ranging from satisfac tion, loyalty (“How strongly to you agree that [com- pany X] deserves your loyalty?”), and repeat-purchase60 Section 1 + ‘The Strategic Marketing Process intention (“How likely is it that you will continue to purchase products/services from [company X]?”) The single item “How likely is it that you would recom- mend [company X] to a friend or colleague?” on a scale from 1 to 10 (extremely likely) was found to be the most predictive of future behaviors (actual recom- mendations as well as actual repeat purchase) and, at the firm level, of future growth and profitability. To compute Reichheld’s “Net Promoter Index,” the firm sums the number of customers who respond with a nine or a ten on the single question (customers are la- beled “Promoters”) and subtracts the number who re- sponded with anything from a zero to a six (those Reichheld labeled “Detractors’; respondents who gave a seven or an eight are termed “passively satisfied”): Net Promoter = ¥\(9, 10) — (0, 1,2,3,4, 5, 6) Reichheld has argued that this Net Promoter score is the “ultimate question,’—the “one number you need to grow.” Although it isa simplification of the com- plex array of customer responses that likely begin with some evaluation like “satisfaction,” it is certainly ‘Company Profit” Acauisition Cost a revealing post-consumption marker of customers’ appraisals of the marketing programs. LOYALTY-BASED MARKETING. Targeting loyal cus- tomers—and especially profitable loyal customers can ead to dramatic improvements in profitability. Reichheld also conducted numerous studies across in- dustries on the relationship between customer loyalty and firm profits and growth, and found that firms with more loyal customers were more profitable. He attributed that relationship to the related findings that longer-term customers spread acquisition costs across more purchases and continue to provide base profits while increasing their purchases, costing less to serve, referring other customers to the products/brands, and even paying a price premium (see Figure 6-3.4 Subsequent research has augmented those findings to propose that it is not just loyalty that matters, but, rather, loyalty and profitability. The converse to target- ing profitable, loyal customers is also true: although wwe generally think of firms as ceaselessly seeking to at- tract more customers, “firing” unprofitable and fickle customers can also improve results. 2 i 3 z 5 3 2. 5 Profit from Reduced (Operating Costs Profit rom Increased Purchases and Higher “This Pattern is Based on ‘our Experience in Many Industries. FIGURE 6-3 Why Loyal Customers Are More Profitable®Thus, the core metrics—customer satisfaction, asiomer loyalty, customer profitability, and “cost 10 are all essential in setting objectives and are key basis of assessment and adjustment for strate jie marketing planning. Some of these data come operational data—sales and shipment records, uunting systems, and the like—and other data fom surveys of current customers. Customer tionship Management (CRM) systems track and ganize those customer data at the segment and the vidual customer level for tailoring offerings, tar- fing communications, and, notably, for assessing andadjusting the strategy and marketing mix. MONITORING THE ENVIRONMENT. It is also im- Portant to forecast external factors related to the Summary iis first section of this book, Strategic Marketing has lhid out a concise, high-level roadmap for strategic mar- Keting analysis and planning, This is a powerful “way of Situation ‘Assessment Strategy Formation Implementation: Postioning end Warkoting ran) the Marketing Mix — Forocats Documentation, , Assessment and ‘Aalustment FIGURE 6-4 The Strategic Marketing Process Chapter 6 * Planning, Assessment and Adjustment 61 strategy and to monitor those factors. Forecasts of economic conditions and market-wide factors used as the bases for planning should be specified during the planning and then assessed continuously. In de- veloping the marketing plan, the strategist should strive to surface assumptions about expected re- sponses by customers, competitors, channel part- ners, and other constituents. As strategy is estab- lished and its implementation begun, those Parameters must be monitored, thus beginning anew the situation assessment and strategy formation stages. Assessment and adjustment feeds back into gap analyses of all of the earlier steps in strategic marketing analysis and planning—situation assess- ‘ment, strategy formation, and implementation via positioning and the marketing mi thinking” that is practical, effective, and complete— shown again graphically in Figure 6-4. This is how you ar- tack strategic marketing. This framework identifies and62 Section 1 + ‘The Strategic Marketing Process organizes the tools and frameworks required for drilling down into a particular challenge, and it clearly points the reader to short notes that elaborate on those tools. The situation ‘Assessment Strategy Formation Implementatic sections that follow will put meat on that skeleton with more detailed notes on how to apply the tools referenced ‘thus far, Positioning and. the Marketing Mix Not 3: Budgets, Forecasts, Documentation, sr Saeco Assessment and Note a: aster and me ‘Nine a [App A: The Basic Financial amr are Srmgy Linking Documentation, Assessment and Adjustment to Relevant Tools and Frameworks Endnotes |, Willard I, Zangwill, “Manager's Journal: When Customer Research Is a Lousy Idea,” Wall Street Journal (March 8, 1993): A12. 2. Fred Reichheld, “The Ultimate Question: Driving Good Profits and True Growth” (Boston, MA: Harvard Business Press, 2006); and Frederick F. Reichheld, “The One Number You Need to Grow,’ Harvard Business Review 81, no. 12 (December 2003): 46-54. 3. bid. 4, Frederick F.Reichheld and Thomas Teal, The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Boston, MA: Harvard Business Press, 1996); Frederick F. Reichheld, “Loyalty-based Management,” Harvard Business Review 71, no. 2 (March 1993): 64-73; and, Frederick F. Reichheld and W. Earl Sasser Jr, “Zero Defections: Quality Comes to Services,” Harvard Business Review 68, no. 5 (September-October, 1990): 105-111. Ibid. This figure is found on page 39 of The Loyalty Effect.SITUATION ASSESSMENT 1 Market Definition Red Bull, the Austrian company that is credited with creating the energy-drinks market in the early 1980s, sells more than four billion units per year and, according to some mar- ket analysts, commands a 60 percent market share.' However, other sources say that Red Bull's market share is just 12 percent,’ and others say it is even less. Which is right? The answer is: “all ofthe above.” Gauging Red Bull’s market share depends, of course, on how you define the market. In the energy drinks market, Red Bull is the clear market leader with approximately 60 percent of the market. In the “functional drinks” market, which also includes sports drinks such as Gatorade, Red Bull has a share of about 12 percent. Ultimately, in the “beverage” market, Red Bull competes with bottled water, colas, and juices, and it has only a tiny market share. So what is the correct definition of a market? This question is important, and it hhas a number of implications for marketing. For one, this question defines who the competitors are and what potential substitutes exist for a product. It also defines the competitive position (relative market share) of a product in the product portfolio. If the market is defined too narrowly, a product will have a limited number of competi- tors and a high market share, and a company might overlook threats or possible sub- stitutes (e.g., sports drinks or functional foods that could serve as a substitute for an energy drink). It might also miss opportunities to meet related customer needs. On. the other hand, defining the market too broadly can complicate matters instead of simplifying decision making, by considering too many competitors and substitutes (some of which may be irrelevant).? One way to define a market and identify competition is to examine patterns of substitution.“ This can be done from a demand-side perspective or from a supply-side Perspective. The demand-side perspective analyzes substitutes that are considered by the customer during the buying decision because they offer similar functions, In con- trast, the supply-side approach tries to identify all competitors that could serve the needs of a customer group. 63