Windshield Wiper Milestone One Context Need Pricing

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timer Asked: Feb 21st, 2019
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Question Description

Products:

Today's electric car batteries have insufficient battery life and cannot complete long-distance travel. I want to design the hood of the car into a solar panel as an auxiliary charging device. During the car journey, the hood charges the electric car by absorbing solar energy, increasing the battery life of the electric car.

requirements of content:

Milestone One: Context, Need, Pricing
In Module Three, you will submit a short paper covering context, need, and pricing. This milestone establishes your chosen organization’s direction within the
marketplace. This is important because it drives the subsequent activities, milestones, and the final project. Without a strong sense of the organization’s purpose
within the marketplace, knowledge of consumer trends, and how to meet target market needs at the appropriate price, management is less likely to maximize
the efficiency of business activities and more likely to miss fully meeting the needs of its chosen target market. This milestone establishes how the organization
will differentiate itself from its competition through branding with a unique product or service offering designed to meet specific consumer needs or desires that
are shaped by their demographics, personality, or buying style. This milestone will be graded with the Milestone One Rubric.

requirements of formation :

executive summary
complete APA formatting
English proficient graduate-level writing

Ma r rke ke ting Management M a na gement A S t r ate gic De cis io n- Ma k i n g Ap p ro a c h This page intentionally left blank Ma rke ting t ing Management M a na gement A S t r a t eg ic Dec isio n- Ma k i n g Ap p ro a c h E ight h Editio n J o h n W . Mu l l i ns Asso ciate Pro fe ss o r o f M ana ge m e nt P r a c t i c e i n M a rk e t i ng and E n trepr en eu rs h ip L ondo n B us ine ss S ch o o l Orv i l l e C . Wal k er , J r . J ame s D. W atk ins Pro fe ss or o f M a rk e t i ng , E m e ri t us U niv ersity o f M inn es o ta MARKETING MANAGEMENT: A STRATEGIC DECISION-MAKING APPROACH, EIGHTH EDITION Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. Previous editions © 2010, 2008, and 2005. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper containing 10% postconsumer waste. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 ISBN: 978–0–07–802879–3 MHID: 0–07–802879–5 Vice President & Editor-in-Chief: Brent Gordon Vice President of Specialized Publishing: Janice M. Roerig Blong Editorial Director: Paul Ducham Marketing Manager: Donielle Xu Managing Development Editor: Laura Hurst Spell Project Manager: Jolynn Kilburg Design Coordinator: Brenda A. Rolwes Cover Image: Getty Images Buyer: Kara Kudronowicz Media Project Manager: Balaji Sundararaman Compositor: S4Carlisle Publishing Services Typeface: 10/12 Times Roman Printer: R.R. Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Mullins, John W. (John Walker) Marketing management : a strategic decision-making approach / John W. Mullins, Orville C. Walker, Jr. — 8th ed. p. cm. Includes index. ISBN 978–0–07–802879–3 — ISBN 0–07–802879–5 1. Marketing—Management. I. Walker, Orville C. II. Title. HF5415.13.M352324 658.8—dc23 2013 2011049516 www.mhhe.com ABOUT THE AUTHORS John W. Mullins John W. Mullins is Associate Professor of Management Practice in Marketing and Entrepreneurship at London Business School. He earned his MBA at the Stanford Graduate School of Business and, considerably later in life, his PhD in marketing from the University of Minnesota. An award-winning teacher, John brings to his teaching and research 20 years of executive experience in high-growth firms, including two ventures he founded, one of which he took public. Since becoming a business school professor in 1992, John has published more than 40 articles in a variety of outlets, including Harvard Business Review, MIT Sloan Management Review, and The Wall Street Journal, as well as in numerous scholarly journals in marketing and in entrepreneurship. His research has won national and international awards from the Marketing Science Institute, the American Marketing Association, and the Richard D. Irwin Foundation. He is also coauthor of Marketing Strategy: A DecisionFocused Approach, 7th edition. John’s consulting, executive education, and prolific case-writing regularly take him to destinations in Africa, India, and Latin America. His best-selling trade book, The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan, is the definitive work on the assessment and shaping of market opportunities. John’s newest trade book, Getting to Plan B: Breaking Through to a Better Business Model with noted venture capital investor Randy Komisar, has won widespread critical acclaim. It is reshaping the approach entrepreneurs and other innovators are taking to starting their ventures. Orville C. Walker, Jr. Orville C. Walker, Jr. is Professor Emeritus in the University of Minnesota’s Carlson School of Management, where he served until recently as the James D. Watkins Professor of Marketing and Director of the PhD Program. He holds a master’s degree in social psychology from Ohio State University and a PhD in marketing from the University of Wisconsin–Madison. Orville is the coauthor of three books and has published more than 50 research articles in scholarly and business journals. He has won several awards for his research, including the O’Dell award from the Journal of Marketing Research, the Maynard award from the Journal of Marketing, and a lifetime achievement award from the Sales Management Interest Group of the American Marketing Association. Orville has been a consultant to a number of business firms and not-for-profit organizations, and he has taught in executive development programs around the world, including programs in Poland, Switzerland, Scotland, and Hong Kong. Perhaps his biggest business challenge, however, has been his attempt to turn a profit as the owner-manager of a small vineyard in western Wisconsin. v Brief Contents Preface xvi Section One 10 Product Decisions 11 Pricing Decisions 250 280 The Role of Marketing in Developing Successful Business Strategies 1 12 Distribution Channel Decisions 308 13 Integrated Promotion Decisions 342 1 The Marketing Management Process 2 Section Four 2 The Marketing Implications of Corporate and Business Strategies 30 Strategic Marketing Programs for Selected Situations 373 14 Marketing Strategies for a Digitally Networked World 374 15 Understanding Market Opportunities 68 Strategies for New and Growing Markets 400 16 4 Understanding Consumer Buying Behavior 96 Strategies for Mature and Declining Markets 436 Section Five 5 Understanding Organizational Markets and Buying Behavior 122 Implementing and Controlling Marketing Programs 465 6 Measuring Market Opportunities: Forecasting and Market Knowledge 146 17 Organizing and Planning for Effective Implementation 466 18 7 Targeting Attractive Market Segments 178 Measuring and Delivering Marketing Performance 492 8 Differentiation and Brand Positioning 202 Section Two Market Opportunity Analysis 3 67 Section Three Developing Strategic Marketing Programs 225 9 vi Business Strategies: A Foundation for Marketing Program Decisions 226 Index 519 Contents Preface xvi Who Does What? Marketing Institutions 21 Who Pays the Cost of Marketing Activities— And Are They Worth It? 22 Room for Improvement in Marketing Efficiency 23 The Role of the Marketing Decision Maker 23 Section One The Role of Marketing in Developing Successful Business Strategies 1 1 The Marketing Management Process 2 Some Recent Developments Affecting Marketing Management 24 Samsung—Building a Global Brand 2 New Competitive and Marketing Strategies The Results 3 Marketing Challenges Addressed in Chapter 1 Why Are Marketing Decisions Important? 21 Globalization 24 Increased Importance of Service 25 Information Technology 25 Relationships across Functions and Firms 2 3 4 The Importance of the Top Line 5 Marketing Creates Value by Facilitating Exchange Relationships 5 What Factors Are Necessary for a Successful Exchange Relationship? 5 1. Who Markets and Who Buys? The Parties in an Exchange 6 2. Customer Needs and Wants 7 3. What Gets Exchanged? Products and Services 10 4. How Exchanges Create Value 10 5. Defining a Market 12 What Does Effective Marketing Practice Look Like? 13 Marketing Management—A Definition 13 Integrating Marketing Plans with the Company’s Strategies and Resources 15 Market Opportunity Analysis 16 Formulating Strategic Marketing Programs 17 Formulating Strategic Marketing Programs for Specific Situations 18 Implementation and Control of the Marketing Program 19 The Marketing Plan—A Blueprint for Action 19 Take-aways Endnotes 2 27 27 28 The Marketing Implications of Corporate and Business Strategies 30 IBM Switches Strategies 30 Technology Changes and Competitor Actions Require a Shift in Strategy 30 A New Corporate Strategy 31 New Business and Marketing Strategies 31 The Bottom Line 32 Marketing Challenges Addressed in Chapter 2 32 What Is Marketing’s Role in Formulating and Implementing Strategies? 33 Market-Oriented Management 35 Does Being Market-Oriented Pay? 35 Factors That Mediate Marketing’s Strategic Role 36 Three Levels of Strategy: Similar Components, but Different Issues 39 Strategy: A Definition 39 The Components of Strategy 39 The Hierarchy of Strategies 40 Corporate Strategy 40 vii viii Contents Business-Level Strategy Marketing Strategy 42 42 Your Market Is Attractive: What about Your Industry? 80 The Marketing Implications of Corporate Strategy Decisions 42 Corporate Scope—Defining the Firm’s Mission 42 Corporate Objectives 47 Corporate Sources of Competitive Advantage 49 Corporate Growth Strategies 49 Allocating Corporate Resources 52 Limitations of the Growth-Share Matrix Sources of Synergy 57 Challenges in Macro-Level Market and Industry Analysis 84 Information Sources for Macro-Level Analyses 85 Understanding Markets at the Micro Level 54 Mission, Aspirations, and Risk Propensity It’s Who You Know, Not What You Know Putting the Seven Domains to Work 90 91 Anticipating and Responding to Environmental Change 91 62 Impact and Timing of Event Section Two 67 Take-aways Endnotes The Cellular Telephone Business: Increasing Competition in a Growing Market 68 4 The Mobile Telephony Market 68 Cell Phone Manufacturing 68 Cell Phone Service Providers 69 Network Equipment Down, Too 69 Marketing Challenges Addressed in Chapter 3 Markets and Industries: What’s the Difference? Assessing Market and Industry Attractiveness 92 Swimming Upstream or Downstream: An Important Strategic Choice 93 Understanding Market Opportunities 68 93 94 Understanding Consumer Buying Behavior 96 Cruise Ships—Not Just for Grandma and Grandpa Anymore 96 70 70 71 Macro Trend Analysis: A Framework for Assessing Market Attractiveness, Macro Level 72 The Demographic Environment 72 The Sociocultural Environment 75 The Economic Environment 76 The Regulatory Environment 77 The Technological Environment 78 The Natural Environment 79 89 Ability to Execute on the Industry’s Critical Success Factors 90 Take-aways 62 3 88 The Team Domains: The Key to the Pursuit of Attractive Opportunities 89 How Should Strategic Business Units Be Designed? 59 The Business Unit’s Objectives 59 The Business Unit’s Competitive Strategy 60 Market Opportunity Analysis 86 Understanding Industries at the Micro Level The Marketing Implications of Business-Unit Strategy Decisions 58 Endnotes Porter’s Five Competitive Forces 80 A Five Forces Analysis of the Cellular Phone Service Industry 83 Savvy Marketing Helped Fuel Industry Growth 96 Future Challenges 97 Marketing Challenges Addressed in Chapter 4 98 The Psychological Importance of the Purchase Affects the Decision-Making Process 99 How Do Consumers Make High-Involvement Purchase Decisions? 99 Low-Involvement Purchase Decisions 107 Understanding the Target Consumer’s Level of Involvement Enables Better Marketing Decisions 107 ix Contents Installations 142 Accessory Equipment 142 Operating Supplies 143 Business Services 143 Why People Buy Different Things: Part 1— The Marketing Implications of Psychological and Personal Influences 111 Perception and Memory 111 Needs and Attitudes 112 Demographics, Personality, and Lifestyle Take-aways 115 Why People Buy Different Things: Part 2—The Marketing Implications of Social Influences 117 Culture 117 Social Class 118 Reference Groups 118 The Family 119 Endnotes 120 Understanding Organizational Markets and Buying Behavior 122 DHL Supply Chain: Building Long-Term Relationships with Organizational Buyers Marketing Challenges Addressed in Chapter 5 123 124 A Comparison of Organizational versus Consumer Markets 124 What Do the Unique Characteristics of Organizational Markets Imply for Marketing Programs? 126 The Organizational Customer Is Usually a Group of Individuals 126 How Organizational Members Make Purchase Decisions 129 Types of Buying Situations 129 The Purchase Decision-Making Process 130 The Marketing Implications of Different Organizational Purchasing Situations 136 Purchasing Processes in Government Markets 138 Selling Different Kinds of Goods and Services to Organizations Requires Different Marketing Programs 139 Raw Materials 139 Component Materials and Parts Measuring Market Opportunities: Forecasting and Market Knowledge 146 141 146 Bell’s Charter at Intel 146 How Do Anthropology and Ethnography Work? 147 What Is Bell Learning about Generation X? 147 Can Bell’s Work Make a Difference? 147 Marketing Challenges Addressed in Chapter 6 Every Forecast Is Wrong! 122 Building Long-Term Relationships with Customers 122 Long-Term Relationships Enhance Long-Term Performance 123 Who Is the Customer? 6 144 Intel’s Secret Weapon Take-aways 120 5 Endnotes 144 148 148 A Forecaster’s Tool Kit: A Tool for Every Forecasting Setting 149 Statistical and Other Quantitative Methods 150 Observation 151 Surveys or Focus Groups 151 Analogy 153 Judgment 153 Market Tests 154 Psychological Biases in Forecasting 154 Mathematics Entailed in Forecasting 154 Rate of Diffusion of Innovations: Another Perspective on Forecasting 156 The Adoption Process and Rate of Adoption 156 Adopter Categories 157 Implications of Diffusion of Innovation Theory for Forecasting Sales of New Products and New Firms 157 Cautions and Caveats in Forecasting 159 Keys to Good Forecasting 159 Common Sources of Error in Forecasting Why Data? Why Marketing Research? 160 160 Customer Relationship Management: Charting a Path toward Competitive Advantage 162 Internal Records Systems 162 Marketing Databases Make CRM Possible 163 x Contents Why CRM Efforts Fail 166 Client Contact Systems 166 Competitive Intelligence Systems Choosing Attractive Market Segments: A Five-Step Process 189 167 Step 1: Select Market-Attractiveness and Competitive-Position Factors 190 Step 2: Weight Each Factor 193 Step 3: Rate Segments on Each Factor, Plot Results on Matrices 193 Step 4: Project Future Position for Each Segment 195 Step 5: Choose Segments to Target, Allocate Resources 195 Marketing Research: A Foundation for Marketing Decision Making 167 Step 1: Identify the Managerial Problem and Establish Research Objectives 168 Step 2: Determine the Data Sources and Types of Data Required 169 Step 3: Design the Research 171 Step 4: Collect the Data 174 Step 5: Analyze the Data 174 Step 6: Report the Results to the Decision Maker 175 Different Targeting Strategies Suit Different Opportunities 196 Niche-Market Strategy 197 Mass-Market Strategy 197 Growth-Market Strategy 198 What Users of Marketing Research Should Ask 175 Rudimentary Competence: Are We There Yet? 175 Global Market Segmentation Take-aways Take-aways 176 Endnotes Endnotes 176 8 7 Targeting Attractive Market Segments 178 The New Middle Class: Who and How Large? 178 Targeting India’s New Middle Class 179 Targeting: One Ingredient in Marketing Success 179 Marketing Challenges Addressed in Chapter 7 200 Differentiation and Brand Positioning 202 202 The Jared Diet 202 Repositioning Fuels Subway’s Growth 202 Value: A Second Dimension to Subway’s Positioning 203 Marketing Challenges Addressed in Chapter 8 203 180 Do Market Segmentation and Target Marketing Make Sense in Today’s Global Economy? 180 Most Markets Are Heterogeneous 181 Today’s Market Realities Often Make Segmentation Imperative 181 How Are Market Segments Best Defined? 199 Fast Food Turns Healthy The Developing World’s Emerging Middle Class 178 198 Differentiation: One Key to Customer Preference and Competitive Advantage 204 Differentiation among Competing Brands Physical Positioning 205 Limitations of Physical Positioning 182 Who They Are: Segmenting Demographically 183 Where They Are: Segmenting Geographically 185 Geodemographic Segmentation 185 How They Behave: Behavioral Segmentation 186 Innovative Segmentation: A Key to Marketing Breakthroughs 189 Perceptual Positioning 205 206 206 Levers Marketers Can Use to Establish Brand Positioning 207 Preparing the Foundation for Marketing Strategies: The Brand Positioning Process 208 Step 1: Identify a Relevant Set of Competitive Products 209 Step 2: Identify Determinant Attributes 210 Step 3: Collect Data about Customers’ Perceptions for Brands in the Competitive Set 212 xi Contents Step 4: Analyze the Current Positions of Brands in the Competitive Set 212 Step 5: Determine Customers’ Most Preferred Combination of Attributes 216 Step 6: Consider Fit of Possible Positions with Customer Needs and Segment Attractiveness 218 Step 7: Write Positioning Statement or Value Proposition to Guide Development of Marketing Strategy 218 Appropriate Conditions for a Prospector Strategy 238 Appropriate Conditions for an Analyzer Strategy 240 Appropriate Conditions for a Defender Strategy 240 How Different Business Strategies Influence Marketing Decisions 242 Product Policies 243 Pricing Policies 245 Distribution Policies 245 Promotion Policies 245 The Outcome of Effective Positioning: Building Brand Equity 221 Managing Brand Equity 222 Take-aways 224 What If the Best Marketing Program for a Product Does Not Fit the Business’s Competitive Strategy? 246 Endnotes 224 Take-aways Some Caveats in Positioning Decision-Making 223 Endnotes 248 248 Section Three Developing Strategic Marketing Programs 225 10 9 Marketing Challenges Addressed in Chapter 10 Business Strategies and Marketing Programs at 3M 226 How Do Businesses Compete? 228 229 Generic Business-Level Competitive Strategies 229 Do the Same Competitive Strategies Work for Single-Business Firms and Start-ups? 232 Do the Same Competitive Strategies Work for Service Businesses? 232 Do the Same Competitive Strategies Work for Global Competitors? 234 Will the Internet Change Everything? 234 How Do Competitive Strategies Differ from One Another? 235 Differences in Scope 235 Differences in Goals and Objectives 237 Differences in Resource Deployments 237 Differences in Sources of Synergy 238 Deciding When a Strategy Is Appropriate: The Fit between Business Strategies and the Environment 238 250 Product Decisions in a Services Business Business Strategies: A Foundation for Marketing Program Decisions 226 Marketing Challenges Addressed in Chapter 9 Product Decisions 250 251 Product Design Decisions for Competitive Advantage 252 Goods and Services: Are the Product Decisions the Same? 253 Product Quality and Features Decisions 253 Branding Decisions 255 Packaging Decisions 258 Services Decisions and Warranties 258 Managing Product Lines for Customer Appeal and Profit Performance 259 Product Systems 260 New Product Development Process Decisions 261 The Importance of New Products to Long-Term Profitability 261 New Product Success and Failure 261 Organizing for New Product Development 262 Key Decisions in the New Product Development Process 263 Limitations of Stage Gate Thinking and Processes 270 Product Decisions over the Product Life Cycle 271 Market and Competitive Implications of Product Life Cycle Stages 272 xii Contents Strategic Implications of the Product Life Cycle 277 Limitations of the Product Life Cycle Framework 278 Designing Distribution Channels: What Kinds of Institutions Might Be Included? 315 Merchant Wholesalers 315 Agent Middlemen 315 Retailers 316 Nonstore Retailing 317 Take-aways 278 Endnotes 278 Channel Design Alternatives 11 Pricing Decisions 280 Ryanair: Low Prices, High Profits—But Increasing Costs 280 Marketing Challenges Addressed in Chapter 11 A Process for Making Pricing Decisions 281 Alternative Consumer Goods Channels 319 Alternative Industrial Goods Channels 320 Which Alternative Is Best? It Depends on the Firm’s Objectives and Resources 320 Availability and the Satisfaction of Customer Service Requirements 321 Promotional Effort, Market Information, and Postsale Service Objectives 323 Cost-Effectiveness 324 Flexibility 326 Multichannel Distribution 326 282 Strategic Pricing Objectives 283 Estimating Demand and Perceived Value 286 Estimating Costs 289 Analyzing Competitors’ Costs and Prices 290 Methods Managers Use to Determine an Appropriate Price Level 291 Cost-Oriented Methods 291 Competition-Oriented Methods 293 Customer-Oriented Methods 295 Channel Design for Global Markets Channel Design for Services 306 Take-aways 308 Selling Soft Drinks in Africa—Coke Builds a Distribution System 308 Endnotes 13 Marketing Challenges Addressed in Chapter 12 309 Why Do Multifirm Marketing Channels Exist? 310 Designing Distribution Channels: What Are the Objectives to Be Accomplished? 311 Product Availability 311 Meeting Customers’ Service Requirements Promotional Effort 314 Market Information 314 Cost-Effectiveness 314 Flexibility 314 331 Vertical Marketing Systems 331 Sources of Channel Power 334 Channel Control Strategies 334 Trade Promotions—Incentives for Motivating Channel Members 335 Channel Conflicts and Resolution Strategies 338 305 12 Distribution Channel Decisions 330 Channel Management Decisions Take-aways 306 Endnotes 327 Market Entry Strategies 327 Channel Alternatives 328 Deciding on a Price Structure: Adapting Prices to Market Variations 299 Geographic Adjustments 299 Global Adjustments 300 Discounts and Allowances 301 Differential Pricing 303 Product-Line Pricing Adjustments 318 339 340 Integrated Promotion Decisions 342 Nano Goes Nowhere 342 Marketing Missteps 342 Tata Responds 343 Marketing Challenges Addressed in Chapter 13 343 The Promotion Mix: A Communication Tool Kit 344 313 Developing an Integrated Marketing Communications Plan 345 Step 1: Define the Audience(s) to Be Targeted 345 Step 2: Set the Promotional Objectives 346 Step 3: Set the Promotion Budget 347 xiii Contents Step 4: Design the Promotion Mix 348 Step 5: Evaluate the Results 350 Developing Digital World Marketing Strategies: The Critical Questions 391 The Nitty-Gritty of Promotional Decision Making 351 Managing Digitally Networked Strategies: The Talent Gap 395 Making Advertising Decisions 351 Making Personal Selling Decisions 362 Making Sales Promotion Decisions 367 Making Public Relations Decisions 368 . . . And All the Rest 369 Developing Strategies to Serve Digital World Markets 396 Serving the Dot-Com Markets of Tomorrow 397 Take-aways Endnotes Take-aways 370 398 398 Endnotes 370 15 Section Four Canon, Inc.—Success That Is Hard to Copy Strategic Marketing Programs for Selected Situations 373 Games as Apps 374 More than Games 374 Business Models 375 Is It Real, or Is It a Bubble? 374 375 Marketing Challenges Addressed in Chapter 14 375 Does Every Company Need a Social Media Strategy? 376 Threats or Opportunities? The Inherent Advantages and Disadvantages of the Digital World for Marketers 378 The Syndication of Information 378 Increasing Returns to Scale of Network Products 379 The Ability to Efficiently Personalize and Customize Market Offerings 380 Disintermediation and Restructuring of Distribution Channels 380 Global Reach, 24/7 Access, and Instantaneous Delivery 382 Are These Digital World Attributes Opportunities or Threats? 382 First-Mover Advantage: Fact or Fiction? 384 Developing a Strategy for a Digitally Networked World 385 Marketing Applications for a Digitally Networked World 385 400 Marketing Challenges Addressed in Chapter 15 14 Marketing Strategies for a Digitally Networked World 374 Opportunities in the App Economy Strategies for New and Growing Markets 400 How New Is New? 401 402 Market Entry Strategies: Is It Better to Be a Pioneer or a Follower? 404 Pioneer Strategy 404 Not All Pioneers Capitalize on Their Potential Advantages 406 Follower Strategy 407 Determinants of Success for Pioneers and Followers 408 Strategic Marketing Programs for Pioneers 410 Mass-Market Penetration 410 Niche Penetration 410 Skimming and Early Withdrawal 412 Marketing Program Components for a Mass-Market Penetration Strategy 412 Marketing Program Components for a Niche Penetration Strategy 415 Marketing Program Components for a Skimming Strategy 417 Growth-Market Strategies for Market Leaders 417 Marketing Objectives for Share Leaders 418 Marketing Actions and Strategies to Achieve Share-Maintenance Objectives 418 Fortress, or Position Defense, Strategy 420 Flanker Strategy 423 Confrontation Strategy 423 Market Expansion 424 Contraction or Strategic Withdrawal 425 Share-Growth Strategies for Followers 425 Marketing Objectives for Followers 425 xiv Contents Marketing Actions and Strategies to Achieve Share Growth 425 Frontal Attack Strategy 426 Leapfrog Strategy 430 Flanking and Encirclement Strategies 430 Supporting Evidence 431 Take-aways 432 Endnotes Implementing and Controlling Marketing Programs 465 17 Organizing and Planning for Effective Implementation 466 Electrolux—Organizing to Rule the World of Household Appliances 466 433 16 Strategies for Mature and Declining Markets 436 Johnson Controls—Making Money in Mature Markets 436 Marketing Challenges Addressed in Chapter 16 437 Challenges in Mature Markets 438 Challenges in Declining Markets 438 Strategic Choices in Mature Markets 438 Strategies for Maintaining Competitive Advantage 439 Methods of Differentiation 440 Are the Dimensions the Same for Service Quality on the Internet? 443 Methods of Maintaining a Low-Cost Position 445 Customers’ Satisfaction and Loyalty Are Crucial for Maximizing Their Lifetime Value 447 Marketing Strategies for Mature Markets 449 Strategies for Maintaining Current Market Share 449 Strategies for Extending Volume Growth 451 Strategies for Declining Markets Section Five 457 Relative Attractiveness of Declining Markets 457 Divestment or Liquidation 460 Marketing Strategies for Remaining Competitors 460 Too Many Brands, Too Little Coordination A New Structure to Implement the New Strategy 467 Preliminary Results 467 466 Marketing Challenges Addressed in Chapter 17 468 Designing Appropriate Administrative Relationships for the Implementation of Different Competitive Strategies 469 Business-Unit Autonomy 469 Shared Programs and Facilities 471 Evaluation and Reward Systems 472 Designing Appropriate Organizational Structures and Processes for Implementing Different Strategies 472 Functional Competencies and Resource Allocation 472 Additional Considerations for Service Organizations 474 Organizational Structures 475 Recent Trends in Organizational Design 480 Organizational Adjustments as Firms Grow and Markets Change 481 Organizational Designs for Selling in Global Markets 482 Marketing Plans: The Foundation for Implementing Marketing Actions 483 The Situational Analysis 487 Key Issues 488 Objectives 489 Marketing Strategy 489 Action Plans 489 Projected Profit-and-Loss Statement Contingency Plans 490 Take-aways 463 Take-aways Endnotes Endnotes 464 490 490 490 xv Contents 18 Measuring and Delivering Marketing Performance 492 Metrics Pay for Walmart 492 Changing Metrics for a Changing Strategy Can Walmart’s Overseas Stores Plug the Gap? 493 493 Marketing Challenges Addressed in Chapter 18 493 Designing Marketing Metrics Step by Step 495 Setting Standards of Performance 496 Specifying and Obtaining Feedback Data Evaluating Feedback Data 501 Taking Corrective Action 502 A Tool for Periodic Assessment of Marketing Performance: The Marketing Audit 515 Types of Audits Take-aways Identifying Key Variables 503 Tracking and Monitoring 504 Strategy Reassessment 504 Endnotes Design Decisions for Marketing Metrics 505 515 Measuring and Delivering Marketing Performance 516 Design Decisions for Strategic Monitoring Systems 503 Who Needs What Information? SEO and SEM Analysis 509 501 When and How Often Is the Information Needed? 510 In What Media and in What Format(s) or Levels of Aggregation Should the Information Be Provided? 511 Does Your System of Marketing Metrics Measure Up? 511 What Contingencies Should Be Planned For? 512 Global Marketing Monitoring 514 504 Index 518 518 519 Preface Why This Book? W ● ● ● xvi HY DID YOUR INSTRUCTOR CHOOSE THIS BOOK? Chances are, it was for one or more of the following reasons: Your instructor has designed his or her course around the use of cases, a real-world project, or a marketing simulation such as Markstrat, to bring marketing decision-making to life. This book has been written with exactly these kinds of instructors in mind. Thus, one of your instructor’s key objectives is to give you the necessary tools and frameworks to enable you to be an effective contributor to marketing decision-making—regardless of whether you follow a career in marketing positions per se, in another functional area, or as an entrepreneur or in other general management roles. This book’s focus on strategic decision-making sets it apart from other texts that place greater emphasis on description of marketing phenomena than on the strategic and tactical marketing decisions that managers and entrepreneurs must make each and every day. Your instructor wants to use the most current and most internet-savvy book available. We integrate the latest web and social networking developments, from Aprimo to Zynga and more, throughout the book, and we devote an entire chapter, Chapter 14, to the development of marketing strategies for today’s digitally networked world. In addition, we supplement the book with an interactive website to help you self-test what you learn and to help your instructor choose the best cases and other materials and in-class activities. Our goal—and probably that of your instructor as well—is to make both the latest internet-based tools as well as time-tested marketing principles relevant to those of you who will work in companies of all kinds, dot-com and otherwise. Your instructor appreciates and believes you will benefit from the real-world, global perspectives offered by the authors of this book. Our combined entrepreneurial, marketing management, and consulting experience spans a broad variety of manufacturing, service, software, and distribution industries and has taken us—and thereby you, the reader—around the world many times. Simply put, we’ve actually done what we teach, as well as what we write about in this book. As the reader will see from the outset in Chapter 1, marketing decision-making is a critical activity in every firm, from start-ups to big companies with traditional marketing departments. Further, it is not just marketing managers who make marketing decisions. People in nearly every role in every company can have powerful influence on how happy customers are, or are not, with the goods and services the company provides. Stockbrokers must attract new customers. Accounting and consulting firms must find ways to differentiate their services from other providers so their customers have reasons to give them their business. Software engineers must understand how their technology can benefit the intended customer, for without such benefits, customers will not buy. Thus, we have written this book to meet the marketing needs of readers who hope to make a difference in the longterm strategic success of their organizations—whether their principal roles are in marketing or otherwise. In this brief preface, we want to say a bit more about each of the three distinctive benefits, listed above, that this book offers its readers. We also point out the key changes in this edition compared to previous ones; and we thank our many students, colleagues, and others from whom we have learned so much and without whom this book would not have been possible. A Focus on Strategic Decision-Making Previous editions of this book have been known for their strategic approach, an approach that helps clarify the relationships among corporate, business-level, and marketing strategies for firms large and small; the xvii Preface relationships between marketing strategies and the marketing environment; and the relationships between marketing and other functional areas in the firm. This eighth edition retains this strategic perspective while providing the reader with specific tools and frameworks for making marketing decisions that take best advantage of the conditions in which the firm finds itself—both internally, in terms of the firm’s mission and competencies, and externally, in terms of the market and competitive context in which it operates. By focusing on decision-making, we believe we’ve written the best textbook available for instructors who incorporate case-based teaching, marketing simulations, and/or course-long projects like the development of a marketing plan in their course design. And, by keeping each chapter—and the book in total—concise and readable, we allow space in students’ busy schedules for instructors to add supplemental readings to highlight the latest in marketing thinking. Our decision-focused approach is also important to students and executives who are our readers, because, in most well-designed marketing management classes and executive courses, the students or participants will be asked to make numerous decisions—decisions in case studies about what the protagonist in the case should do; decisions in a course project, such as those entailed in developing a marketing plan; or decisions in a marketing simulation. Our decision-focused approach is also important to employers, who tell us they want today’s graduates to be prepared to “hit the ground running” and contribute to the firm’s decision-making from day one. The ability to bring thoughtful and disciplined tools and frameworks—as opposed to seat-of-the-pants hunches or blind intuition—to marketing decision-making is one of the key assets today’s business school graduates offer their employers. This book puts the tools in the tool box to make this happen. In the end, employers want to know what their new hires can do, not just what they know. Web-Savvy Insights This book brings a realistic and informed perspective to an important question many students have been asking in recent years: “Has the advent of the internet changed all the rules?” Our answer is, “Well, yes and no.” On the one hand, the internet has made available a host of new marketing tools, from Facebook to e-mail marketing to delivery of digital goods and services over the internet, many of which are available to companies in every industry. On the other hand, time-tested marketing fundamentals, such as understanding one’s customers and competitors and meeting customer needs in ways that are differentiated from the offerings of those competitors, have become even more important in the fast-moving digital world, as the many dot-com failures attest. Thus, throughout the book, we integrate examples of dot-com companies—both successful and not—to show how both yesterday’s and today’s marketing tools and decision frameworks can most effectively be applied. Because the advent of social networking and other new technologies is so important in its own right, however, we also devote Chapter 14 to this fastgrowing arena. This chapter provides for marketers in all kinds of companies a road map for decisions about where, when, and how to deploy the tools now available in today’s digitally networked world. A Real-World, Global Perspective Theory is important, because it enhances our understanding of business phenomena and helps managers think about what they should do. It is in the application of theory—the world of marketing practice— where we believe this book excels. Our decision focus is all about application. But we don’t just bring an academic perspective to the party, important as that perspective is. One of us, John Mullins, brings to this book 20 years of executive experience in the retailing industry in the United States, including three entrepreneurial companies. John now works in Europe at the London Business School, where he draws on the perspectives of MBA students and executive education participants from more than 120 countries to inform this book with the realities of building vibrant businesses in today’s global economy. John’s work in executive education regularly takes him not only to North America and Europe, but to Africa, Asia, and Latin America as well. His first-hand vantage point into these fast-growing regions will be evident to readers of this book. Orv Walker spent most of his career at the Carlson School of Management at the University of Minnesota, where he worked with some of the world’s leading consumer goods marketers and won the marketing xviii discipline’s most prestigious awards for his research. Orv also enjoyed a number of years running a business as a vintner in the rolling hills of western Wisconsin. Both of us have contributed the fruits of our research to the growing body of knowledge in the marketing management, marketing strategy, new product development, and entrepreneurship arenas. The result of our collective experience and expertise is a book filled with examples of real people from around the world making real decisions, examples of start-ups and highgrowth companies as well as examples of larger, more established firms. What’s New in This Edition? In this eighth edition of Marketing Management, we’ve done significant updating to reflect four key trends that are sweeping the world of marketing theory and practice and changing the aspirations of graduates everywhere: ● ● ● ● The growing interest of many of today’s students in all things entrepreneurial and in learning what it will take to run their own companies, whether now— upon, or even before graduation—or at some later point in their careers. The growing importance of fast-growing emerging markets like India and China on the global economic stage and the growing realization in companies everywhere that business today is a global game. The changing nature of marketing research. These changes are being brought about by two factors: the power of the internet to make many kinds of research both less expensive and faster to carry out, and by a growing recognition that understanding customer needs in today’s increasingly complex world requires more than a consumer survey administered now and again. The growing ubiquity and power of social networks— Facebook, Linkedln, Twitter, and the like—which offer numerous opportunities for marketers of all kinds, whether companies with goods of services to market or political uprisings seeking to change the world. We’ve addressed the first of these issues, the growing interest of students in entrepreneurship by continuing to add new examples throughout the book about how entrepreneurial companies—not just large, established ones—are applying the tools and concepts that this book brings to life. The author team knows from experience that the entrepreneurial path makes Preface for achallenging—and always exciting—career path. As increasing numbers of today’s graduates are taking the entrepreneurial plunge, we’d like our readers who choose such a path to be well-equipped for the journey. Recent editions of this book have been known for their real-world global perspective and this edition is no exception. We’ve continued to work hard in this revision to add examples from fast-growing emerging economies like India, China, and elsewhere. Four new globally focused case vignettes—on the emerging middle class in the developing world (Chapter 7) on marketing Coca-Cola in China (Chapter 12): on the marketing of the Tata Nano, the world’s least expensive automobile (Chapter 13): and on the strategy and global organizational structure that Swedish appliancemaker Electrolux employs (Chapter 17)—will provide our readers with new insight into marketing on today’s global stage. For almost every company, it seems, India or China—or Brazil, Russia, or another developing country—is important as a source of supply or labor, as a market for what the company produces, or both. To address the changing nature of marketing research, we’ve done a significant updating of Chapter 6. We now open the chapter with a case vignette on Intel’s secret weapon, an anthropologist and ethnographer named Genevieve Bell, whose team’s consumer insights—along with those of other technology-driven companies that are ramping up their qualitative and ethnographic research efforts—are changing the way high-tech products are conceived and developed. Throughout the chapter, we address the many changes in marketing research—and in forecasting, too—that these and other changes, including the growing clout of social networks and other web-based phenomena, are bringing about. Perhaps nothing, however, provides a greater opportunity for today’s marketing graduates than the growing ubiquity and power of social networks and their applicability for marketers of all kinds. Thus, we’ve done a major updating of Chapter 14 to accomplish two things. First, we’ve removed much of the earlier material that described many of the marketing possibilities of the internet, since many of today’s internet marketing tools are well understood by today’s web-savvy readers. Second, we’ve refocused the chapter on the reality that today we live and work in a digitally networked world. A new case vignette opens the chapter with a look at the burgeoning array of opportunities in the market for apps. In addition, xix Preface throughout the chapter, dozens of new examples address the social networking phenomenon, mobile and location-based advertising, and other digital world developments from a variety of perspectives. As today’s digitally networked world continues its rapid evolution, keeping students (the easy part, since many of the most important changes are being led by members of their generation) and instructors (the harder part!) current on such developments is essential and, in our view, well worth the entire chapter we dedicate to it. In addition to the major changes we’ve noted above, every chapter has undergone rigorous scrutiny, with materials refreshed and updated, new examples added, outdated ones deleted, and some of the latest empirical evidence incorporated so readers know what works and what doesn’t. Instructors will be pleased to know, however, that the structure and flow of this eighth edition remains unchanged. Our purpose in each and every change we have made is to better prepare the reader to “hit the ground running” and contribute to marketing decision-making from whatever vantage point in the organization he or she sits. Our focus on strategic decision-making remains, as always, the key strength of this book. Additional Resources Supplemental materials for instructors and students are available on the book website at www.mhhe.com/ mullins8e. Instructor resources include an instructor’s manual, PowerPoints, and a test bank. A list of recommended cases and supplementary readings is also available. These materials range from both classical and recent practitioner-focused articles from Harvard Business Review and MIT Sloan Management Review to carefully selected, classroom-ready, knock-yoursocks-off teaching cases set all over the world (all with teaching notes available), in companies large and small, old and new. They’ll help any instructor keep his or her course bang up to date and pragmatically focused. Thanks! Simply put, this book is not solely our work—far from it. Many of our students, colleagues, and those we work with in industry have made contributions that have significantly shaped our perspectives on marketing decision-making. We are grateful to all of them. We wish to give thanks to the individuals who reviewed the previous edition of this text and provided useful feedback: Catharine Curran, University of Massachusetts–Dartmouth; Anna Andriasova, University of Maryland University College; Sanjay S. Mehta, Sam Houston State University; Prema Nakra, Marist College. We also thank a small army of talented people at McGraw-Hill/Irwin for their work that has turned our rough manuscript into an attractive and readable book. In particular, our editors, Laura Spell and Lori Bradshaw, have been instrumental in giving birth to this edition. Without them, we’d probably still be writing! Finally, we thank Harper Boyd, without whom this book would not exist, and our parents, without whom, of course, neither of us would be here. To all of you we extend our love, our respect, and our gratitude for passing on to us your curiosity and your passion for learning. We therefore dedicate this book to Harper Boyd, to Jeannette and Orville Walker, Sr., and to Alice and Jack Mullins. John W. Mullins Orville C. Walker, Jr. London, U.K.; Madison, Wisconsin Summer 2011 Walkthrough Case Vignette These vignettes have been chosen to increase the book’s global focus and international perspective. C HAPTER S IX Measuring Market Opportunities: Forecasting and Market Knowledge Intel’s Secret Weapon1 G ENEVIEVE BELL HAS A RADICAL IDEA. Bell, the only female among Intel’s roster of top technical talent dubbed Intel Fellows, and Director of Intel’s User Experience Group, thinks the world would be a better place if we can better understand how people would like to use technology, rather than tossing technology that people don’t really want into the market at an alarming pace. Bell was given her own lab at Intel in 2010, an event that may change Intel, or even the future of technology itself. “Imagine,” says Bell, “If we were willing to take on board the ways in which PCs don’t work and applied that to other technologies such as our refrigerators or televisions. If your fridge said, “I’m terribly sorry, you cannot have that cold milk until I’ve rebooted myself and downloaded new drivers!” or your TV said, “You gives his or her permission to be sent marketing messages. Were this not the case, cannot the watch the end of the cricket match because I am defragging my hard drive,” we would all go insane.” system would be inundated with unwanted messages to the point that it would come to a screeching halt!19 The growth of unwelcome e-mails, or spam, is a customer problem that software makers are working hard to address. Bell’s Charter at Intel Blogging is another fast-growing internet application. Given the ease with which anyone can now post material on the web, companies large and small are developing blogs In Bell’s view, her charter at Intel is straightforward, with which they can, sometimes anonymously, promote their products or ideas or even dis“To provide insights and inspire innovation.” Her team parage competition. There are even sites (for example, www.betterbusinessblogging.com of )social scientists, interaction designers and human to help businesses develop their blogs! factors engineers is charged with setting research Podcasting, a technology that provides a way for consumers to receive audio via the 146 internet, is another growing web-based application. Advertisers and other providers such as CNN, the Cable News Network, provide short audio feeds that can be downloaded and listened to on a PC or on a portable MP3 player. While the new media seem, on the surface, to be radically different from their more traditional counterparts—radio, television, and print—the logic entailed in planning their roles in promotional programs is no different than for other media. Considerations of reach, frequency, and cost—measured in cost per thousand impressions (or “hits” or “click-throughs” on the web)—provide a means of comparing their value to one another and to traditional media. Cost per acquisition, another measure, is useful for web advertising that results directly in actual customer purchases, a model familiar in the directmarketing industry. To the extent that new media performance can be measured (How many extra customers does a restaurant get for weekday lunches as a result of its ad, and at what cost per customer?), marketers will be encouraged to use them to their full economic potential. The rapid growth of these and other new media has led to a variety of ethical issues marketers must address, including the implications of location-based services discussed in Ethical Perspective 13.2. directions, leading new product strategy and definition, and driving consumer-centric product innovation and thinking across the company. All this is everyday work for this wiry-haired woman who as a very small girl used to kill things—frogs and the like—growing up in an aboriginal community in Australia’s outback. Why is there a role like Bell’s at Intel today? “I joined Intel in 1998,” she recalls, “There was a collective sense in Intel’s senior management that they didn’t know what was going to happen when PCs became mass market. They knew they had market research, they knew they had the skills to size markets and how to survey people, and a little bit of usability work was going on even then, but I think the sense of what was missing was this notion about what was motivating people, what did they care about and was there an opportunity if you understood the things to drive new uses of technology.” “For many years thereafter, a part of every presentation I gave, every class I taught, every meeting I attended was explaining what an anthropologist was, what ethnography was, what was user centered design and why it was going to be a useful tool at Intel.” In her 13 years at Intel, Bell has fundamentally changed how the company envisions, plans, and develops its product platforms. International Media Global advertising has been aided by the rise of globally oriented television media like CNN, MTV, and ESPN, all of which originate primarily in the United States, and a variety of other media like STAR-TV and Al Jazeera, which originate in Asia and the Middle East, respectively. The ability of media like these to deliver to Ethical Perspective 13.2 Do You Really Want Burglars to Know Where You Are? The creators of PleaseRobMe.com, a simple website that publishes a live feed of location-based posts that appear on Twitter, points out that the tweeters are somewhere other than at home. The site’s creators want to highlight the fact that tweeters on the likes of Foursquare and other location-based services give away information that burglars would love to have. But the founders of location-based services and the venture capitalists backing them will have to deal with growing concerns that collecting information about people’s movements may have unintended consequences. xx The Centre for Democracy and Technology, a privacy advocate, argues that the privacy policies of companies that are collecting and using location-based data are “uneven at best and inadequate at worst.” Some companies are better, of course, and some worse. Loopt includes software that monitors its service for suspicious patterns of behaviour, it says. But politicians are getting into the act, holding a congressional hearing in Washington to examine the implications of such services and their rapid growth. If web-savvy burglars want to take advantage of all this data, it would appear that they’d better do so soon. Source: “Follow Me,” The Economist, March 6, 2010, p. 81. For more on Foursquare and Loopt, see www.foursquare.com and www.loopt.com. Ethical Perspectives These minicases highlight ethical issues that commonly arise in marketing management. Strategic Issue Stattisstic Sta ti al me metho hod ds gen enera rally ly ass ssum me th that at the he futur fu ure will look ok ve veryy muc much llikee the he passt. p t So Som me etiimess th his is no ot th the case e. much h lik like th CenturyLinkk Mountain an n when its statt failed to allo cal data that are available. Whee to introduce a new flavor, its m to forecast the sales for the new w high-technology products, for w extremely expensive to producee Take-aways End-of-chapter points review the most important “lessons learned” from each chapter. Strategic Issue Highlight critical information and crucial questions throughout each chapter. Global Perspective and Internet Icons Identify global examples as well as effective internet marketing for both new and economic marketers. music from iTunes and for the which to play them. First, Napp rage with consumers (though n convinced the courts that Napstt than 300 million units, proving use of analogs like these, as w not to copy—is py a crucial appro Take-aways 1. Every forecast and estimate of market potential is wrong! Evidence-based forecasts and estimates, prepared using the tools provided in this chapter, are far more credible—and generally more accurate—than 3. Superior market knowledge is not only an important source of competitive advantage, but it also results in happier, higher volume of, and more loyal customers. Thus, the systematic development of market knowledge xxi This page intentionally left blank Section One The Role of Marketing in Developing Successful Business Strategies Ch ap t e r 1 The Marketing Management Process C h apter 2 The Marketing Implications of Corporate and Business Strategies 1 C HAPTER O NE The Marketing Management Process Samsung—Building a Global Brand1 S AMSUNG ELECTRONICS is the largest component of South Korea’s largest chaebol—one of the giant family-controlled conglomerates that have been instrumental in building the country’s economy over the last half century. Samsung’s electronics unit started out in 1970 making cheap TV sets for the Sanyo label. Over time it morphed into a technically innovative company that was one of the pioneers in developing flat-screen displays, plasma TVs, multifunction cell phones, and other digital devices. But until the mid-1990s, the unit competed primarily by (a) producing technical components or low-cost manufactured products for firms with better-known brands, such as Dell, Hewlett-Packard, and General Electric; and (b) selling me-too consumer products— like TVs and microwave ovens—under the Samsung brand through discount chains like Walmart at very low prices. Samsung’s cost-driven competitive strategy worked well until 1996, but then several shocks in its market and competitive environments forced a major reevaluation. First, the global market for memory chips and other components Samsun supplied for other electronics brands softened because of increased competition and excess capacity. At about the same time, sales of Samsung’s own branded products were also declining. As Yun Jong-yong—a company veteran who was brought in as CEO of the electronics unit—complained, Samsung could build a TV that was technically as good as a Sony, but because of the 2 down-market image of the Samsung brand its sets sat at the back of the store or piled up in discount chains. Finally, the Asian financial crisis of 1997 made a major strategic shift essential for the unit’s survival. New Competitive and Marketing Strategies Mr. Yun initiated an ambitious new competitive strategy aimed at developing and marketing technically superior products while building an image of Samsung as a stylish, high-quality brand commanding a premium price. The objective was to establish a unique competitive position using technical innovation and design to appeal to younger and relatively upscale customers around the world. “If we were to continue competing only on price,” Mr. Yun argued, “the Chinese would slaughter us.” Technical Innovation and R&D In order to implement its new competitive strategy, Samsung had to become a pioneer in developing new digital technologies. While Sony and other rivals had a substantial lead in consumer electronics, that lead was rooted in the analog world. The digital world required new technical innovations. Consequently, the firm shifted substantial resources into R&D focused on technologies such as large-area LCDs, display drivers and chip sets, and mobile telephony. In the 2009 fiscal year, it spent 7.6 trillion won (over $7 billion)—nearly 6 percent of the unit’s revenue—on R&D. More than onequarter of the company’s workforce—some 44,000 people—are engaged in R&D activities in about 40 research centers around the world. New Product Development and Design But cutting-edge technology does not guarantee market success. It must be incorporated into products that deliver benefits that at least some segment of consumers will consider to be worth the price. And some of those benefits may be subjective—attractive styling, say, or a cool image. Therefore, new product development at Samsung usually involves a team of designers who collaborate closely with the firm’s engineers, manufacturing people, and marketers. To ensure they stay in touch with consumer tastes in different countries, the firm’s 450 designers are assigned to design centers in cities like London, Tokyo, Shanghai, and San Francisco, and the company’s market researchers run focus groups and user surveys in many markets around the world. Marketing Programs to Build the Samsung Brand Revamping Samsung’s marketing efforts was also critical to the success of its new competitive strategy because even the most technically sophisticated and well-designed products are likely to fail unless potential customers know they exist, can acquire them easily, and think they’re worth the money. Therefore, Eric Kim was recruited from outside the firm to head a global marketing effort. One of his first moves was to reorganize the firm’s distribution channels. Consistent with the strategic objective of establishing Samsung as a high-quality brand worthy of a premium price, many of the company’s products were pulled out of low-priced discount chains and distributed through service-oriented electronics specialty stores and web retailers—like Best Buy and Amazon.com—instead. To ensure consistency in Samsung’s marketing communications across world markets, Mr. Kim consolidated the firm’s roster of advertising agencies from 55 down to a single global advertising group, British-based WPP. He then launched the firm’s first brand-building campaign with fashion-forward TV commercials showing off the company’s cool sense of style as well as the technical sophistication of its products. The firm also makes extensive use of more contemporary promotional tools such as product placements, sponsorships, and internet advertising to strengthen its brand. For instance, Samsung provides both financial and technical support for a variety of sporting and cultural events in every major region of the world. It is a sponsor of the Olympics, Asian games, and other international events, but it also supports regional and local events—such as the Montreal Jazz Festival and the Chelsea Football Club in the UK—as a means of staying close to local customers. The Results Samsung Electronics’ revamped competitive strategy and the marketing programs designed to implement it have been a smashing success. According to studies by Interbrand (a brand consultancy), the global value of Samsung’s brand increased by more than 200 percent from 2000 through 2008, and it overtook Sony as the most valuable consumer electronics brand. As a result, the unit’s sales grew to 139 trillion won (about $119 billion) in the 2009 fiscal year, and operating profit reached 11.6 trillion won. Marketing Challenges Addressed in Chapter 1 The activities of Samsung’s managers as they worked to redefine the company’s brand image and supporting marketing plan demonstrate that marketing involves decisions crucial to the success of every organization, whether large or small, profit or nonprofit, 3 4 Section One The Role of Marketing in Developing Successful Business Strategies manufacturer, retailer, or service firm. The CEO of a high-tech firm like Samsung must decide what technologies to pursue, what goods or services to sell, to whom, with what features and benefits, at what price, and so on. A chief financial officer for a large multinational corporation must market the merits of the company to the capital markets to obtain the resources needed for continued growth. The executive director of a nonprofit community agency must pursue the resources necessary for the agency to achieve its mission, whether those resources come from fees for the services it delivers or from grants and contributions. And all of those managers must market their ideas for improving their organizations’ prospects and performance to their colleagues inside the firm as well as to customers, suppliers, strategic partners, and prospective employees. Thus, most managers engage in tasks involving marketing decisions virtually every day. This book provides prospective managers and entrepreneurs with the marketing tools, perspectives, and analytical frameworks they’ll need to play an effective role in the marketing life and overall strategic development of their organizations, regardless of whether or not they occupy formal marketing jobs. Chapter 1 addresses a number of broad but important questions all managers must resolve in their own minds: Are marketing decisions important? Does marketing create value for customers and shareholders? What constitutes effective marketing practice? Who does what in marketing and how much does it cost? And finally, what decisions go into the development of a strategic marketing program for a particular good or service and how can those decisions be summarized in an action plan? Why Are Marketing Decisions Important? The improved performance of Samsung Electronics following the retooling of its strategic marketing plan illustrates the importance of good marketing decisions in today’s business organizations. And according to many managers and expert observers around the world, a strong customer focus and well-conceived and executed marketing strategies will be even more crucial for the success of most organizations as the global marketplace becomes more crowded and competitive.2 The importance of marketing in a company’s ongoing success can be better appreciated when you consider the activities marketing embraces. Marketing attempts to measure and anticipate the needs and wants of a group of customers and respond with a flow of needsatisfying goods and services. Accomplishing this requires the firm to ● ● ● ● ● ● Target those customer groups whose needs are most consistent with the firm’s resources and capabilities. Develop products and/or services that meet the needs of the target market better than competitors. Make its products and services readily available to potential customers. Develop customer awareness and appreciation of the value provided by the company’s offerings. Obtain feedback from the market as a basis for continuing improvement in the firm’s offerings. Work to build long-term relationships with satisfied and loyal customers. The most important characteristic of marketing as a business function is its focus on customers and their needs. This is a focus that all managers—not just marketers—need to adopt to ensure their organizations can build and sustain a healthy “top line.” Chapter One The Marketing Management Process 5 The Importance of the Top Line In the financial markets it is a company’s bottom line—its profitability—that is most important. In the long run, all firms must make a profit to survive. But as the managers at Samsung are well aware, there can never be a positive bottom line—nor financing, employees, or anything else—without the ability to build and sustain a healthy top line: sales revenue. As a wise observer once said, nothing happens until somebody sells something. Or to paraphrase management guru Peter Drucker, everything a company does internally is a cost center. The only profit center is a customer whose check doesn’t bounce. Strategic Issue That is why the customer focus inherent in the marketing function A customer focus enables firms to enjoy is important. When properly implemented, a customer focus enables success by exploiting changes in the firms to enjoy success by exploiting changes in the marketplace, by marketplace, by developing products and developing products and services that have superiority over what is services that have superiority over what is currently available, and by taking a more currently available, and by taking a more focused and integrated crossfocused and integrated cross-functional functional approach to their overall operations, as Samsung has done approach to their overall operations. in its product-development process. Marketing Creates Value by Facilitating Exchange Relationships While we have described marketing activities from an individual organization’s perspective, marketing also plays an important role in the broader context of the global economy. It helps facilitate exchange relationships among people, organizations, and nations. Marketing is a social process involving the activities necessary to enable individuals and organizations to obtain what they need and want through exchanges with others and to develop ongoing exchange relationships.3 Increased division and specialization of labor are some of the most important changes that occur as societies move from a primitive economy toward higher levels of economic development. But while increased specialization helps improve a society’s overall standard of living, it leads to a different problem: Specialists are no longer self-sufficient. Artisans who specialize in making pots become very skilled and efficient at pot making, producing a surplus of pots, but they do not make any of the many other goods and services they need to survive and to improve their lifestyle. A society cannot reap the full benefits of specialization until it develops the means to facilitate the trade and exchange of surpluses among its members. Similarly, a nation cannot partake of the full range of goods and services available around the world or penetrate all potential markets for the economic output of its citizens unless exchanges can occur across national boundaries. What Factors Are Necessary for a Successful Exchange Relationship? Many exchanges are necessary for people and organizations to reap the benefits of the increased specialization and productivity that accompany economic development. But such exchanges do not happen automatically, nor does every exchange necessarily lead 6 Section One The Role of Marketing in Developing Successful Business Strategies to a mutually satisfying long-term relationship. The conditions for a successful exchange transaction can be met only after the parties themselves—or marketing intermediaries such as a wholesale distributor or a retailer—have performed several tasks. These include identifying potential exchange partners, developing offerings, communicating information, delivering products, and collecting payments. This is what marketing is all about. Before we take a closer look at specific marketing activities and how they are planned and implemented by marketing managers, we will discuss some terms and concepts in our definition of marketing and the conditions necessary for exchange. Let’s examine the following questions: 1. Who are the parties involved in exchange relationships? Which organizations and people market things, and who are their customers? 2. Which needs and wants do parties try to satisfy through exchange, and what is the difference between the two? 3. What is exchanged? 4. How does exchange create value? Why is a buyer better off and more satisfied following an exchange? 5. How do potential exchange partners become a market for a particular good or service? 1. Who Markets and Who Buys? The Parties in an Exchange Virtually every organization and individual with a surplus of anything engages in marketing activities to identify, communicate, and negotiate with potential exchange partners. Some are more aggressive—and perhaps more effective—in their efforts than others. When considering extensive marketing efforts aimed at stimulating and facilitating exchange, we think first of the activities of goods manufacturers (Intel, BMW, Samsung), service producers (Air France, McDonald’s, 20th Century Fox), and large retailers (Zara, Marks & Spencer, Wal-Mart). However, museums, hospitals, theaters, universities, and other social institutions— whether for profit or nonprofit—also carry out marketing activities to attract customers, students, and donors. In the past, their marketing efforts were not very extensive or well organized. Now, increasing competition, changing customer attitudes and demographics, and rising costs have caused many nonprofit organizations to look to more extensive marketing efforts to solve their problems.4 For example, some U. S. churches are using marketing techniques to address social problems, as well as to increase church attendance. But as discussed in Ethical Perspective 1.1, such efforts can also raise ethical questions. Customers Both individuals and organizations seek goods and services obtained through exchange transactions. Ultimate customers buy goods and services for their own personal use or the use of others in their immediate household. These are called consumer goods and services. Organizational customers buy goods and services (1) for resale (as when TESCO buys several gross of Jeans for resale to individual consumers); (2) as inputs to the production of other goods or services (as when Toyota buys sheet steel to be stamped into car body parts); or (3) for use in the day-to-day operations of the organization (as when a university buys paper and printer cartridges). These are called industrial goods and services. Throughout this book we examine differences in the buying behavior of these two types of customers and the marketing strategies and programs relevant for each.5 Chapter One 7 The Marketing Management Process Ethical Perspective 1.1 Marketing Goes to Church in the United States What’s old-time religion to do? At a time when the search for spiritual guidance is on the rise, angels, crystals, and shamans are more engaging to some people than organized religion. Amid the competition for a piece of America’s soul, denominations such as the Southern Baptists, Lutherans, and Roman Catholics are searching for ways to reach baby boomers—without seeming too evangelical. Those religions, along with the Mormon Church, which is starting its 50th advertising campaign, have introduced national public-service campaigns focused on children and families. They are also producing cable and network television specials that incorporate Christian themes in their story lines, and studying how best to use the internet to get their spiritual message across. The Lutheran Hour Ministries, which spends about half of its $20 million budget on marketing, produced an advertising campaign with themes about family, instead of specific religious messages. A print, radio, and TV campaign that appeared in Chicago shows two children with the words “Drugs. Violence. Peer Pressure. The world is tough. Being a kid shouldn’t be.” The rest of the text includes a toll-free number to call to receive a free audio cassette and booklet on how to “talk with your kids about today’s issues and the Christian values they need in today’s world.” Some observers have expressed doubts about the ethics of the Lutheran Hour approach, fearing that it may be just a well-disguised attempt to identify prospects for recruiting new church members. It is true that a person who calls the toll-free number can request a visit from members of a local Lutheran church. But “there’s no hit made [to recruit]. It’s not a bait-and-switch,” says Dr. Dale Meyer, speaker for the Lutheran Hour Ministries. However, other denominations—particularly evangelical congregations like California’s Saddleback Valley Community Church, one of the biggest religious institutions in America—have recently been much more aggressive in using marketing techniques to recruit new converts as well as raise money for social projects like fighting poverty in Africa. Those techniques focus not only on media advertising, but also on internet ads, blogs, websites, and a variety of “product enhancements” such as the formation of interest and lifestyle groups within the congregation and the addition of church coffee shops and cafeterias. But these techniques can also provoke some negative reactions among segments of the churchgoing population. For instance, a recent study suggests that while baby boomers largely approve of these contemporary approaches to religion, “the younger generation sees the megachurches as too production-oriented, too precise. . . . They want a more traditional understanding of religion and faith.” Sources: Fara Warner, “Churches Develop Marketing Campaigns,” The Wall Street Journal, April 17, 1995, p. B4; William C. Symonds, “Earthly Empires,” BusinessWeek, May 23, 2005, pp. 78–88; Fara Warner, “Prepare Thee for Some Serious Marketing,” The New York Times, October 22, 2006, Section3, pp. 1–4; and Brett McCracken, “The Perils of ‘Wannabe Cool’ Christianity,” The Wall Street Journal, August 13, 2010, archived at www.online.wsj.com. 2. Customer Needs and Wants Needs are the basic forces that drive customers to take action and engage in exchanges. An unsatisfied need is a gap between a person’s actual and desired states on some physical or psychological dimension. We all have basic physical needs critical to our survival, such as food, drink, warmth, shelter, and sleep. We also have social and emotional needs critical to our psychological well-being, such as security, belonging, love, esteem, and selffulfillment. Those needs that motivate the consumption behavior of individuals are few and basic. They are not created by marketers or other social forces; they flow from our basic biological and psychological makeup as human beings. Organizations also must satisfy needs to assure their survival and well-being. Shaped by the organization’s strategic objectives, these needs relate to the resource inputs, capital equipment, supplies, and services necessary to meet those objectives. Wants reflect a person’s desires or preferences for specific ways of satisfying a basic need. Thus, a person wants particular products, brands, or services to satisfy a need. 8 Section One The Role of Marketing in Developing Successful Business Strategies A person is thirsty and wants a Coke. A company needs office space and its top executives want an office at a prestigious address in midtown Manhattan. Basic needs are relatively few, but people’s many wants are shaped by social influences, their past history, and consumption experiences. Different people may have very different wants to satisfy the same need. Everyone needs to keep warm on cold winter nights, for instance. But some people want electric blankets, while others prefer old-fashioned down comforters. This distinction between needs and wants helps put into perspective the charge that “marketers create needs,” or that “marketers make people want things they don’t need.” Neither marketers nor any other single social force can create needs deriving from the biological and emotional imperatives of human nature. On the other hand, marketers—and many other social forces—influence people’s wants. A major part of a marketer’s job is to develop a new product or service and then to stimulate customer wants for it by convincing people it can help them better satisfy one or more of their needs. Do Customers Always Know What They Want? Some managers—particularly in high-tech firms—question whether a strong focus on customer needs and wants is always a good thing. They argue that customers cannot always articulate their needs and wants, in part because they do not know what kinds of products or services are technically possible. As Akio Morita, the late visionary CEO of Sony, once said: Our plan is to lead the public with new products rather than ask them what kind of products they want. The public does not know what is possible, but we do. So instead of doing a lot of marketing research, we refine our thinking on a product and its use and try to create a market for it by educating and communicating with the public.6 Others have pointed out that some very successful new products, such as the Chrysler minivan and Compaq’s pioneering PC network server, were developed with little or no market research. On the other hand, some famous duds, like Ford’s Edsel, New Coke, and McDonald’s McLean low-fat hamburger, were developed with a great deal of customer input.7 The laws of probability dictate that some new products will succeed and more will fail regardless of how much is spent on marketing research. But the critics of a strong customer focus argue that paying too much attention to customer needs and wants can stifle innovation and lead firms to produce nothing but marginal improvements or line extensions of products and services that already exist. How do marketers respond to this charge? While many consumers may lack the technical sophistication necessary to articulate their needs or wants for cutting-edge technical innovations, the same is not true for industrial purchasers. About half of all manufactured goods in most countries are sold to other organizations rather than individual consumers. Many high-tech industrial products are initiated at the urging of one or more major customers, developed with their cooperation (perhaps in the form of an alliance or partnership), and refined at customer beta sites. As for consumer markets, one way to resolve the conflict between the views of technologists and marketers is to consider the two components of R&D. First there is basic research and then there is development—the conversion of technical concepts into actual salable products or services. Most consumers have little knowledge of scientific advancements and emerging technologies. Therefore, they usually don’t—and probably shouldn’t—play a role in influencing how firms like Samsung allocate their basic research dollars. However, a customer focus is critical to development. Someone—or some development team—within the organization must have either the insight and market experience or the substantial customer input necessary to decide what product to develop from a new technology, what benefits it will offer to customers, and whether customers will value Chapter One 9 The Marketing Management Process those benefits sufficiently to make the product a commercial success. The importance of a customer focus often becomes clear when a firm attempts to develop a variety of successful new product offerings from a single well-established technology as illustrated by the travails of LEGO, the Swedish toy company, described in Exhibit 1.1. In the case of an innovative new technology, it often must be developed into a concrete product concept before consumers can react to it and its commercial potential can be assessed. In other cases, consumers can express their needs or wants for specific benefits even though they do not know what is technically feasible. They can tell you what problems they are having with current products and services and what additional benefits they would like from new ones. For instance, before Apple introduced the i-Pod, few consumers would have asked for such a product because they were unfamiliar with the possibilities of digitization and miniaturization in the electronics industry. But if someone had asked whether they would buy a product smaller than a Sony Walkman that could store and play thousands of songs they could download from their computer without messing with cassette tapes or CDs, many probably would have said, “Sure!” A strong customer focus is not inconsistent with the development of technically innovative products, nor does it condemn a firm to concentrate on satisfying only current, articulated customer wants. More important, while firms can sometimes succeed in the short run even though they ignore customer desires, a strong customer focus usually pays Exhibit 1.1 N How LEGO Revived Its Brand ot many toy companies in the world have as much brand recognition as LEGO. Three generations of kids around the world have built cars, fire trucks, even entire cities, with the Swedish company’s plastic bricks. But despite its widely known and respected brand, the firm’s profits declined dramatically in the early to mid-2000s. One reason for the decline was a loss of strategic focus. LEGO launched a kid’s TV series, a set of action figures drawn from that series, and other products in highly competitive categories which were largely unrelated to the firm’s popular bricks and where the firm had no experience or special expertise. More critically, LEGO began foundering within its core product line as well. Top management had given free reign to the firm’s designers to develop more imaginative creations for kids to build with LEGO bricks. The designers happily embraced their new freedom and developed many increasingly complex and artistic designs. Unfortunately, those complex designs incorporated thousands of new components, many of which were not interchangeable with those of other products in the line. As a result, parts inventories exploded and supply costs went through the roof. To make matters worse, many of the new designs did not appeal to the kids who are the firm’s ultimate consumers, and sales of the company’s core products went down hill. Paradoxically, the solution to LEGO’s product design and profitability problems involved reducing the creative freedom of the firm’s designers. Top executives decreed that new product development projects should be managed by teams involving marketing managers familiar with tastes, preferences, and purchase behaviors in different countries; manufacturing managers who could help control production and supply costs; market researchers who could test kids reactions to various product prototypes; as well as designers. While innovative product design is LEGO’s primary competitive strength, the company has found that designers function most successfully when placed under some constraints; namely that the products being designed appeal to the customers who will use them. As Mads Nipper, LEGO’s VP of Products and Markets points out, “Children are . . . very demanding about what they want to buy. If your offer does not stack up, they will go somewhere else.” Source: Jay Greene, “How LEGO Revised Its Brand,” www .businessweek/design.com, July 23, 2010. See also, Jay Greene, Design Is How It Works (New York: Portfolio/Penguin Group, 2010), and www.LEGO.com. 10 Section One The Role of Marketing in Developing Successful Business Strategies big dividends in terms of market share and profit over the long haul,8 as we’ll see in the next chapter. 3. What Gets Exchanged? Products and Services Products and services help satisfy a customer’s need when they are acquired, used, or consumed. Products are essentially tangible physical objects (such as cars, watches, and computers) that provide a benefit. For example, a car provides transportation; a watch tells the time. Services are less tangible and, in addition to being provided by physical objects, can be provided by people (doctors, lawyers, architects), institutions (the Roman Catholic Church, the United Way), places (Walt Disney World, Paris), and activities (a contest or a stop-smoking program). 4. How Exchanges Create Value Customers Buy Benefits, Not Products As argued earlier, when people buy products to satisfy their needs, they are really buying the benefits they believe the products provide, rather than the products per se. For instance, you buy headache relief, not aspirin. The specific benefits sought vary among customers depending on the needs to be satisfied and the situations where products are used. Because different customers seek different benefits, they use different choice criteria and attach different importance to product features when choosing models and brands within a product category. (This is diagrammed in Exhibit 1.2.) For example, a car buyer with strong needs for social acceptance and esteem might seek a socially prestigious automobile. Such a buyer would be likely to attach great importance to criteria relating to social image and engineering sophistication such as a high-powered motor, European-road-car styling, all-leather interior, and a state-of-the-art sound system. Keep in mind, too, that services offered by the seller can also create benefits for customers by helping them reduce their costs, obtain desired products more quickly, or use those products more effectively. Such services are particularly important for satisfying Exhibit 1.2 Customers Buy Benefits, Not Products Need Benefits sought Choice criteria Product/service features Brand/supplier chosen Chapter One The Marketing Management Process 11 organizational buyers. For example, a few years ago the Massachusetts Institute of Technology discovered that it was doing business with about 20,000 vendors of office and laboratory supplies each year. To improve the efficiency of its purchasing system, MIT developed a computerized catalog that staff members can access via the school’s intranet. It then formed alliances with two main suppliers—Office Depot Inc. and VWR Corp.— who won the bulk of MIT’s business by promising to deliver superior service. Both firms deliver purchases within a day or two right to the purchaser’s desk rather than to a building’s stockroom.9 Product Benefits, Service, and Price Determine Value A customer’s estimate of a product’s or service’s benefits and capacity to satisfy specific needs and wants determines the value he or she will attach to it. Generally, after comparing alternative products, brands, or suppliers, customers choose those they think provide the most need-satisfying benefits per dollar. Thus, value is a function of intrinsic product features, service, and price, and it means different things to different people.10 Customers’ estimates of products’ benefits and value are not always accurate. For example, after buying an air-conditioning installation for its premises, a company may find that the product’s cost of operation is higher than expected, its response time to changes in the outside temperature is slow, and the blower is not strong enough to heat or cool remote areas in the building. A customer’s ultimate satisfaction with a purchase, then, depends on whether the product actually lives up to expectations and delivers the anticipated benefits. This is why customer services—particularly those occurring after a sale, such as delivery, installation, operating instruction, and repair—are often critical for maintaining satisfied customers. Also, it is essential that companies handle customer complaints effectively. The average business never hears from 96 percent of its dissatisfied customers. This is unfortunate, for 50 percent of those who complain would do business with the company again if their complaints were handled satisfactorily—95 percent if the complaints were resolved quickly.11 The Value of Long-Term Customer Relationships Firms have traditionally focused on the individual transaction with a customer as the fruition of their marketing efforts. But as global markets have become increasingly competiStrategic Issue tive and volatile, many firms have turned their attention to building Many firms have turned their attention a continuing long-term relationship between the organization and the to building a continuing long-term customer as the ultimate objective of a successful marketing strategy. relationship between the organization and They are taking action to increase lifetime customer value—the presthe customer as the ultimate objective of a successful marketing strategy. ent value of a stream of revenue that can be produced by a customer over time. For an automobile manufacturer, for instance, the lifetime value of a first-time car buyer who can be kept satisfied and loyal to the manufacturer— buying all future new cars from the same company—is well over a million dollars. Throughout this book we will discuss marketing decisions and activities geared to increasing the satisfaction and loyalty—and therefore the lifetime value—of customers. While such activities can add to a company’s marketing costs, they can also produce big dividends, not only in terms of long-term revenues and market share, but also in terms of profitability. The reason is simple: It costs more to attract a new customer than to keep an existing one.12 To persuade a customer to leave a competitor and buy your product or service instead usually takes either a financial inducement (a lower price or special promotional deal) or an extensive and convincing communication program (advertising or sales force effort), all of which are costly. Consequently, the increased loyalty that comes through developing long-term customer relationship translates into higher profits. 12 Section One The Role of Marketing in Developing Successful Business Strategies Brand Equity The assets—including customers’ perceptions of a product’s benefits and value, their positive past experiences, and their loyalty over time—linked to a brand’s name and symbol constitute the brand’s equity.13 Brand equity reflects the value of the brand name and logo as promotional tools for attracting future buyers and building market share and profitability. That is why Samsung’s recent marketing efforts have concentrated on building the equity of the Samsung brand in global markets by incorporating innovative technologies and stylish design in the firm’s offerings and advertising them as appropriate products for modern lifestyles. Ultimately, in other words, a brand’s value to the company depends on how much value customers think the brand provides for them; value creation cuts both ways. 5. Defining a Market A market consists of (a) individuals and organizations who (b) are interested and willing to buy a particular product to obtain benefits that will satisfy a specific need or want, and who (c) have the resources (time, money) to engage in such a transaction. Some markets are sufficiently homogeneous that a company can practice undifferentiated marketing in them. That is, the company attempts to market a line of products using a single marketing program. But because people have different needs, wants, and resources, the entire population of a society is seldom a viable market for a single product or service. Also, people or organizations often seek different benefits to satisfy needs and wants from the same type of product (e.g., one car buyer may seek social status and prestige while someone else wants economical basic transportation). The total market for a given product category thus is often fragmented into several distinct market segments. Each segment contains people who are relatively homogeneous in their needs, their wants, and the product benefits they seek. Also, each segment seeks a different set of benefits from the same product category. Strategic marketing management involves a seller trying to determine the following points in an effort to define the target market: 1. Which customer needs and wants are currently not being satisfied by competitive product offerings. 2. How desired benefits and choice criteria vary among potential customers and how to identify the resulting segments by demographic variables such as age, sex, lifestyle, or some other characteristics. Exhibit 1.3 H Haier—A Chinese Manufacturer Pursues Segments of the Appliance Market aier, the rapidly growing Chinese manufacturer of washing machines, refrigerators, and other household appliances, uses extensive market research to modify product designs and marketing programs to fit the unique needs and preferences of a variety of geographic, socioeconomic, and lifestyle segments. For instance, customer surveys discovered that people in Saudi Arabia desired extra-large washing machines to hold the flowing robes that are commonly worn there. Consequently, Haier developed a machine with a 26-pound capacity—more than double that of the average washer. The product was a hit, selling more than 10,000 units in its first year. At the other extreme, the firm also offers a miniwasher, aimed at developing economies, that costs only $38. Another washing machine, designed to handle fluctuations in voltage and pick up where it left off if the power goes out, is marketed in rural areas of Asia where the power supply is not always reliable. Source: David Rocks, “China Design,” BusinessWeek, November 21, 2005, pp. 56–62. Chapter One The Marketing Management Process 13 3. Which segments to target, and which product offerings and marketing programs appeal most to customers in those segments. 4. How to position the product to differentiate it from competitors’ offerings and give the firm a sustainable competitive advantage. Exhibit 1.3 provides an example of a Chinese firm that has been very successful in segmenting the household appliances market, targeting precisely defined niches within that market, and positioning its products and services to appeal to the customers in these target segments. What Does Effective Marketing Practice Look Like? Exchange transactions—and particularly long-term relationships—do not happen automatically. They are the result of many decisions that must be planned and carried out by somebody. Sometimes a single organization has the necessary resources to plan and execute an entire marketing strategy by itself. Usually, though, a firm’s marketing program involves cooperative efforts from a network of more specialized institutions: suppliers, wholesalers, retailers, advertising agencies, and the like. In some cases, major customers may be involved in shaping and executing parts of a firm’s marketing program, such as new product development and testing. Regardless of who is involved, we refer to the entire sequence of analyses, decisions, and activities involved in planning, carrying out, and evaluating a strategic marketing program as the marketing management process. We take a more detailed look at this process— and at the roles of different functional managers and marketing institutions in planning and executing the activities involved—next. Marketing Management—A Definition Our discussion suggests that marketing management occurs whenever one party has something it would like to exchange with another. Marketing management is the process that helps make such exchanges happen. More specifically, marketing management is the process of analyzing, planning, implementing, coordinating, and controlling programs involving the conception, pricing, promotion, and distribution of products, services, and ideas designed to create and maintain beneficial exchanges with target markets for the purpose of achieving organizational objectives. Exhibit 1.4 diagrams the major decisions and activities involved in the marketing management process, and it also serves as the organizational framework for the rest of this book. For that reason, it is important to note the basic focus of this framework and the sequence of events within it. A Decision-Making Focus The framework has a distinct decision-making focus. Planning and executing an effective marketing program involves many interrelated decisions about what to do, when to do it, and how. Those decisions are the major focus of the rest of this book. Every chapter details decisions that must be made and actions taken with respect to a specific piece of a strategic marketing program and provides the analytical tools and frameworks you’ll need to make those decisions intelligently. Analyzing the 4Cs A substantial amount of analysis of customers, competitors, and the company itself occurs before decisions are made concerning specific components of the marketing program. This reflects our view that successful marketing 14 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit 1.4 The Marketing Management Process External environment Marketing’s role in strategy development • Corporate and business-unit objectives and strategies (Chapter 2) Market opportunity analysis (The 4 Cs: company, context, customers, and competitors) • Understanding market opportunities (Chapter 3) • Customer behavior (Chapters 4 and 5) • Marketing research and forecasting (Chapter 6) • Market segmentation and targeting (Chapter 7) • Positioning decisions (Chapter 8) Developing strategic marketing programs (The 4 Ps: product, price, place, and promotion) • Business strategies and marketing program decisions (Chapter 9) • Product and service decisions (Chapter 10) • Pricing decisions (Chapter 11) • Distribution decisions (Chapter 12) • Promotion decisions (Chapter 13) Strategic marketing programs for selected situations • Strategies for the digitally networked world (Chapter 14) • Strategies for new and growing markets (Chapter 15) • Strategies for mature and declining markets (Chapter 16) Implementing and managing marketing programs • Organizing and planning for implementation (Chapter 17) • Measuring and motivating marketing performance (Chapter 18) management decisions usually rest on an objective, detailed, and evidence-based understanding of the market and the environmental context. Of course, most marketing strategies never get implemented in quite the same way as they were drawn on paper. Adjustments are made and new activities undertaken in response to rapid changes in customer demands, competitive actions, or shifting economic conditions. But a thorough and ongoing analysis of the market and the broader environment enables managers to make such adjustments in a well-reasoned and consistent way rather than by the seat of the pants. The analysis necessary to provide the foundation for a good strategic marketing plan should focus on four elements of the overall environment that may influence a given strategy’s appropriateness and ultimate success: (1) the company’s internal resources, capabilities, and strategies; (2) the environmental context—such as broad social, economic, Chapter One The Marketing Management Process 15 and technology trends—in which the firm will compete; (3) the needs, wants, and characteristics of current and potential customers; and (4) the relative strengths and weaknesses of competitors and trends in the competitive environment. Marketers refer to these elements as the 4Cs, and they are described in more detail below. Integrating Marketing Plans with the Company’s Strategies and Resources Many firms—particularly larger organizations with multiple divisions or business units— develop a hierarchy of interdependent strategies. Each strategy is formulated at varying levels within the firm and deals with a different set of issues. For example, as we’ll see in the next chapter, IBM has reduced its focus and the proportion of resources it devotes to its traditional computer hardware businesses. Instead, it is seeking future growth and profits by investing heavily in developing information engineering, software, and business consulting services. This change in emphasis reflects IBM’s new corporate strategy. This level of strategy reflects the company’s mission and provides direction for decisions about what businesses it should pursue, how it should allocate its available resources, and its growth policies. Samsung’s heavy investment in R&D, consumer research, and product design to develop a new generation of technically superior, attractively designed digital electronics products represents part of a business-level (or competitive) strategy that addresses how the business intends to compete in its industry. Samsung seeks to gain a competitive advantage by offering cutting-edge technology, innovative design, and superior customer value. Finally, interrelated decisions about market segments, product line, advertising appeals and media, prices, and partnerships with suppliers, distributors, retailers, and other agencies all reflect a firm’s marketing strategy. This is the company’s plan for pursuing its objectives within a particular product-market. In the case of smaller companies or start-ups with only a single product line, however, business-level competitive strategy and marketing strategy substantially overlap. A major part of the marketing manager’s job is to monitor and analyze customers’ needs and wants and the emerging opportunities and threats posed by competitors and trends in the external environment. Therefore, because all levels of strategy must consider such factors, marketers often play a major role in providing inputs to—and influencing the development of—corporate and business strategies. Conversely, general managers and senior managers in other functions need a solid understanding of marketing in order to craft effective organizational strategies. Marketing managers also bear the primary responsibility for formulating and implementing strategic marketing plans for individual product-market entries or product lines. But as the above discussion suggests, such strategic marketing proStrategic Issue grams are not created in a vacuum. Instead, the marketing objectives The marketing objectives and strategy for and strategy for a particular product-market entry must be achievable a particular product-market entry must be with the company’s available resources and capabilities and consistent achievable with the company’s available resources and capabilities and consistent with the direction and allocation of resources inherent in the firm’s with the direction and allocation of corporate and business-level strategies. In other words, there should be resources inherent in the firm’s corporate a good fit—or internal consistency—among the elements of all three and business-level strategies. levels of strategy. Chapter 2 describes in more detail the components of corporate and business strategies and the roles marketers and other functional managers play in shaping the strategic direction of their organizations and business units. 16 Section One The Role of Marketing in Developing Successful Business Strategies Market Opportunity Analysis A major factor in the success or failure of strategies at all three levels is whether the strategy elements are consistent with the realities of the firm’s external environment. Thus, the next step in developing a strategic marketing plan is to monitor and analyze the opportunities and threats posed by factors outside the organization. This is an ongoing responsibility for marketing managers. Understanding Market Opportunities Understanding the nature and attractiveness of any opportunity requires an examination of the external environment, including the markets to be served and the industry of which the firm is a part. In turn, this examination involves a look at broad macro issues like environmental trends that are driving or constraining market demand and the structural characteristics of the industry as a whole, as well as specific aspects of the firm and what it brings to the party. It is also necessary to examine the management team that will be charged with implementing whatever marketing strategy is developed to determine if they have what it takes to get the job done. Chapter 3 provides a framework for examining these issues, and dramatizes how different the attractiveness of one’s market and one’s industry can be; an insight that is easily (and often) overlooked. Customer Analysis The primary purpose of marketing activities is to facilitate and encourage exchange transactions with potential customers. One of a marketing manager’s major responsibilities is to analyze the motivations and behavior of present and potential customers. What are their needs and wants? How do those needs and wants affect the product benefits they seek and the criteria they use in choosing products and brands? Where do they shop? How are they likely to react to specific price, promotion, and service policies? To answer such questions, a marketing manager must have some notion of the mental processes customers go through when making purchase decisions and of the psychological and social factors that influence those processes. Chapter 4 discusses the processes and influences that shape consumers’ buying behavior. Because some aspects of the purchase process differ for organizations, Chapter 5 examines the buying behavior of institutional customers. Marketing Research and Forecasting Marketing managers must obtain objective information about potential customers, the satisfaction and loyalty of current customers, the firm’s wholesale and retail partners, and the strengths and weaknesses of competitors. Consequently, even relatively small organizations often expend substantial financial and personnel resources studying the needs and preferences of potential customers, developing new products, and tracking the sales patterns and satisfaction of existing customers and channel members. If managers are to make informed decisions, however, research information must be converted into estimates of the sales volume and profit the firm might reasonably expect a particular marketing program to generate within a given market segment. Chapter 6 discusses techniques and methods for collecting and analyzing marketing research information and for forecasting the market potential and likely sales volumes of particular market segments. The specific research methods that marketing managers use to make decisions about elements of a marketing program—such as what price to charge or which advertising media to use—will be examined in more detail in chapters dealing with each of these program decisions. Market Segmentation, Targeting, and Positioning Decisions Not all customers with similar needs seek the same products or services to satisfy those needs. Their purchase decisions may be influenced by individual preferences, personal characteristics, social circumstances, and so forth. On the other hand, customers who do purchase the same Chapter One The Marketing Management Process 17 product may be motivated by different needs, seek different benefits from the product, rely on different sources of information about products, and obtain the product from different distribution channels. Thus, one of the manager’s most crucial tasks is to divide customers into market segments—distinct subsets of people with similar needs, circumstances, and characteristics that lead them to respond in a similar way to a particular product or service offering or to a particular strategic marketing program. Chapter 7 examines dimensions for measurement and analytical techniques that can help managers identify and define market segments in both consumer and organizational markets. After defining market segments and exploring customer needs and the firm’s competitive strengths and weaknesses within segments, the manager must decide which segments represent attractive and viable opportunities for the company; that is, on which segments to focus a strategic marketing program. Chapter 7 discusses some of the considerations in selecting a target segment. Finally, the manager must decide how to position the product or service offering and its brand within a target segment; that is, to design the product and its marketing program so as to emphasize attributes and benefits that appeal to customers in the target segment and at once distinguish the company’s brand from those of competitors. Issues and analytical techniques involved in marketing positioning decisions are discussed in Chapter 8. Formulating Strategic Marketing Programs Designing an effective strategic marketing program for a product-market entry involves three interrelated sets of decisions: 1. The manager must set specific objectives to be accomplished within the target market, such as sales volume, market share, and profitability goals. Those objectives must be consistent with the firm’s corporate and business-unit strategic objectives, yet specific enough to enable management to monitor and evaluate the product-market entry’s performance over time. 2. The manager must decide on an overall marketing strategy to appeal to customers—and to gain a competitive advantage—in the target market. The strategy must be consistent with the firm’s capabilities, its corporate and business-unit strategies, and the product-market objectives. 3. The manager must then make decisions about each element of the tactical marketing program used to carry out the strategy. These decisions must be internally consistent and integrated across all elements of the marketing program. Specifying Marketing Objectives and Strategies The first step in developing a strategic marketing program is to specify the objectives and the overall marketing strategy of each target market. As we’ve mentioned, these are partly dictated by corporate and business-level objectives, strategies, and resources. For instance, the nature of Samsung’s product line, its pricing and distribution policies, and its advertising appeals and promotion efforts are all influenced by the firm’s competitive strategy of offering technically innovative and stylish electronics products at premium prices. Chapter 9 describes a number of generic business-level competitive strategies and examines the way such strategies influence decisions about marketing objectives and programs, as well as the role other functional managers play in implementing those marketing programs. Marketing Program Components Dozens of specific tactical decisions must be made in designing a strategic marketing program for a product-market entry. These decisions fall into four categories of major marketing variables that a manager has some ability to control over the short term. Often called the 4 Ps, the controllable elements of a marketing program are the product offering (including the breadth of the product line, 18 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit 1.5 Decisions within the Four Elements of the Marketing Mix Product Place • Quality • Features • Style • Options • Brand name • Packaging • Guarantees/ warranties • Services • Numbers and types of middlemen • Locations/ availability • Inventory levels The target market Price Promotion • List price • Discounts • Allowances • Credit terms • Payment period • Rental/lease • Advertising • Personal selling • Sales promotion • Point-of-purchase materials • Publicity quality levels, and customer services); price; promotion (advertising, sales promotion, and salesforce decisions); and place (or distribution). Because decisions about each element should be consistent and integrated with decisions concerning the other three, the four components are often referred to as the marketing mix. The marketing mix is the combination of controllable marketing variables that a manager uses to carry out a marketing strategy in pursuit of the firm’s objectives in a given target market. Exhibit 1.5 outlines some of the decisions that must be made within each of the four elements of the marketing mix. Chapters 10 through 13 discuss in more detail the various methods and criteria for making decisions about each of these program components. Formulating Strategic Marketing Programs for Specific Situations The strategic marketing program for a product should reflect market demand and the competitive situation within the target market. But demand and competitive conditions change over time as a product moves through its life cycle. Therefore, different marketing strategies are typically more appropriate and successful for different market conditions and at different life-cycle stages. Chapter 14 explores marketing strategies for the rapidly evolving conditions being created by e-commerce and the digitally networked world. Chapter 15 examines marketing strategies for introducing new entries and for strengthening a product’s Chapter One The Marketing Management Process 19 competitive position as its market grows. Chapter 16 then discusses the marketing strategies a firm might adopt in mature and declining product-markets. Implementation and Control of the Marketing Program A final critical determinant of a strategy’s success is the firm’s ability to implement it effectively. And this depends on whether the strategy is consistent with the resources, the organizational structure, the coordination and control systems, and the skills and experience of company personnel.14 Managers must design a strategy to fit the company’s existing resources, competencies, and procedures—or try to construct new structures and systems to fit the chosen strategy. For example, Samsung’s brand building program would not be so successful without its substantial investments in R&D, marketing research, and product design, and a team structure that encourages communication and cooperation across functional areas throughout the development process. Chapter 17 discusses the structural variables, planning and coordination processes, and personnel and corporate culture characteristics related to the successful implementation of various marketing strategies. The final tasks in the marketing management process are determining whether the strategic marketing program is meeting objectives and adjusting the program when performance is disappointing. This measurement and control process provides feedback to managers and serves as a basis for a market opportunity analysis in the next planning period. Chapter 18 examines ways to evaluate marketing performance and develop contingency plans when things go wrong. The Marketing Plan—A Blueprint for Action The results of the various analyses and marketing program decisions discussed above should be summarized periodically in a detailed formal marketing plan.15 A marketing plan is a written document detailing the current situation with respect to customers, competitors, and the external environment and providing guidelines for objectives, marketing actions, and resource allocations over the planning period for either an existing or a proposed product or service. While some firms—particularly smaller ones—do not bother to write their marketing plans, most organizations believe that “unless all the key elements of a plan are written down . . . there will always be loopholes for ambiguity or misunderstanding of strategies and objectives, or of assigned responsibilities for taking action.”16 This suggests that even small organizations with limited resources can benefit from preparing a written plan, however brief. Written plans also provide a concrete history of a product’s strategies and performance over time, which aids institutional memory and helps educate new managers assigned to the product. Written plans are necessary in most larger organizations because a marketing manager’s proposals must usually be reviewed and approved at higher levels of management and because the approved plan provides the benchmark against which the manager’s performance will be judged. Finally, the discipline involved in producing a formal plan helps ensure that the proposed objectives, strategy, and marketing actions are based on rigorous analysis of the 4Cs and sound reasoning. Because a written marketing plan is such an important tool for communicating and coordinating expectations and responsibilities throughout the firm, we will say more about it in Chapter 17 when we discuss the implementation of marketing programs in detail. But 20 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit 1.6 Contents of a Marketing Plan Section Content I. Executive summary Presents a short overview of the issues, objectives, strategy, and actions incorporated in the plan and their expected outcomes for quick management review. II. Current situation and trends Summarizes relevant background information on the market, competition, and the macroenvironment, and trends therein, including size and growth rates for the overall market and key segments. III. Performance review (for an existing product or service only) Examines the past performance of the product and the elements of its marketing program (e.g., distribution, promotions). IV. Key issues Identifies the main opportunities and threats to the product that the plan must deal with in the coming year, and the relative strengths and weaknesses of the product and business unit that must be taken into account in facing those issues. V. Objectives Specifies the goals to be accomplished in terms of sales volume, market share, and profit. VI. Marketing strategy Summarizes the overall strategic approach that will be used to meet the plan’s objectives. VII. Action plans This is the most critical section of the annual plan for helping to ensure effective implementation and coordination of activities across functional departments. It specifies VIII. Projected profit-and-loss statement ● The target market to be pursued. ● What specific actions are to be taken with respect to each of the 4 Ps. ● Who is responsible for each action. ● When the action will be engaged in. ● How much will be budgeted for each action. Presents the expected financial payoff from the plan. IX. Controls Discusses how the plan’s progress will be monitored; may present contingency plans to be used if performance falls below expectations or the situation changes. X. Contingency plans Describes actions to be taken if specific threats or opportunities materialize during the planning period. because the written plan attempts to summarize and communicate an overview of the marketing management process we have been examining, it is worthwhile to briefly examine the contents of such plans here. Marketing plans vary in timing, content, and organization across companies. In general, marketing plans are developed annually; though planning periods for some big-ticket industrial products, such as commercial aircraft, may be longer, and in some highly volatile industries, such as telecommunications or electronics, they can be shorter. Plans typically follow a format similar to that outlined in Exhibit 1.6. There are three major parts to the plan. First, the marketing manager details his or her assessment of the current situation. This is the homework portion of the plan where the manager summarizes the results of his or her analysis of current and potential customers, the company’s relative strengths and weaknesses, the competitive situation, the major trends in the broader environment that may affect the product and, for existing products, past performance outcomes. This section typically also includes forecasts, estimates of sales potential, and other assumptions underlying the plan, which are especially important for proposed new products or services. Based on these analyses, the manager may also call Chapter One 21 The Marketing Management Process attention to several key issues—major opportunities or threats that should be dealt with during the planning period. The second part of the plan details the strategy for the coming period. This part usually starts by specifying the objectives (e.g., sales volume, market share, profits, customer satisfaction levels) to be achieved by the product or service during the planning period. It then outlines the overall marketing strategy, the actions associated with each of the 4 Ps necessary to implement the strategy, and the timing and locus of responsibility for each action. Finally, the plan details the financial and resource implications of the strategy and the controls to be employed to monitor the plan’s implementation and progress over the period. Some plans also specify some contingencies: how the plan will be modified if certain changes occur in the market, competitive, or external environments. Who Does What? Marketing Institutions A strategic marketing program involves a large number of activities aimed at encouraging and facilitating exchanges and building relationships with customers. And all of those activities must be performed by somebody for exchanges to happen. One of the few eternal truths in marketing is that “you can eliminate the middlemen, but you can’t eliminate their functions.” Somebody has to gather information or feedback from customers concerning their needs and wants; use that information to design product or service offerings that will provide valued benefits; communicate the existence and benefits of the offering to the market; perform the storage, order fulfillment, and transportation activities necessary to make the product conveniently available to customers; finance purchases; collect payment; and resolve customer problems or complaints after the sale. The major flows of the physical product, payment, and information that occur during an exchange are summarized in Exhibit 1.7. In a few cases, nearly all these activities are performed by a single organization and its employees. Such internal control of the full range of marketing functions and activities is referred to as vertical integration. Dell Computer’s reliance on the internet to attract customers and process orders together with a flexible manufacturing system that produces computers to order and minimizes finished inventories, and Canon’s reliance on its own Exhibit 1.7 What Must Change Hands to Complete an Exchange between a Buyer and a Seller? Information about the Market and Customer Needs and Wants Seller Information about the Product and the Offer Physical Product or Service Money or Something Else of Value Buyer 22 Section One The Role of Marketing in Developing Successful Business Strategies factories, salesforce, and distribution facilities to produce and market its copiers and printers are examples of highly integrated marketing organizations. The majority of goods and services in most developed economies, however, are marketed through alliances or networks involving multiple institutions or middlemen. These networks are commonly referred to as marketing channels or channels of distribution. Each institution within the channel specializes in performing only a part of the activities or functions necessary to conduct exchanges with the end user. We will examine these institutions and the nature of their interactions with one another in more detail in Chapter 12. Marketing institutions fall into one of the following categories: ● ● ● ● Merchant wholesalers take title to the goods they sell and sell primarily to other resellers (retailers), industrial, and commercial customers, rather than to individual consumers. Agent middlemen, such as manufacturers’ representatives and brokers, also sell to other resellers and industrial or commercial customers, but they do not take title to the goods they sell. They usually specialize in the selling function and represent client manufacturers on a commission basis. Retailers sell goods and services directly to final consumers for their personal, nonbusiness use. Facilitating agencies, such as advertising agencies, marketing research firms, collection agencies, railroads, and web portals, specialize in one or more marketing functions on a fee-for-service basis to help their clients perform those functions more effectively and efficiently. Who Pays the Cost of Marketing Activities—And Are They Worth It? The final selling price of the product reflects the costs of performing the activities necessary for exchange transactions. Those costs vary widely across different products and customers. They account for a relatively high proportion of the price of frequently purchased consumer package goods such as cereals and cosmetics. Extensive transportation, storage, and promotion activities facilitate the millions of consumer purchases that occur every year. In developed economies, on average, roughly 50 percent of the retail price of such products is made up of marketing and distribution costs; one-half represents retailer margins, and the other half the marketing expenses of the manufacturer and wholesale middlemen.17 On the other hand, marketing costs for nontechnical industrial goods, such as sheet steel or basic chemicals, are much lower because they are sold in large quantities directly to a small number of regular customers. Though both individual and organizational customers pay for the marketing activities of manufacturers and their middlemen, they are still usually better off than if they were to undertake all the functions themselves. This is true for two reasons: First, the purchasing, storage, promotion, and selling activities of wholesalers and retailers allow customers to buy a wide variety of goods from a single source in one transaction, thereby increasing transactional efficiency. For example, a consumer may buy a week’s groceries on a single trip to the supermarket (or perhaps even over the internet from a home-delivery service) rather than engage in separate transactions with a butcher, a baker, and a variety of farmers or food processors. Thus, the number of exchanges necessary for a consumer to acquire a desired assortment of goods and services is reduced and efficiency is increased when middlemen are added to an economic system. A second benefit of an extensive marketing system is that specialization of labor and economies of scale lead to functional efficiency. Manufacturers and their agents can perform the exchange activities more cheaply than can individual customers. A railroad, for Chapter One The Marketing Management Process 23 instance, can ship a load of new tires from a plant in Akron to a wholesaler in Tucson more cheaply than an individual consumer in Arizona could transport them in the family minivan. From the customer’s viewpoint, then, the increased transactional and functional efficiency of exchange produced by members of the marketing system increases the value— the utility/price relationship—of goods and services. A product has greater utility for a potential customer when it can be purchased with a minimum of risk and shopping time (possession utility), at a convenient location (place utility), and at the time the customer is ready to use the product (time utility). Room for Improvement in Marketing Efficiency While the existence of specialized institutions in our economy’s marketing system has greatly increased the efficiency and value of most exchange transactions from the customer’s point of view, that does not mean the current system is nearly as efficient as it could be. Marketing is one of the few functional areas of business whose efficiency has not substantially improved in recent years. Two authorities estimate that, on average, manufacturing costs have declined from about 50 percent of total corporate costs after World War II to about 30 percent today through automation, flexible manufacturing systems, product redesign for manufacturing, just-in-time approaches, and so on. Similarly, they argue that the average costs of “management”—defined to include finance, accounting, human resources, and support functions like R&D—have fallen from about 30 percent to 20 percent as the result of downsizing, outsourcing, and process reengineering. On the other hand, they estimate that the percentage of corporate costs accounted for by marketing activities actually went up over the same period.18 Of course, there are some good reasons why marketing costs have increased in recent years, including the greater intensity of global competition, the rapid pace of technological change, the fragmentation of the communications media, and many other factors. However, at least part of the problem can be attributed to marketers themselves. Marketing managers have been slow to develop accurate measures and metrics of marketing performance and, therefore, slow to understand the effectiveness of various marketing actions relative to their costs, and thus their impact on a firm’s bottom line. In a recent survey of over 100 marketing executives in global companies in the United States, United Kingdom, and Germany, for instance, nearly all respondents agreed that improving the effectiveness of their marketing investments was one of their corporation’s top three business priorities. But 84 percent of those respondents admitted that marketing return on investment (MROI) is not well understood in their businesses, and only 54 percent said they measured any of their marketing activities consistently.19 We will focus throughout this book on ways marketers are attempting to improve operational efficiency through (1) more effective use of telecommunications and information technologies, such as internet ads, product placements, event sponsorships, company blogs, and the like; (2) the development of cooperative alliances with suppliers, middlemen, and ultimate customers; and (3) the search for new measurement and budgeting methods that are more clearly focused on improving cash flows and adding economic value.20 The Role of the Marketing Decision Maker The title marketing manager is necessarily and intentionally vague because many people are directly involved with an organization’s marketing activities. This can include people not formally located in a marketing or sales department or even within the company. The 24 Section One The Role of Marketing in Developing Successful Business Strategies exact nature of the marketing manager’s job will vary widely depending on the industry involved, the organization’s structure, and its position in the managerial hierarchy. While the marketing manager bears the primary responsibility for formulating and implementing a strategic marketing program for a product or service, a single marketing manager (1) seldom does all the analysis or makes all the decisions involved in such plans all alone and (2) almost never has the formal authority to demand that all the activities specified in the plan be carried out by subordinates exactly as they are written down. Many marketing activities are usually contracted out to independent middlemen or facilitating agencies or are performed in concert with a firm’s suppliers, major customers, or other organizational partners. A marketing manager has no formal authority over these outsiders. Thus, the development and nurturing of long-term relationships with suppliers, channel members, and major customers can do more than simply improve marketing efficiency; they can provide the information, advice, and cooperation necessary to devise and carry out successful marketing strategies.21 Even those marketing activities that are performed in-house are seldom all within the domain of the marketing department or under the authority of a single marketing executive. Implementing a marketing plan requires cooperation and coorStrategic Issue dination across many specialized functional areas. Marketing is—or Creating value is a cross-functional should be—everybody’s business. After all, delivering superior value endeavor, and marketing and to customers is the key to business success, and that superior value nonmarketing executives alike must flows from a combination of well-designed products or services, prooperate with a clear customer focus to make it happen. duced with high quality; efficient operations that enable low costs and competitive prices; and reliable customer service. Creating value is a cross-functional endeavor, and marketing and nonmarketing executives alike must operate with a clear customer focus to make it happen. Some Recent Developments Affecting Marketing Management While many of the basic tasks involved in developing and implementing strategic marketing programs have remained unchanged for decades, recent developments in our economy and around the world have greatly changed the context in which those tasks are carried out and the information and tools that marketers have at their disposal. These developments include (1) the increased globalization of markets and competition, (2) the growth of the service sector of the economy and the importance of service in maintaining customer satisfaction and loyalty, (3) the rapid development of new information and communications technologies, and (4) the growing importance of relationships for improved coordination and increased efficiency of marketing programs and for capturing a larger portion of customers’ lifetime value. Some recent impacts of these four developments on marketing management are briefly summarized below and will be continuing themes throughout this book. Globalization International markets account for a large and growing portion of the sales of many organizations. But while global markets represent promising opportunities for additional sales growth and profits, differences in market and competitive conditions across country boundaries can require firms to adapt their competitive strategies and marketing programs to be successful. Even when similar marketing strategies are appropriate for multiple countries, international Chapter One The Marketing Management Process 25 differences in infrastructure, culture, legal systems, and the like, often mean that one or more elements of the marketing program—such as product features, promotional appeals, or distribution channels—must be tailored to local conditions for the strategy to be effective. Increased Importance of Service A service can be defined as “any activity or benefit that one party can offer another that is essentially intangible and that does not result in the ownership of anything. Its production may or may not be tied to a physical product.”22 Service businesses such as airlines, hotels, restaurants, and consulting firms account for roughly two-thirds of all economic activity in the United States, and services are the fastest-growing sector of most other developed economies around the world. While many of the decisions and activities involved in marketing services are essentially the same as those for marketing physical goods, the intangible nature of many services can create unique challenges for marketers. We will discuss these challenges—and the tools and techniques firms have developed to deal with them—throughout this book. As the definition suggests, services such as financing, delivery, installation, user training and assistance, and maintenance are often provided in conjunction with a physical product. Such ancillary services have become more critical to firms’ continued sales and financial success in many product-markets. As markets have become crowded with global competitors offering similar products at ever-lower prices, the creative design and effective delivery of supplemental services has become a crucial means by which a company may differentiate its offering and generate additional benefits and value for customers. Those additional benefits, in turn, can justify higher prices and margins in the short term and help improve customer satisfaction, retention, and loyalty over the long term.23 Of course, lousy customer service can have the opposite effect. This is especially a danger when intense price competition pushes a firm to cut costs by reducing or outsourcing customer service and support. For instance, a few years ago Dell attempted to maintain its long-standing low-cost position in the personal computer industry by—among other things—reducing the number of technicians in its customer call centers and limiting each technician’s training to only a few specialized problem areas. As a result, increasing numbers of customers spent 30 minutes or more on hold when they called Dell for help, and 45 percent were transferred at least once before they found a technician with the expertise to solve their problem. Consequently, Dell’s customer satisfaction rating in the United States plummeted, and despite expensive attempts to improve service—including the use of independent retail outlets to sell and service Dell equipment—the firm’s market share, profits, and stock prices have still not fully recovered.24 Information Technology The computer revolution and related technological developments are changing the nature of marketing management in two important ways. First, new technologies are making it possible for firms to collect and analyze more detailed information about potential customers and their needs, preferences, and buying habits. Thus, it is now possible for many firms to identify and target smaller and more precisely defined market segments—sometimes segments consisting of only one or a few customers—and to customize product features, promotional appeals, prices, and financing arrangements to fit such segments.25 A second impact of information technology has been to open new channels for communications and transactions between suppliers and customers. As Exhibit 1.8 suggests, one simple way of categorizing these new channels is based on whether the suppliers and customers involved are organizations or individual consumers. 26 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit 1.8 Categories of E-Commerce B USINESS Business-to-Business (B2B) Examples: Business ● Purchasing sites of Ford, Oracle, Cisco ● Supply chain networks linking producers and distribution channel members, such as 3M and Walmart Consumer-to-Business (C2B) Examples: Consumer ● Sites that enable consumers to bid on unsold airline tickets and other goods and services, such as Priceline C ONSUMER Business-to-Consumer (B2C) Examples: ● E-tailers, such as E*Trade, Amazon ● Producers’ direct sales sites, such as Dell, Ryanair, Sofitel Hotels ● Websites of traditional retailers, such as Sears, Lands’ End, Marks & Spencer Consumer-to-Consumer (C2C) Examples: ● Auction sites, such as eBay, QXL Source: Adapted from “A Survey of E-Commerce: Shopping Around the web,” The Economist, February 26, 2000, p. 11. Global sales over the internet are growing so fast that solid estimates of their volume are hard to come by. However, internet revenues of manufacturers, wholesalers, retailers, and selected service firms (not including travel) amounted to nearly $3.5 trillion in the United States in 2008 (the most recent census data available at the time of this writing) and worldwide volume of $5.5 to $6.5 trillion seems a reasonable guess.26 Growth in both the global and U.S. markets has averaged about 18 to 25 percent annually for the past several years, and is likely to continue at about the same pace. Roughly 90 percent of those sales were business-to-business transactions, such as those in the upper-left quadrant of Exhibit 1.8. Many high-tech firms like Oracle Corp. and Cisco Systems, and even some more traditional companies such as Toyota and Xerox conduct all or a large portion of their purchasing activities over the web. And many firms rely on their websites to communicate product information to potential customers, make sales, and deal with customer problems. Perhaps even more important, though, new information and communications technologies are enabling firms to forge more cooperative and efficient relationships with their suppliers and distribution channel partners. For example, Procter & Gamble and 3M have formed alliances with major retailers—such as Kroger and Walmart—to develop automatic restocking systems. Sales information from the retailer’s checkout scanners is sent directly to the supplier’s computers, which figure out automatically when to replenish each product and schedule deliveries direct to each of the retailer’s stores. Such paperless exchanges reduce mistakes and billbacks, minimize inventory levels, improve cash flow, and increase customer satisfaction and loyalty. In contrast, internet sales from businesses to consumers (the upper-right quadrant in Exhibit 1.8) accounted for only about $288 billion (excluding travel) in the United States in 2008, less than 3.6 percent of the country’s total retail sales.27 However, sales volumes of firms such as Amazon, Dell Computer, and iTunes are expanding rapidly, and many traditional retailers are expanding their marketing efforts on the web as well. And information available over the internet is affecting consumer purchase patterns even when the Chapter One 27 The Marketing Management Process purchases are made in traditional retail outlets. For instance, a recent survey found that nearly 6-in-10 adults in the United States (58 percent) have researched a product or service online before making a purchase and 24 percent have posted comments or reviews about things they have bought.28 The proportion of consumers gathering information online grew to 78 percent among people with internet accesss. Clearly, the web is presenting marketers with new strategic options—as well as new competitive threats and opportunities—regardless of what or to whom they are selling. Therefore, we will devote all of Chapter 14 to marketing strategies for e-commerce, and discuss specific examples and their implications in every chapter. Relationships across Functions and Firms New information technologies and the ongoing search for greater marketing efficiency and customer value in the face of increasing competition are changing the nature of exchange between companies. Instead of engaging in a discrete series of arm’s-length, adversarial exchanges with customers, channel members, and suppliers on the open market, more firms are trying to develop and nurture long-term relationships and alliances, such as the one between 3M and Wal-Mart. Such cooperative relationships are thought to improve each partner’s ability to adapt quickly to environmental changes or threats, to gain greater benefits at lower costs from its exchanges, and to increase the lifetime value of its customers.29 Similar kinds of cooperative relationships are emerging inside companies as firms seek mechanisms for more effectively and efficiently coordinating across functional departments the various activities necessary to identify, attract, service, and satisfy customers. In many firms, the planning and execution that used to be the responsibility of a product or marketing manager are now coordinated and carried out by cross-functional teams. Thus, the boundaries between functional areas are beginning to blur, and marketing programs are increasingly a group activity. Regardless of who is responsible or who carries out the work, however, the decisions and activities involved in such marketing programs remain the same. They are the focus of the rest of this book. Take-aways 1. Marketing is pervasive. It is a social process involving the activities that facilitate exchanges of goods and services among individuals and organizations. 2. Customers buy benefits, not products. The benefits a customer receives from a firm’s offering, less the costs he or she must bear to receive those benefits, determine the offering’s value to that customer. 3. Delivering superior value to one’s customers is the essence of business success. Because delivering superior value is a multifunctional endeavor, both marketing and nonmarketing managers must adopt a strong focus on the customer and coordinate their efforts to make it happen. 4. A focus on satisfying customer needs and wants is not inconsistent with being technologically innovative. 5. The marketing management process requires an understanding of the 4Cs: the company and its mission, strategies, and resources; the macroenvironmental context in which it operates; customers and their needs and wants; and competitors. Obtaining an objective, detailed, evidence-based understanding of these factors is critical to effective marketing decision making. 6. Marketing decisions—such as choices about what goods or services to sell, to whom, and with what strategy—are made or approved at the highest levels in most firms, whether large or small. Therefore, managers who occupy or aspire to strategic positions in their organizations need marketing perspectives and analytical skills. 28 Section One The Role of Marketing in Developing Successful Business Strategies Endnotes 1. This case example is based on information found in “Samsung’s Lessons in Design,” issue: The Journal of Business and Design, Volume 9, No.1 (Fall 2003), pp. 25–31; “As Good as It Gets? Special Report: Samsung Electronics,” The Economist, January 15, 2005, pp. 64–66; Moon Ihlwan, “Samsung’s Rise in Digital TV,” BusinessWeek Online, October 4, 2007; “Losing Its Shine,” The Economist, February 9, 2008, p. 71; Cliff Edwards, “Samsung: Rethinking the Printer Business,” www.businessweek.com/innovation, January 5, 2009; and the company’s 2009–2010 Sustainability Report at www.samsung.com. 2. For example, see Christine Moorman and Roland T. Rust, “The Role of Marketing,” Journal of Marketing 63 (Special Issue 1999), pp. 180–97; Frederick E. Webster, Jr., “Marketing Management in Changing Times,” Marketing Management, January–February 2002, pp. 18–23; and David Kiley and Burt Helm, “The Short Life of the Chief Marketing Officer,” BusinessWeek, December 10, 2007, pp. 63–65. 3. The American Marketing Association offers a similar, though more detailed, definition of marketing, as follows: “Marketing is the process of planning and executing the conception, pricing, promotion, and distributing of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.” 4. For more examples, see Philip Kotler and Alan R. Andreasen, Strategic Marketing for Nonprofit Organizations, 7th ed. (Englewood Cliffs, NJ: Prentice Hall, 2008). 5. Some evidence indicates that differences between organizational and individual consumers account for more of the variation in the performance of a given business strategy across firms than any other environmental or organizational variable. See Donald C. Hambrick and David Lei, “Toward an Empirical Prioritization of Contingency Variables for Business Strategy,” Academy of Management Journal 28 (1985), pp. 763–88. 6. Quoted in Gary Hamel and C. K. Prahalad, Competing for the Future (Cambridge, MA: Harvard Business School Press, 1994). 7. Justin Martin, “Ignore Your Customer,” Fortune, May 1, 1995, pp. 121–26. 8. For empirical evidence, see John C. Narver and Stanley F. Slater, “The Effect of a Market Orientation on Business Profitability,” Journal of Marketing 54 (April 1990), pp. 1–18; Stanley F. Slater and John C. Narver, “Market Orientation, Performance, and the Moderating Influence of Competitive Environment,” Journal of Marketing 58 (January 1994), pp. 46–55; and Ahmet H. Kirca, Satish Jayachandran, and William O. Bearden, “Market Orientation: A Meta-Analytic Review and Assessment of Its Antecedents and Impact on Performance, Journal of Marketing 69 (April 2005), pp. 24–41. 9. John W. Verity, “Revolution in the Supply Closet,” BusinessWeek, June 10, 1996, p. 112. 10. Rahul Jacob, “Beyond Quality and Value,” Fortune, Special Issue, Autumn–Winter 1993, p. 10. 11. Patricia Sellers, “How to Handle Customers’ Gripes,” Fortune, October 24, 1988, p. 88. 12. Patricia Sellers, “Keeping the Customers You Already Have,” Fortune, Special Issue, Autumn–Winter 1993, p. 57. See also, Frederick F. Reicheld, “Loyalty and the Renaissance of Marketing,” Marketing Management 2 (1994), pp. 10–21. 13. For a more detailed discussion of brand equity, see David A. Aaker, Brand Equity (New York: Free Press, 1991); and David A. Aaker, Building Strong Brands (New York: Free Press, 1996). 14. C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review 68 (May–June 1990), pp. 79–91; George S. Day, “The Capabilities of Market-Driven Organizations,” Journal of Marketing 58 (October 1994), pp. 37–52; and Stanley F. Slater, Eric M. Olson, and G. Tomas M. Hult, “Worried About Strategy Implementation? Don’t Overlook Marketing’s Role,” Business Horizons 53 (2010), pp. 469–79 (archived online at www.sciencedirect.com.) 15. For a more detailed discussion of formal marketing plans, see Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning, 4th ed. (New York: Irwin/McGraw-Hill, 1997); and Marian Burk Wood, The Marketing Plan: A Handbook 3rd ed. (Upper Saddle River, NJ: Prentice-Hall, 2008). 16. David S. Hopkins, The Marketing Plan (New York: The Conference Board, 1981), p. 2. 17. Jagdish N. Sheth and Rajendra S. Sisodia, “Feeling the Heat,” Marketing Management 4 (Fall 1995), p. 10. 18. Ibid. 19. “Prophet’s ‘State of Marketing’ Study Finds Marketers Challenged to Measure Up,” www.prophet.com/newsevents, February 28, 2008. 20. Rajendra K. Srivastava, Tasadduq A. Shervani, and Liam Fahey, “Marketing, Business Processes, and Shareholder Value: An Organizationally Embedded View of Marketing Activities and the Discipline of Marketing,” Journal of Marketing 63 (Special Issue 1999), pp. 168–79; Roland T. Rust, Katherine N. Lemon, and Valarie Zeithaml, “Return on Marketing: Using Customer Equity to Focus Marketing Strategy,” Journal of Marketing 68 (January 2004), pp. 109–27; Roland T. Rust, T. Ambler, G. Carpenter, V. Kumar, and R. Srivastava, “Measuring Marketing Productivity: Current Knowledge and Future Directions,” Journal of Marketing 68 (October 2004), pp. 76–89; and Paul W. Farris, Neil T. Bendle, Phillip E. Pfeifer, and David J. Reibstein, Marketing Metrics, 2nd ed. (Upper Saddle River, NJ: Pearson Publishing Inc., 2010). 21. Ravi S. Achrol and Philip Kotler, “Marketing in the Network Economy,” Journal of Marketing 63 (Special Issue 1999), pp. 146–63. 22. Philip Kotler and Gary Armstrong, Principles of Marketing (Englewood Cliffs, NJ: Prentice Hall, 1989), p. 575. 23. For examples, see Terry G. Vavra, Aftermarketing (Burr Ridge, IL: Richard D. Irwin, 1995). 24. Brian Hindo, “Satisfaction Not Guaranteed,” BusinessWeek, June 19, 2006, pp. 32–36; Arik Hesseldahl, “Dell’s Disappointing Quarter,” www.businessweek.com/technology, February 28, 2008; and Aaron Ricadela, “Dell: Scant Signs of Recovery,” www.businessweek.com/technology, July 14, 2009. 25. For examples, see Faith Keenan, Stanley Holmes, Jay Greene, and Roger O. Crockett, “A Mass Market of One,” BusinessWeek, December 2, 2002, pp. 68–72; and Anthony Bianco, “The Vanishing Mass Market,” BusinessWeek, July 12, 2004, pp. 61–72. 26. “U.S. Census Bureau E-Stats Report,” www.census.gov/estats, May 27, 2010. 27. “U.S. Census Bureau E-Stats Report,” May 27, 2010. 28. Jim Jansen, “Online Product Research,” Pew Research Center’s Internet and American Life Project, www.pewinternet.org/reports/2010 (September 29, 2010). See also Nanette Byrnes, “More Clicks at the Bricks,” Business Week, December 17, 2007, pp. 50–52. 29. Achrol and Kotler, “Marketing in the Network Economy.” This page intentionally left blank C HAPTER T WO The Marketing Implications of Corporate and Business Strategies IBM Switches Strategies1 F OR DECADES International Business Machines focused most of its efforts on the hardware side of the computer industry: first on large mainframe computers, then on personal computers (PCs), and then, as the internet began to take off in the mid–1990s, on servers and related equipment. Its target customers for that hardware were typically organizations rather than individual consumers and usually large organizations that needed lots of data processing capacity and had the financial resources to afford it. IBM’s competitive strategy was also quite consistent over the years. Given that the firm was never the lowest-cost producer in the industry, it did not try to compete with low prices. Instead, the firm pursued a quality differentiation strategy by offering superior products backed up by excellent technical service and selling them at premium prices. To implement its strategy, the company tried to ensure a steady stream of cutting-edge products by allocating vast resources to R&D and product development. On the marketing side, the firm maintained substantial advertising and promotion budgets to keep potential customers informed about its constantly evolving product lines and to burnish the identity of the IBM brand. More important, though, were the millions spent recruiting, training, and compensating 30 one of the world’s largest and most technically competent salesforces. Technology gy Changes g and Competitor p Actions Require a Shift in Strategy For decades IBM’s corporate, business, and marketing strategies were all very successful. By the mid-1990s, however, several of IBM’s traditional businesses were in trouble. The company’s share of the worldwide PC market fell to about 8 percent in 1999, third behind Dell and Compaq. Similarly, while server sales, made up mostly of UNIX-based computers, were growing rapidly around the world, IBM was able to capture only a small share of that business. Even its venerable mainframe business, which had been a low-growth but highly profitable market throughout the 1980s and early 1990s, suffered a profit squeeze due to falling prices and declining demand. IBM’s performance problems can be traced to a variety of factors, which all worked to make the firm’s tried-and-true corporate, competitive, and marketing strategies less effective than they once were. For one thing, major technological changes in the macroenvironment—such as the rapid increase in power of desktop PCs, the emergence of the internet, and the development of internal, organizationwide computer networks—greatly contributed to the declining demand for large mainframe computers and centralized data processing systems. Also, IBM’s quality differentiation strategy became less effective as some of its product-markets began to mature and customers’ purchase criteria changed. Technical and performance differences among competing brands became less pronounced as the PC industry matured, for example, and later buyers tended to be less technically sophisticated, more price-conscious, and more interested in buying equipment that was easy to use. IBM’s premium price position put it at a disadvantage in attracting such customers. Even IBM’s traditional focus on large organizational customers contributed to the firm’s problems in the newly emerging markets for servers and related equipment and software. It was slow to pursue the many small start-up businesses at the forefront of the dot-com revolution, leaving an open field for Sun, Cisco Systems, and other competitors. A New Corporate Strategy In view of the changing environment and IBM’s lackluster performance, top executives began to refocus the corporate mission, de-emphasizing the development and manufacture of high-tech hardware—even to the extreme of selling the firm’s PC business to China’s Lenovo Group Ltd.—while increasing the emphasis on providing customers with business consulting, software, and outsourcing services. To leverage the firm’s existing competencies and its long-term relationships with its traditional customers, some of the new services the firm developed concentrated on helping large, bricks-and-mortar firms hook old corporate databases (often on mainframes) into new online systems. A broader strategic thrust involved the development of “enterprise solutions on demand”—packages of networked and modularized technologies, software, and consulting services aimed at helping organizations in a variety of business and service sectors rethink, redesign, and manage large chunks of their operations; everything from accounting and customer service to human resources and procurement. For instance, an IBMdesigned system and software helped the Bank of Russia reduce its transaction processing costs by 95 percent. Recently, another strategic thrust focused on business analytics; designing systems to size up and organize the vast streams of data companies collect in order to identify opportunities for cutting costs or increasing revenues and customer satisfaction. The French retailer Carrefour, for example, recently used IBM analytics to dig through purchase patterns, figure out what each customer was likely to buy next, and offer targeted coupons that drew customers back into the stores. New Business and Marketing Strategies IBM’s new corporate emphasis on business services and software as its primary paths toward future growth also forced some changes in the firm’s competitive and marketing strategies. At the business level, the firm still seeks to differentiate itself from competitors on the basis of superior quality and to charge premium prices for that quality. But in its new service businesses, competitive superiority depends on the knowledge, experience, and expertise of its consultants—and their familiarity with a customer’s operations that comes from continuing interaction—rather than the technical quality of its products. Therefore, to implement its new service-based strategy effectively, the company reorganized and reallocated many of its internal resources. Given that the success of IBM’s new competitive strategy depends heavily on the knowledge and expertise of its personnel and their ability to forge beneficial relationships with customers, the firm’s salesforce is more crucial than ever. But many salespeople who used 31 32 Section One The Role of Marketing in Developing Successful Business Strategies to sell the company’s hardware have been retrained and turned into business consultants. The company also acquired PriceWaterhouseCoopers consulting, a move that helped IBM focus more on executive-level business consulting in addition to traditional technology consulting. The firm also found that in order to tailor systems to a customer’s business problems, industry-specific knowledge and experience are useful. Consequently, its enterprise solutions and analytics services are focused on six broad sectors, including banking and financial markets, health care, government, telecommunications, and consumer products. Also, in order to develop innovative solutions, each customer is serviced by a team that includes representatives from consulting/sales, software, systems/ technology, and sometimes R&D. A team’s members may reside in different IBM offices around the world, but each team specializes in only one customer sector. A majority of the firm’s $6 billion R&D budget is now focused on solving business problems rather than on improving the technical performance of its hardware. More than 70 percent of the 4,900 U. S. patents granted to IBM in 2009 were for software and services. Finally the superior expertise and experience of IBM’s people—and the firm’s ability to satisfy the service needs of customers in a variety of industries— was communicated via an advertising campaign featuring a series of ads that stress the firm’s extensive consulting resources and capabilities and were placed in a variety of media directed at managers and entrepreneurs. The Bottom Line While IBM’s new strategies are bringing it face-to-face with new competitors in the business consulting and outsourcing industries, such as Accenture, SAS, and India’s Tata Consultancy Services Ltd., early results are encouraging. Due in part to the global financial crisis, total revenues were down about 5 percent in 2009, but income from continuing operations was up 9 percent to a record $18 billion. And since the firm began refocusing its strategy in 2002 it has increased its pretax margin by 2 ½ times, quadrupled earnings per share, and more than doubled free cash flow. Marketing Challenges Addressed in Chapter 2 IBM’s experiences in the information technology industry illustrate some important points about the nature of business strategy and the interrelationships among different levels of strategy in an organization. They also demonstrate the importance of timely and accurate insights into customer desires, environmental trends, and competitors’ actions in formulating successful strategies at every level. As we discussed in Chapter 1, marketing managers’ familiarity with customers, competitors, and environmental trends often means they play a crucial role in influencing strategies formulated at higher levels in the firm. While the need for new corporate and competitive strategies at IBM became obvious because of stagnating sales and declining profits in some of the firm’s most venerable businesses, decisions about the content of those new strategies were influenced by information and analyses supplied by the firm’s marketing and sales personnel. Marketing executives were key members of the task force appointed to analyze the firm’s strengths and weaknesses and develop new directions for growth and profitability. Some firms systematically incorporate such market and competitive analyses into their planning processes. They also coordinate their activities around the primary goal of satisfying unmet customer needs. Such firms are market-oriented d and follow a business philosophy commonly called the marketing concept. Market-oriented firms have been shown to be among the more profitable and successful at maintaining strong competitive positions in their industries over time. As we shall see later in this chapter, however, companies do not always embrace a market orientation—nor rely as heavily on inputs from their marketing and sales personnel—in developing their strategies. Some firm’s strategies are driven more by technology, production, or cost concerns. Chapter Two The Marketing Implications of Corporate and Business Strategies 33 Regardless of their participation or influence in formulating corporate and businesslevel strategies, marketing managers’ freedom of action is ultimately constrained by those higher-level strategies. The objectives, strategies, and action plans for Strategic Issue a specific product-market are but one part of a hierarchy of strategies Ea ach h le evvel el of strat st ategy gy must s b be e ccon onsis siste tentt within the firm. Each level of strategy must be consistent with—and witth h—a —and th the erref efo ore re in nfflu luenc nced ed an and d therefore influenced and constrained by—higher levels within the ccon nstr strain ained ed by by— —hig highe herr llevel v ls wiith hin i tthe he hierarchy. For example, not only the new services developed by IBM, hierar hie arch chy. but also their advertising appeals, prices, and other aspects of their marketing plans were shaped by the shift in corporate strategy toward emphasizing software, services, and business consulting as the primary avenues for future growth. These interrelationships among the various levels of strategy raise several questions of importance to marketing managers as well as managers in other functional areas and top executives. While marketing managers clearly bear the primary responsibility for developing strategic marketing plans for individual product or service offerings, what role does marketing play in formulating strategies at the corporate and divisional or business-unit level? Why do some organizations pay much more attention to customers and competitors when formulating their strategies (i.e., why are some firms more market-oriented) than others, and does it make any difference in their performance? What do strategies consist of, and are they similar or different at the corporate, business, and functional levels? What specific decisions underlie effective corporate and business-level strategies, and what are their implications for marketing? What Is Marketing’s Role in Formulating and Implementing Strategies? The essence of strategic planning at all levels is identifying threats to avoid and opportunities to pursue. The primary strategic responsibility of any manager is to look outward continuously to keep the firm or business in step with changes in the environment. Because they occupy positions at the boundary between the firm and its customers, distributors, and competitors, marketing managers are usually most familiar with conditions and trends in the market environment. Consequently, they not only are responsible for developing strategic plans for their own product-market entries, but also are often primary participants and contributors to the planning process at the business and corporate level as well. The wide-ranging influence of marketing managers on higher-level strategic decisions is clearly shown in a survey of managers in 280 U.S. and 234 German business units of firms in the electrical equipment, mechanical machinery, and consumer package goods industries.2 The study examined perceptions of marketing managers’ influence relative to managers from sales, R&D, operations, and finance on a variety of strategic and tactical decisions within their businesses. Exhibit 2.1 summarizes the results. The study found that, on average, marketing and sales executives exerted significantly more influence than managers from other functions on strategic decisions concerning traditional marketing activities, such as advertising messages, pricing, distribution, customer service and support, and measurement and improvement of customer satisfaction. Interestingly, though, the influence of sales executives was perceived to be even greater than that of marketing managers on some of these decisions. One reason—particularly in the industrial-goods firms selling electronic equipment and machinery—may be that sales managers have more detailed information about customer needs and desires because they have direct and continuing contact with existing and potential buyers. 34 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit b t 2.1 . Influence of Functional Units over Various Business Decisions Decisions Marketing Sales R&D Operations Finance Strategic direction of the business 38 29** 11** 9** 14** Expansion into new geographic markets 39 45** 3** 3** 10** Choices of strategic partners 33 38* 7** 9** 12** New product development 32 23** 29* 9** 7** Major capital expenditures 13 11** 13 29** 35** 2** Business strategy decisions Marketing strategy decisions Advertising messages 65 29** 3** 1** Customer satisfaction measurement 48 35** 5** 8** 4** Customer satisfaction improvement 40 37* 7** 10** 6** Distribution strategy 34 52** 1** 6** 6** Customer service and support 31 47** 5** 10** 7** Pricing 30 41** 4** 9** 16** The number in each cell is the mean of the amount of points given by responding managers to each function, using a constant-sum scale of 100. A t-test was performed to compare column 2 (mean of relative influence of marketing) with columns 3 through 6 (relative influence of sales, R&D, operations, and finance). Statistically significant differences with marketing are indicated by asterisks, where: * p<.05; ** p<.01. Source:: Adapted from “Marketing’s Influence within the Firm,” by Christian Homburg, John P. Workman, Jr., and Harley Krohmer, Journal of Marketing. Copyright 1999 by the American Marketing Association. Reproduced with permission of the American Marketing Association in the format textbook via Copyright Clearance Center. More surprisingly, marketing managers were also perceived to wield significantly more influence than managers from other functional areas on cross-functional, businesslevel strategic decisions. While the views of finance and operations executives carry more weight in approving major capital expenditures, marketing and sales managers exert more influence on decisions concerning the strategic direction of the business unit, expansion into new geographic markets, the selection of strategic business partners, and new product development. Might the relative influence of the different functions become more similar as firms adopt more integrative organizational forms, such as cross-functional work teams? The study’s results suggest not. Marketing’s influence was not significantly reduced in companies that had instituted cross-functional structures and processes. But marketing managers may not play as pervasive a strategic role in other cultures as they do in the United States. The study found that marketers’ influence on both tactical and strategic issues was significantly lower in German firms. As one of the study’s authors points out, “Germany has traditionally stressed technology and operations more than the softer, customer-oriented aspects central to marketing. So even when the environment changes, a signal to top-level German managers that marketing should be playing a greater role, they are reluctant to give it that role.”3 Chapter Two The Marketing Implications of Corporate and Business Strategies 35 Market-Oriented Management No matter where companies are located however, marketing managers do not play an equally extensive strategic role in every firm because not all firms are equally market-oriented. Not surprisingly, marketers tend to have a greater influence on all levels of strategy in organizations that embrace a market-oriented philosophy of business. More critically, managers in other functional areas of market-oriented firms incorporate more customer and competitor information into their decision-making processes as well. Market-oriented organizations tend to operate according to the business philosophy known as the marketing concept. As originally stated by General Electric six decades ago, the marketing concept holds that the planning and coordination of all company activities around the primary goal of satisfying customer needs is the most effective means to attain and sustain a competitive advantage and achieve company objectives over time. Thus, market-oriented firms are characterized by a consistent focus by personnel in all departments and at all levels on customers’ needs and competitive circumstances in the market environment. They are also willing and able to quickly adapt products and functional programs to fit changes in that environment. Such firms pay a great deal of attention to customer research before products are designed and produced. They embrace the concept of market segmentation by adapting product offerings and marketing programs to the special needs of different target markets. Market-oriented firms also adopt a variety of organizational procedures and structures to improve the responsiveness of their decision making, including using more detailed environmental scanning and continuous, real-time information systems; seeking frequent feedback from and coordinating plans with key customers and major suppliers; decentralizing strategic decisions; encouraging entrepreneurial thinking among lower-level managers; and using interfunctional management teams to analyze issues and initiate strategic actions outside the formal planning process.4 For example, IBM formed a high-level cross-functional task force to reevaluate its market environment, develop a new strategic focus, and map new avenues toward future growth. And it has formed cross-functional teams to help individual customers identify and resolve their business problems and to sustain long-term relationships. These and other actions recommended to make an organization more market-driven and responsive to environmental changes are summarized in Exhibit 2.2. Does Being Market-Oriented Pay? Since an organization’s success over time hinges on its ability to provide benefits of value to its customers—and to do that better than its competitors—it seems likely that marketoriented firms should perform better than others. By paying careful attention to customer needs and competitive threats—and by focusing activities across all functional departments on meeting those needs and threats effectively—organizations should be able to enhance, accelerate, and reduce the volatility and vulnerability of their cash flows.5 And that should enhance their economic performance and shareholder value. Indeed, profitability is the third leg, together with a customer focus and cross-functional coordination, of the three-legged stool known as the marketing concept. Sometimes the marketing concept is interpreted as a philosophy of trying to satisfy all customers’ needs regardless of the cost. That would be a prescription for financial disaster. Instead, the marketing concept is consistent with the notion of focusing on only those segments of the customer population that the firm can satisfy both effectively and d profitably. 36 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit b t 2.2 . Guidelines for Market-Oriented Management 1. Create customer focus throughout the business. 9. Measure and manage customer expectations. 10. Build customer relationships and loyalty. 2. Listen to the customer. 3. Define and nurture your distinctive competence. 11. Define the business as a service business. 4. Define marketing as market intelligence. 12. Commit to continuous improvement and innovation. 5. Target customers precisely. 13. Manage culture along with strategy and structure. 6. Manage for profitability, not sales volume. 14. Grow with partners and alliances. 7. Make customer value the guiding star. 15. Destroy marketing bureaucracy. 8. Let the customer define quality. Source:: “Executing the New Marketing Concept,” by Frederick E. Webster, Jr., Marketing Management. Copyright 1994, by the American Marketing Association. Reproduced by permission of the American Marketing Association in the format textbook via Copyright Clearance Center. Firms might offer less extensive or costly goods and services to unprofitable segments or avoid them altogether. Substantial evidence supports the idea that being market-oriented pays dividends, at least in a highly developed economy such as the United States. A number of studies involving more than 500 firms or business units across a variety of industries indicate that a market orientation has a significant positive effect on various dimensions of performance, including return on assets, sales growth, and new product success.6 Even entrepreneurial start-ups appear to benefit from a strong Strategic Issue customer orientation. One recent study of start-ups in Japan and the A marke kett orie orient ntatio ti n ha ass a sign gnifi fican ant possiitiive eefffeect po ct on n va vario rious us di dim meenssion onss of of United States found that new firms that focused on marketing first, per p erffor orma mance, ce in ncclu ud din ng retu turn n on as assseets ts, rather than lowering costs or advancing technology, were less likely to sal aless gr growth w h, an nd d ne new wp prro odu duct suc ucce cesss. be brought down by competitors as their product-markets developed.7 Factors That Mediate Marketing’s Strategic Role Despite the evidence that a market-orientation boosts performance, many companies around the world are not very focused on their customers or competitors. Among the reasons firms are not always in close touch with their market environments are these: ● ● ● Competitive conditions may enable a company to be successful in the short run without being particularly sensitive to customer desires. Different levels of economic development across industries or countries may favor different business philosophies. Firms can suffer from strategic inertia—the automatic continuation of strategies successful in the past, even though current market conditions are changing. Competitive Factors Affecting a Firm’s Market Orientation The competitive conditions some firms face enable them to be successful in the short term without paying much attention to their customers, suppliers, distributors, or other organizations in their market environment. Early entrants into newly emerging industries, particularly industries based on new technologies, are especially likely to be internally focused and not very market-oriented. This is because there are likely to be relatively few strong competitors during the formative years of a new industry, customer demand for the new product is likely to grow rapidly and outstrip available supply, and production problems Chapter Two The Marketing Implications of Corporate and Business Strategies 37 and resource constraints tend to represent more immediate threats to the survival of such new businesses. Businesses facing such market and competitive conditions are often productoriented or production-oriented. They focus most of their attention and resources on such functions as product and process engineering, production, and finance in order to acquire and manage the resources necessary to keep pace with growing demand. The business is primarily concerned with producing more of what it wants to make, and marketing generally plays a secondary role in formulating and implementing strategy. Other functional differences between production-oriented and market-oriented firms are summarized in Exhibit 2.3. As industries grow, they become more competitive. New entrants are attracted and existing producers attempt to differentiate themselves through improved products and more-efficient production processes. As a result, industry capacity often grows faster than demand and the environment shifts from a seller’s market to a buyer’s market. Firms often respond to such changes with aggressive promotional activities—such as hiring more salespeople, increasing advertising budgets, or offering frequent price promotions—to maintain market share and hold down unit costs. Unfortunately, this kind of sales-oriented response to increasing competition still focuses on selling what the firm wants to make rather than on customer needs. Worse, competitors can easily match such aggressive sales tactics. Simply spending more on selling efforts usually does not create a sustainable competitive advantage. As industries mature, sales volume levels off and technological differences among brands tend to shrink as manufacturers copy the best features of each other’s products. Consequently, a firm must seek new market segments or steal share from competitors by offering lower prices, superior services, or intangible benefits other firms cannot match. At this stage, managers can most readily appreciate the benefits of a market orientation, and marketers are often given a bigger role in developing competitive strategies.8 Of course, a given industry’s characteristics may make some components of a market orientation more crucial for good performance than others. For example, Exhibit 2.3 Differences between Production-Oriented and Market-Oriented Organizations Business activity or function Production orientation Marketing orientation Product offering Company sells what it can make; primary focus on functional performance and cost. Company makes what it can sell; primary focus on customers’ needs and market opportunities. Broad. Product line Narrow. Pricing Based on production and distribution costs. Based on perceived benefits provided. Research Technical research; focus on product improvement and cost cutting in the production process. Market research; focus on identifying new opportunities and applying new technology to satisfy customer needs. Packaging Protection for the product; minimize costs. Designed for customer convenience; a promotional tool. Credit A necessary evil; minimize bad debt losses. A customer service; a tool to attract customers. Promotion Emphasis on product features, quality, and price. Emphasis on product benefits and ability to satisfy customers’ needs or solve problems. 38 Section One The Role of Marketing in Developing Successful Business Strategies in an industry dominated by large, dynamic competitors—as in the global automobile industry—being responsive to competitor moves may be even more important than a strong customer focus.9 But the bottom line is that an orientation toward the market— t competitors, customers, and potential customers—is usually crucial for continued success in global markets. The Influence of Different Stages of Development across Industries and Global Markets The previous discussion suggests that the degree of adoption of a market orientation varies not only across firms but also across entire industries. Industries that are in earlier stages of their life cycles, or that benefit from barriers to entry or other factors reducing the intensity of competition, are likely to have relatively fewer marketoriented firms. For instance, in part because of governmental regulations that restricted competition, many service industries—including banks, airlines, physicians, lawyers, accountants, and insurance companies—were slow to adopt the marketing concept. But with the trend toward deregulation and the increasingly intense global competition in such industries, many service organizations are working much harder to understand and satisfy their customers.10 Given that entire economies are in different stages of development around the world, the popularity—and even the appropriateness—of different business philosophies may also vary across countries. A production orientation was the dominant business philosophy in the United States, for instance, during the industrialization that occurred from the mid-1800s through World War I.11 Similarly, a primary focus on developing product and production technology may still be appropriate in developing nations that are in the midst of industrialization. International differences in business philosophies can cause some problems for the globalization of a firm’s strategic marketing programs, but it can create some opportunities as well, especially for alliances or joint ventures. Consider, for example, the partnership between French automaker Renault-Nissan and the Russian car manufacturer AvtoVAZ discussed in Exhibit 2.4. Exhibit 2.4 Renault’s Partnership With Russian Automaker AvtoVAZ Avto VAZ Benefits Both Parties he e Avto oVAZ caar facttory in the central Russia an cityy of To Togliattii is a decrepiit, milee-long buildin ng w ere the co wh compan ny’s Lada d sed dans are turn ned ou ut by 40-yyear-olld equiipmentt. Nevert r helesss, the French h carmakeer Ren ca nault-Nis issan reecentlyy paid $1 billlion forr a 25 peercent stake in AvttoVAZ. Even after in i vesting g more e milliions to o modeernize the pllant, Re enault figu gures th hat Russsia’s low lab bor and d energ gy costts will ma ake the plant ideal for produ d cing the Lo ogan liineup of cars th hat the e firm introduc u ed in n 2004 4. Thee nofrillss Logan n, starrting att abou ut $9,000, ha as beco ome the world’ss mostt succe essful cheap car. Itts partn nership with AvtoVA AZ shou uld also o help Renau ult app peal to Ru ussian car buy uyers an nd captture a largerr share of that cou o ntry’’s rapid dly gro owing market. But AvtoVA AZ willl also benefiit from m the partner-sh hip, esspeciallyy on th he prod duction n side. A key reason thee firm agreed to th he deaal with h Renau ult wass “the mo odern technollogy an nd know w-how w that th he com mpany willl proviide us,”” according to Cha airman Se S rgei Chemezzov. Th he parttnershiip mayy also encourrage gllobal auto o partss supp pliers to buiild new w, mo ore-efficcient plantts nearr the AvtoVAZZ factorry. Sou urces: Based on materiall in Caroll Matlack, k “Renaault’s Gho osn Takes On O a Russian Relic,” www.bu usinessw week.com m, Februaary 29, 2008 08; and Carol Matlack, “Carlos Ghosn’s Russian n Gambitt,” BusinesssWeek, March 17 7, 2008, pp. 57––58. For more in nformatio on about Reenault’s acquisittions an nd alliances c , seee the company’ co ’s website att www.re renault.co om. Chapter Two The Marketing Implications of Corporate and Business Strategies 39 Strategic Inertia In some cases, a firm that achieved success by being in tune with its environment loses touch with its market because managers become reluctant to tamper with strategies and marketing programs that worked in the past. They begin to believe there is one best way to satisfy their customers. Such strategic inertia is dangerous because customers’ needs and competitive offerings change over time. IBM’s traditional focus on large organizational customers, for instance, caused the company to devote too little effort to the much faster-growing segment of small technology start-ups. And its emphasis on computer technology and hardware made it slow to respond to the explosive growth in demand for applications software and consulting services. Thus, in environments where such changes happen frequently, the strategic planning process needs to be ongoing and adaptive. All the participants, whether from marketing or other functional departments, need to pay constant attention to what is happening with their customers and competitors. Three Levels of Strategy: Similar Components, but Different Issues We have argued that marketing managers have primary responsibility for the marketing strategies associated with individual product or service offerings, and that their perspectives and inputs often have a major influence on the decisions that shape corporate and business-level strategies. But we haven’t said much about what those strategic decisions are. Consequently, it’s time to define what strategies are and how they vary across different levels of an organization. Strategy: A Definition Although strategy first became a popular business buzzword during the 1960s, it continues to be the subject of widely differing definitions and interpretations. The following definition, however, captures the essence of the term: A strategy is a fundamental pattern of present and planned objectives, resource deployments, and interactions of an organization with markets, competitors, and other environmental factors.12 Our definition suggests that a strategy should specify (1) whatt (objectives to be accomplished), (2) where (on which industries and product-markets to focus), and (3) how (which resources and activities to allocate to each product-market to meet environmental opportunities and threats and to gain a competitive advantage). The Components of Strategy A well-developed strategy contains five components, or sets of issues: 1. Scope. The scope of an organization refers to the breadth of its strategic domain—the number and types of industries, product lines, and market segments it competes in or plans to enter. Decisions about an organization’s strategic scope should reflect management’s view of the firm’s purpose, or mission. This common thread among its various activities and product-markets defines the essential nature of what its business is and what it should be. 2. Goals and objectives. Strategies should also detail desired levels of accomplishment on one or more dimensions of performance—such as volume growth, profit contribution, or return 40 Section One The Role of Marketing in Developing Successful Business Strategies on investment—over specified time periods for each of those businesses and product-markets and for the organization as a whole. 3. Resource deployments. Every organization has limited financial and human resources. Formulating a strategy also involves deciding how those resources are to be obtained and allocated, across businesses, product-markets, functional departments, and activities within each business or product-market. 4. Identification of a sustainable competitive advantage. One important part of any strategy is a specification of how the organization will compete in each business and product-market within its domain. How can it position itself to develop and sustain a differential advantage over current and potential competitors? To answer such questions, managers must examine the market opportunities in each business and product-market and the company’s distinctive competencies or strengths relative to its competitors. 5. Synergy. Synergy exists when the firm’s businesses, product-markets, resource deployments, and competencies complement and reinforce one another. Synergy enables the total performance of the related businesses to be greater than it would otherwise be: The whole becomes greater than the sum of its parts. The Hierarchy of Strategies Explicitly or implicitly, these five basic dimensions are part of all strategies. However, rather than a single comprehensive strategy, most organizations have a hierarchy of interrelated strategies, each formulated at a different level of the firm. The three major levels of strategy in most large, multiproduct organizations are (1) corporate strategy, (2) business-level strategy, and (3) functional strategies focused on a particular product-market entry. In small, single-product-line companies or entrepreneurial start-ups, however, corporate and business-level strategic issues merge. Our primary focus is on the development of marketing strategies and programs for individual product-market entries, but other functional departments, such as R&D and production, also have strategies and plans for each of the firm’s product-markets. Throughout this book, therefore, we examine the interfunctional implications of product-market strategies, conflicts across functional areas, and the mechanisms that firms use to resolve those conflicts. Strategies at all three levels contain the five components mentioned earlier, but because each strategy serves a different purpose within the organization, each emphasizes a different set of issues. Exhibit 2.5 summarizes the specific focus and issues dealt with at each level of strategy; we discuss them in the next sections. Corporate Strategy At the corporate level, managers must coordinate the activities of multiple business units and, in the case of conglomerates, even separate legal business entities. Decisions about the organization’s scope and resource deployments across its divisions or businesses are the primary focus of corporate strategy. The essential questions at this level include, What business(es) are we in? What business(es) should d we be in? and What portion of our total resources should we devote to each of these businesses to achieve the organization’s overall goals and objectives? Thus, top-level managers at IBM decided to pursue future growth primarily through the development of consulting services and software rather than computer hardware. They shifted substantial corporate resources—including R&D expenditures, marketing and advertising budgets, and vast numbers of salespeople— into the corporation’s service and software businesses to support the new strategic direction. Chapter Two The Marketing Implications of Corporate and Business Strategies 41 Exhibit 2.5 Key Components of Corporate, Business, and Marketing Strategies Strategy components Corporate strategy Business strategy Marketing strategy Scope • Corporate domain—“Which businesses should we be in?” • Corporate development strategy Conglomerate diversification (expansion into unrelated businesses) Vertical integration Acquisition and divestiture policies • Business domain—“Which product-markets should we be in within this business or industry? • Business development strategy Concentric diversification (new products for existing customers or new customers for existing products) • Target market definition • Product-line depth and breadth • Branding policies • Product-market development plan • Line extension and product elimination plans Goals and objectives • Overall corporate objectives aggregated across businesses Revenue growth Profitability ROI (return on investment) Earnings per share Contributions to other stakeholders • Constrained by corporate goals • Objectives aggregated across product-market entries in the business unit Sales growth New product or market growth Profitability ROI Cash flow Strengthening bases of competitive advantage • Constrained by corporate and business goals • Objectives for a specific product-market entry Sales Market share Contribution margin Customer satisfaction Allocation of resources • Allocation among businesses in the corporate portfolio • Allocation across functions shared by multiple businesses (corporate R&D, MIS) • Allocation among productmarket entries in the business unit • Allocation across functional departments within the business unit • Allocation across components of the marketing plan (elements of the marketing mix) for a specific productmarket entry Sources of competitive advantage • Primarily through superior corporate financial or human resources; more corporate R&D; better organizational processes or synergies relative to competitors across all industries in which the firm operates • Primarily through competitive strategy, business unit’s competencies relative to competitors in its industry • Primarily through effective product positioning; superiority on one or more components of the marketing mix relative to competitors within a specific product-market Sources of synergy • Shared resources, technologies, or functional competencies across businesses within the firm • Shared resources (including favorable customer image) or functional competencies across product-markets within an industry • Shared marketing resources, competencies, or activities across product-market entries Attempts to develop and maintain distinctive competencies at the corporate level focus on generating superior human, financial, and technological resources; designing effective organization structures and processes; and seeking synergy among the firm’s various businesses. Synergy can provide a major competitive advantage for firms where related businesses share R&D investments, product or production technologies, distribution channels, a common salesforce and/or promotional themes—as in the case of IBM.13 42 Section One The Role of Marketing in Developing Successful Business Strategies Business-Level Strategy How a business unit competes within its industry is the critical focus of business-level strategy. A major issue in a business strategy is that of sustainable competitive advantage. What distinctive competencies can give the business unit a competitive advantage? And which of those competencies best match the needs and wants of the customers in the business’s target segment(s)? For example, a business with low-cost sources of supply and efficient, modern plants might adopt a low-cost competitive strategy. One with a strong marketing department and a competent salesforce may compete by offering superior customer service.14 Another important issue a business-level strategy must address is appropriate scope: how many and which market segments to compete in, and the overall breadth of product offerings and marketing programs to appeal to these segments. Finally, synergy should be sought across product-markets and across functional departments within the business. Marketing Strategy The primary focus of marketing strategy is to effectively allocate and coordinate marketing resources and activities to accomplish the firm’s objectives within a specific product-market. Therefore, the critical issue concerning the scope of a marketing strategy is specifying the target market(s) for a particular product or product line. Next, firms seek competitive advantage and synergy through a well-integrated program of marketing mix elements (the 4 Ps of product, price, place, promotion) tailored to the needs and wants of potential customers in that target market. The Marketing Implications of Corporate Strategy Decisions To formulate a useful corporate strategy, management must address six interrelated decisions: (1) the overall scope and mission of the organization, (2) company goals and objectives, (3) a source of competitive advantage, (4) a development strategy for future growth, (5) the allocation of corporate resources across the firm’s various businesses, and (6) the search for synergy via the sharing of corporate resources, intangibles, or programs across businesses or product lines. While a market orientation—and the analytical tools that marketing managers use to examine customer desires and competitors’ strengths and weaknesses—can provide useful insights to guide all six of these strategic decisions, they are particularly germane for revealing the most attractive avenues for future growth and for determining which businesses or product-markets are likely to produce the greatest returns on the company’s resources. In turn, all of these corporate decisions have major implications for the strategic marketing plans of the firm’s various products or services. Together, they define the general strategic direction, objectives, and resource constraints within which those marketing plans must operate. We next examine the marketing implications involved in both formulating and implementing these components of corporate strategy. Corporate Scope—Defining the Firm’s Mission A well-thought-out mission statement guides an organization’s managers as to which market opportunities to pursue and which fall outside the firm’s strategic domain. A clearly stated mission can help instill a shared sense of direction, relevance, and achievement Chapter Two The Marketing Implications of Corporate and Business Strategies 43 among employees, as well as a positive image of the firm among customers, investors, and other stakeholders. To provide a useful sense of direction, a corporate mission statement should clearly define the organization’s strategic scope. It should answer such fundamental questions as: What is our business? Who are our customers? What kinds of value can we provide to these customers? and What should our business be in the future? For example, 25 years ago PepsiCo, the manufacturer of Pepsi-Cola, broadened its mission to focus on “marketing superior quality food and beverage products for households and consumers dining out.” That clearly defined mission guided the firm’s managers toward the acquisition of several related companies, such as Frito-Lay, Taco Bell, and Pizza Hut. More recently, in response to a changing global competitive environment, PepsiCo narrowed its scope to focus primarily on packaged d foods (particularly salty snacks) and beverages distributed through supermarket and convenience store channels. This new, narrower mission led the firm to (1) divest all of its fast-food restaurant chains; (2) acquire complementary beverage businesses, such as Tropicana juices, Lipton’s iced teas, and Gatorade sports drinks; and develop new brands targeted at rapidly growing beverage segments, such as Aquafina bottled water. PepsiCo’s most recent mission continues to focus on packaged snacks and beverages sold through food retailers, but also seeks “Performance with purpose.” That phrase essentially boils down to balancing the profit motive with the development of healthier, more nutritious snacks and drinks, and striving for a net-zero impact on the environment. Consequently, PepsiCo has either acquired or partnered with a Bulgarian nut packager, an Israeli hummus maker, and Naked Juice—a California company that makes nutritional beverages like smoothies.15 Market Influences on the Corporate Mission Like any other strategy component, an organization’s mission should fit both its internal characteristics and the opportunities and threats in its external environment. Obviously, the firm’s mission should be compatible with its established values, resources, and distinctive competencies. But it should also focus the firm’s efforts on markets where those resources and competencies will generate value for customers, an advantage over competitors, and synergy across its products. Thus, PepsiCo’s new mission reflects (1) the firm’s package goods marketing, sales, and distribution competencies, (2) its perception that substantial synergies can be realized across snack foods and beverages within supermarket channels via shared logistics, joint displays and sales promotions, cross-couponing, and the like, and (3) a corporate culture that believes the company should be an active player in solving some of the social problems—such as obesity and global warming—the world faces. Criteria for Defining the Corporate Mission Several criteria can be used to define an organization’s strategic mission. Many firms specify their domain in physical terms, focusing on products or services or the technology used. The problem is that such statements can lead to slow reactions to technological or customer-demand changes. For example, Theodore Levitt once argued that Penn Central’s view of its mission as being “the railroad business” helped cause the firm’s failure. Penn Central did not respond to major changes in transportation technology, such as the rapid growth of air travel and the increased efficiency of long-haul trucking. Nor did it respond to consumers’ growing willingness to pay higher prices for the increased speed and convenience of air travel. Levitt argued that it is better to define a firm’s mission as what customer needs are to be satisfied and the functions the firm must perform to satisfy them.16 Products and technologies change over time, but basic customer needs tend to endure. Thus, if Penn Central had 44 Section One The Role of Marketing in Developing Successful Business Strategies defined its mission as satisfying the transportation needs of its customers rather than simply being a railroad, it might have been more willing to expand its domain to incorporate newer technologies. One problem with Levitt’s advice, though, is that a mission statement focusing only on basic customer needs can be too broad to provide clear guidance and can fail to take into account the firm’s specific competencies. If Penn Central had defined itself as a transportation company, should it have diversified into the trucking business? Started an airline? As the upper-right quadrant of Exhibit 2.6 suggests, the most useful mission statements focus on the customer need to be satisfied and the functions that must be performed to satisfy that need. They are specific as to the customer groups and the products or technologies on which to concentrate. Thus, instead of seeing itself as being in the railroad business or as satisfying the transportation needs of all potential customers, Burlington Northern Santa Fe Railroad’s mission is to provide long-distance transportation for large-volume producers of low-value, low-density products, such as coal and grain. Social Values and Ethical Principles An increasing number of organizations are developing mission statements that also attempt to define the social and ethical boundaries of their strategic domain. Some firms are actively pursuing social programs they believe to be intertwined with their economic objectives, while others simply seek to manage their businesses according to the principles of sustainability—meeting humanity’s needs without harming future generations. For example, Unilever has launched a variety of programs to help developing nations wrestle with poverty, water scarcity, and the effects of climate change. The firm’s motives are at least as much economic as moral. Some 40 percent of the Dutch–British giant’s sales and most of its growth now take place in developing nations, and Unilever food products account for about 10 percent of the world’s tea, 30 percent of all spinach, and a large portion of all processed fish. As environmental regulations grow stricter around the world, the firm must invest in green technologies or its leadership in packaged foods, soaps, and other products could be imperiled. “You can’t ignore the impact your company has on the community and the environment,” points out CEO Patrick Cescau. These days, “it’s also about growth and innovation. In the future, it will be the only way to do business.”17 Unfortunately, many top managers are unsure about what kinds of social programs and principles best fit their organization’s resources, competencies, and economic goals. In a recent McKinsey & Co. survey of more than 1,100 top global executives, 79 percent predicted at least some responsibility for dealing with future social and political issues would fall on corporations, but only 3 percent said they currently do a good job dealing with social pressures.18 Thus, crafting mission statements that specify explicit social Exhibit 2.6 Characteristics of Effective Corporate Mission Statements Broad Functional Based on customer needs Physical Based on existing products or technology Specific Transportation business Long-distance transportation for large-volume producers of low-value, low-density products Railroad business Long-haul, coal-carrying railroad Chapter Two The Marketing Implications of Corporate and Business Strategies 45 values, goals, and programs—with inputs from employees, customers, social interest groups, and other stakeholders—is becoming an important part of corporate strategic planning. The ethical principles a firm hopes to abide by in its dealings with customers, suppliers, and employees tend to be more straightforward and specific than the broader issues of social responsibility discussed above. Consequently, roughly two-thirds of U.S. firms have formal codes of ethics, and a growing number have established formal departments dedicated to encouraging compliance with company ethical standards.19 Outside America, fewer firms have formal ethics bureaucracies. To some extent, this reflects the fact that in other countries governments and organized labor both play a bigger role in corporate life. In Germany, for instance, workers’ councils often deal with issues such as sexual equality, race relations, and workers’ rights.20 Ethics is concerned with the development of moral standards by which actions and situations can be judged. It focuses on those actions that may result in actual or potential harm of some kind (e.g., economic, mental, physical) to an individual, group, or organization. Particular actions may be legal but not ethical. For instance, extreme and unsubstantiated advertising claims, such as “Our product is far superior to Brand X,” might be viewed as simply legal puffery engaged in to make a sale, but many marketers (and their customers) view such little white lies as unethical. Thus, ethics is more proactive than the law. Ethical standards attempt to anticipate and avoid social problems, whereas most laws and regulations emerge only after the negative consequences of an action become apparent.21 Why Are Ethics Important? The Marketing Implications of Ethical Standards One might ask why a corporation should take responsibility for providing moral guidance to its managers and employees. While such a question may be a good topic for philosophical debate, there is a compelling, practical reason for a firm to impose ethical standards to guide employees. Unethical practices can damage Strategic Issue the trust between a firm and its suppliers or customers, thereby disruptUnet U ethic ical a pr pract ctices es ca an da ama mag ge e the he ing the development of long-term exchange relationships and resulting in tru ust s be betwe ween n a fi firm m and nd itts sup upplie lierss the likely loss of sales and profits over time. For example, one survey of or cus ustom tomers rs,, ther he eby eb di disru rupti pting n tthe e develo de elopm pment nt of lon ong-t g-teerm m exxch cha an nge e 135 purchasing managers from a variety of industries found that the more re ati rel ations nship hips and d rressult u ing in th thee like ik ly unethical a supplier’s sales and marketing practices were perceived to be, losss of sale sales and dp pro roffitts ove ver time. time. the less eager were the purchasing managers to buy from that supplier.22 Unfortunately, not all customers or competing suppliers adhere to the same ethical standards. As a result, marketers sometimes feel pressure to engage in actions that are inconsistent with what they believe to be right, such as paying bribes to win a sale from a potential customer or to ensure needed resources or services from suppliers and government agencies. Such dilemmas are particularly likely to arise as a company moves into global markets involving different cultures and levels of economic development where economic exigencies and ethical standards may be quite different. For example, in a recent survey of over 90,000 businesspeople in 68 different countries, more than one-quarter of respondents reported paying a bribe in the past year. Bribes were most common in SubSaharan Africa, where more than half of respondents had paid at least one, compared to 23 percent in Latin America, 19 percent in the western Balkans and Turkey, 5 percent in the European Union and North America, and less than 1 percent in Denmark and Norway.23 Such inconsistencies in external expectations and demands across countries and markets can lead to job stress and inconsistent behavior among marketing and sales personnel, which in turn can risk damaging long-term relationships with suppliers, channel partners, and customers. A company can reduce such problems by spelling out formal social policies 46 Section One The Role of Marketing in Developing Successful Business Strategies and ethical standards in its corporate mission statement and communicating and enforcing those standards. For instance, Fluor—a multinational construction firm that earns more than half its $17 billion revenue overseas—has a strict ethical policy against paying any bribes or kickbacks to win new projects. The firm puts all employees through online anticorruption training and provides advice to help them deal with sticky situations, but they then receive zero tolerance and face tough penalties for any infractions. This dedication to high ethical standards and transparency helped make Fluor the world’s most admired engineering firm in Fortune magazine’s survey in 2009.24 Unfortunately, it is not always easy to decide what a firm’s ethical policies and standards should be. There are multiple philosophical traditions or frameworks that managers might use to evaluate the ethics of a given action. Consequently, different firms or managers can pursue somewhat different ethical standards, particularly across national cultures. Exhibit 2.7 displays a comparison (across three geographic regions) of the proportion of company ethical statements that address a set of specific issues. Note that a larger number of companies in the United States and Europe appear to be more concerned with the ethics of their purchasing practices than those of their marketing activities. A general code of ethics prescribed for members of the American Marketing Association (the largest association of marketing professionals) is shown in Appendix 2.1 at the end of this chapter. Since many ethical issues in marketing are open to interpretation and debate, however, we will examine such issues and their implications individually as they arise throughout the remainder of this book. Exhibit b t 2.7 .7 Issues Addressed by Company Ethics Statements Fundamental guiding principles of company Purchasing Proprietary information Workplace safety Environmental responsibility Marketing Intellectual property Confidentiality of employee records Product safety Employee privacy Drug-related issues Technological T innovation United States e (N = 157) Europe (N = 20) Canada (N = 23) AIDS 0 20 40 40 60 60 80 80 Number of Companies Source:: Ronald E. Berenbeim, Corporate Ethics Practices s (New York: The Conference Board, 1992). Used by permission. 100 Chapter Two The Marketing Implications of Corporate and Business Strategies 47 Corporate Objectives Confucius said, “For one who has no objective, nothing is relevant.” Formal objectives provide decision criteria that guide an organization’s business units and employees toward specific dimensions and performance levels. Those same objectives provide the benchmarks against which actual performance can be evaluated. To be useful as decision criteria and evaluative benchmarks, corporate objectives must be specific and measurable. Therefore, each objective contains four components: ● ● ● ● A performance dimension or attribute sought. A measure or indexx for evaluating progress. A target or hurdle level to be achieved. A time frame within which the target is to be accomplished. Exhibit 2.8 lists some common performance dimensions and measures used in specifying corporate as well as business-unit and marketing objectives. When specifying shortterm business-level and marketing goals, however, two additional dimensions become important: their relevance to higher-level strategies and goals and their attainability. Thus, we find it useful to follow the SMART acronym when specifying objectives at all levels: specific, measurable, attainable, relevant, and time-bound. The Marketing Implications of Corporate Objectives Most organizations pursue multiple objectives. This is clearly demonstrated by a study of the stated objectives of 82 large corporations. The largest percentage of respondents (89 percent) had explicit profitability objectives; 82 percent reported growth objectives; 66 percent had specific market share goals. More than 60 percent mentioned social responsibility, employee welfare, and customer service objectives, and 54 percent of the companies had R&D/new product development goals.25 These percentages add up to more than 100 percent because most firms had several objectives. Trying to achieve many objectives at once leads to conflicts and trade-offs. For example, the investment and expenditure necessary to pursue growth in the long term is likely to reduce profitability and ROI in the short term.26 Managers can reconcile conflicting goals by prioritizing them. Another approach is to state one of the conflicting goals as a constraint or hurdle. Thus, a firm attempts to maximize growth subject to meeting some minimum ROI hurdle. In firms with multiple business units or product lines, however, the most common way to pursue a set of conflicting objectives is to first break them down into subobjectives, then assign subobjectives to different business units or products. Thus, subobjectives often vary across business units and product offerings depending on the attractiveness and potential of their industries, the strength of their competitive positions, and the resource allocation decisions made by corporate managers. For example, PepsiCo’s managers likely set relatively high volume and share-growth objectives but lower ROI goals for the firm’s Aquafina brand, which is battling for prominence in the rapidly growing bottled water category, than for Lay’s potato chips, which hold a commanding 40 percent share of a mature product category. Therefore, two marketing managers responsible for different products may face very different goals and expectations—requiring different marketing strategies to accomplish—even though they work for the same organization. As firms emphasize developing and maintaining long-term customer relationships, customer-focused objectives—such as satisfaction, retention, and loyalty—are being given greater importance. Such market-oriented objectives are more likely to be consistently pursued across business units and product offerings. There are several reasons for this. 48 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit b t 2.8 .8 Common Performance Criteria and Measures That Specify Corporate, Business-Unit, and Marketing Objectives Performance criteria Possible measures or indexes • Growth $ sales Unit sales Percent change in sales • Competitive strength Market share Brand awareness Brand preference • Innovativeness $ sales from new products Percentage of sales from product-market entries introduced within past five years Percentage cost savings from new processes • Profitability $ profits Profit as percentage of sales Contribution margin* Return on investment (ROI) Return on net assets (RONA) Return on equity (ROE) • Utilization of resources Percent capacity utilization Fixed assets as percentage of sales • Contribution to owners Earnings per share Price/earnings ratio • Contribution to customers Price relative to competitors Product quality Customer satisfaction Customer retention Customer loyalty Customer lifetime value • Contribution to employees Wage rates, benefits Personnel development, promotions Employment stability, turnover • Contribution to society $ contributions to charities or community institutions Growth in employment *Business-unit managers and marketing managers responsible for a product-market entry often have little control over costs associated with corporate overhead, such as the costs of corporate staff or R&D. It can be difficult to allocate those costs to specific strategic business units (SBUs) or products. Consequently, profit objectives at the SBU and product-market level are often stated as a desired contribution margin n (the gross profit prior to allocating such overhead costs). First, given the huge profit implications of a customer’s lifetime value, maximizing satisfaction and loyalty tends to make good sense no matter what other financial objectives are being pursued in the short term. Second, satisfied, loyal customers of one product can be leveraged to provide synergies for other company products or services. Finally, customer satisfaction and loyalty are determined by factors other than the product itself or the activities of the marketing department. A study of one industrial paper company, for example, found that about 80 percent of customers’ satisfaction scores were accounted for by nonproduct factors, such as order processing, delivery, and postsale services.27 Since such factors are influenced by many functional departments within the corporation, they are likely to have a similar impact across a firm’s various businesses and products. Chapter Two The Marketing Implications of Corporate and Business Strategies 49 Corporate Sources of Competitive Advantage There are many ways a company might attempt to gain an advantage within the scope of its competitive domain. In most cases, though, a sustainable competitive advantage at the corporate level is based on company resources: resources that other firms do not have, that take a long time to develop, and that are hard to acquire.28 Many such unique resources are marketing related. For example, some businesses have highly developed market information systems, extensive market research operations, and/or cooperative long-term relationships with customers that give them a superior ability to identify and respond to emerging customers’ needs and desires. Others have a brand name that customers recognize and trust, cooperative alliances with suppliers or distributors that enhance efficiency, or a body of satisfied and loyal customers who are predisposed to buy related products or services.29 But the fact that a company possesses resources that its competitors do not have is not sufficient to guarantee superior performance. The trick is to develop a competitive strategy for each business unit within the firm, and a strategic marketing program for each of its product lines, that convert one or more of the company’s unique resources into something of value to customers. Therefore, we will have more to say about converting corporate strengths into effective business-level competitive strategies later in this chapter. Corporate Growth Strategies Often, the projected future sales and profits of a corporation’s business units and productmarkets fall short of the firm’s long-run growth and profitability objectives. There is a gap between what the firm expects to become if it continues on its present course and what it would like to become. This is not surprising because some of its high-growth markets are likely to slip into maturity over time and some of its high-profit mature businesses may decline to insignificance as they get older. Thus, to determine where future growth is coming from, management must decide on a strategy to guide corporate development. Essentially, a firm can go in two major directions in seeking future growth: expansion of its current businesses and activities, or diversification into new businesses, either through internal business development or acquisition. Exhibit 2.9 outlines some specific options a firm might pursue while seeking growth in either of these directions. Expansion by Increasing Penetration of Current Product-Markets One way for a company to expand is by increasing its share of existing markets. This typically requires actions such as making product or service improvements, cutting costs and prices, or outspending competitors on advertising or promotions. Amazon.com pursued a combination of all these actions—as well as forming alliances with web portals, affinity groups, and the like—to expand its share of web shoppers, even though the expense of such activities postponed the firm’s ability to become profitable. Even when a firm holds a commanding share of an existing product-market, additional growth may be possible by encouraging current customers to become more loyal and concentrate their purchases, use more of the product or service, use it more often, or use it in new ways. Examples include museums that sponsor special exhibitions to encourage patrons to make repeat visits and the recipes that Quaker Oats includes on the package to tempt buyers to include oatmeal as an ingredient in other foods, such as cookies and desserts. Expansion by Developing New Products for Current Customers A second avenue to future growth is through a product-development strategy emphasizing the introduction of product-line extensions or new product or service offerings aimed at existing 50 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit b t 2.9 .9 Alternative Corporate Growth Strategies Current products Market penetration strategies Current markets Product development strategies • Increase market share • Product improvements • Increase product usage Increase frequency of use Increase quantity used New applications • Product-line extensions • New products for same market Market development strategies • New markets New products Expand markets for existing products Geographic expansion Target new segment Diversification strategies • Vertical integration Forward integration Backward integration • Diversification into related businesses (concentric diversification) • Diversification into unrelated businesses (conglomerate diversification) customers. For example, Arm & Hammer successfully introduced a laundry detergent, an oven cleaner, and a carpet cleaner. Each capitalized on baking soda’s image as an effective deodorizer and on a high level of recognition of the Arm & Hammer brand. Expansion by Selling Existing Products to New Segments or Countries Perhaps the growth strategy with the greatest potential for many companies is the development of new markets for their existing goods or services. This may involve the creation of marketing programs aimed at nonuser or occasional-user segments of existing markets. Thus, theaters, orchestras, and other performing arts organizations often sponsor touring companies to reach audiences outside major metropolitan areas and promote matinee performances with lower prices and free public transportation to attract senior citizens and students. Expansion into new geographic markets, particularly new countries, is also a primary growth strategy for many firms. For example, the strategic plan of Degussa, the large German specialty chemicals manufacturer, calls for greatly increased resources and marketing efforts to be directed toward China over the next few years. As Utz-Hellmuth Felcht— the chairman of the firm’s management board—points out, the vast number of untapped potential customers for the firm’s products means China offers greater promise for future sales growth than Western Europe and North America combined.30 While developing nations represent attractive growth markets for basic industrial and infrastructure goods and services, growing personal incomes and falling trade barriers are making them attractive potential markets for many consumer goods and services as well. Market research firm DisplaySearch, for instance, predicts that China will become the world’s largest market for flat-panel TVs by 2012, although price will be a more critical competitive factor than in more-developed economies.31 Expansion by Diversifying Firms also seek growth by diversifying their operations. This is typically riskier than the various expansion strategies because it often involves Chapter Two The Marketing Implications of Corporate and Business Strategies 51 learning new operations and dealing with unfamiliar customer groups. Nevertheless, the majority of large global firms are diversified to one degree or another. Vertical integration is one way for companies to diversify. Forward vertical integration occurs when a firm moves downstream in terms of the product flow, as when a manufacturer integrates by acquiring or launching a wholesale distributor or retail outlet. For example, most of Europe’s fashion houses—like Ermenegeldo Zegna and Georgio Armani—own at least some of their own retail outlets in major cities in order to gain better control over their companies’ merchandising programs and more direct feedback from customers. In recent years such integrated retail outlets have also been important for establishing a foothold in developing markets such as China where independent retailers with a prestige image can be in short supply. Indeed, Zegna now earns 40 percent of its revenues from China.32 Backward integration occurs when a firm moves upstream by acquiring a supplier. Integration can give a firm access to scarce or volatile sources of supply or tighter control over the marketing, distribution, or servicing of its products. But it increases the risks inherent in committing substantial resources to a single industry. Also, the investment required to vertically integrate often offsets the additional profitability generated by the integrated operations, resulting in little improvement in return on investment.33 Related (or concentric) diversification occurs when a firm internally develops or acquires another business that does not have products or customers in common with its current businesses but that might contribute to internal synergy through the sharing of production facilities, brand names, R&D know-how, or marketing and distribution skills. Thus, PepsiCo acquired Cracker Jack to complement its salty snack brands and leverage its distribution strengths in grocery stores. The motivations for unrelated (or conglomerate) diversification are primarily financial rather than operational. By definition, an unrelated diversification involves two businesses that have no commonalities in products, customers, production facilities, or functional areas of expertise. Such diversification mostly occurs when a disproportionate number of a firm’s current businesses face decline because of decreasing demand, increased competition, or product obsolescence. The firm must seek new avenues of growth. Other, more fortunate, firms may move into unrelated businesses because they have more cash than they need in order to expand their current businesses, or because they wish to discourage takeover attempts. Unrelated diversification tends to be the riskiest growth strategy in terms of financial outcomes. Most empirical studies report that related diversification is more conducive to capital productivity and other dimensions of performance than is unrelated diversification.34 This suggests that the ultimate goal of a corporation’s strategy for growth should be to develop a compatible portfolio of businesses to which the firm can add value through the application of its unique core competencies. The corporation’s marketing competencies can be particularly important in this regard. Expansion by Diversifying through Organizational Relationships or Networks Recently, firms have attempted to gain some benefits of market expansion or diversification while simultaneously focusing more intensely on a few core competencies. They try to accomplish this feat by forming relationships or organizational networks with other firms instead of acquiring ownership.35 Perhaps the best models of such organizational networks are the Japanese keiretsu and the Korean chaebol—coalitions l of financial institutions, distributors, and manufacturing firms in a variety of industries that are often grouped around a large trading company that helps coordinate the activities of the various coalition members and markets their goods and services around the world. As we have seen, many Western firms, like IBM, are also forming 52 Section One The Role of Marketing in Developing Successful Business Strategies alliances with suppliers, resellers, and even customers to expand their product and service offerings without making major new investments or neglecting their core competencies. Allocating Corporate Resources Diversified organizations have several advantages over more narrowly focused firms. They have a broader range of areas in which they can knowledgeably invest, and their growth and profitability rates may be more stable because they can offset declines in one business with gains in another. To exploit the advantages of diversification, though, corporate managers must make intelligent decisions about how to allocate financial and human resources across the firm’s various businesses and product-markets. Two sets of analytical tools have proven useful in making such decisions: portfolio models and value-based planning. Portfolio Models One of the most significant developments in strategic management during the 1970s and 1980s was the widespread adoption of portfolio models to help managers allocate corporate resources across multiple businesses. These models enable managers to classify and review their current and prospective businesses by viewing them as portfolios of investment opportunities and then evaluating each business’s competitive strength and the attractiveness of the markets it serves. The Boston Consulting Group’s (BCG) Growth-Share Matrix One of the first—and best known—of the portfolio models is the growth-share matrix developed by the Boston Consulting Group. It analyzes the impact of investing resources in different businesses on the corporation’s future earnings and cash flows. Each business is positioned within a matrix, as shown in Exhibit 2.10. The vertical axis indicates the industry’s growth rate and the horizontal axis shows the business’s relative market share. Exhibit 2.10 BCG’s Market Growth Relative Share Matrix High Stars Question marks 5 2 4 1 6 Market growth rate (in constant dollars) 3 10% Cash cows 7 Dogs 11 8 12 10 9 13 Low 10 0 1 0.1 0 1 Relative market share Source:: Reprinted from Barry Hedley, “Strategy and the Business Portfolio,” Long Range Planning g 10. © 1977 with permission from Elsevier. Chapter Two 53 The Marketing Implications of Corporate and Business Strategies The growth-share matrix assumes that a firm must generate cash from businesses with strong competitive positions in mature markets. Then it can fund investments and expenditures in industries that represent attractive future opportunities. Thus, the market growth rate on the vertical axis is a proxy measure for the maturity and attractiveness of an industry. This model represents businesses in rapidly growing industries as more attractive investment opportunities for future growth and profitability. Similarly, a business’s relative market share is a proxy for its competitive strength within its industry. It is computed by dividing the business’s absolute market share in dollars or units by that of the leading competitor in the industry. Thus, in Exhibit 2.10 a business is in a strong competitive position if its share is equal to, or larger than, that of the next leading competitor (i.e., a relative share of 1.0 or larger). Finally, in the exhibit, the size of the circle representing each business is proportional to that unit’s sales volume. Thus, businesses 7 and 9 are the largest-volume businesses in this hypothetical company, while business 11 is the smallest. Resource Allocation and Strategy Implications Each of the four cells in the growth-share matrix represents a different type of business with different strategy and resource requirements. The implications of each are discussed below and summarized in Exhibit 2.11. ● ● Question marks. Businesses in high-growth industries with low relative market shares (those in the upper-right quadrant of Exhibit 2.11) are called question marks or problem children. Such businesses require large amounts of cash, not only for expansion to keep up with the rapidly growing market, but also for marketing activities (or reduced margins) to build market share and catch the industry leader. If management can successfully increase the share of a question mark business, it becomes a star. But if managers fail, it eventually turns into a dog as the industry matures and the market growth rate slows. Stars. A starr is the market leader in a high-growth industry. Stars are critical to the continued success of the firm. As their industries mature, they move into the bottom-left quadrant and become cash cows. Paradoxically, while stars are critically important, they often are net users rather than suppliers of cash in the short run (as indicated by the possibility of a negative cash Exhibit 2.11 Growth rate (cash use) Cash Flows across Businesses in The BCG Portfolio Model High Question marks Stars Cash flows Low o Cash cows Dogs High Hi h L w Lo Relative market share 54 Section One ● ● The Role of Marketing in Developing Successful Business Strategies flow shown in Exhibit 2.11). This is because the firm must continue to invest in such businesses to keep up with rapid market growth and to support the R&D and marketing activities necessary to maintain a leading market share. Cash cows. Businesses with a high relative share of low-growth markets are called cash cows because they are the primary generators of profits and cash in a corporation. Such businesses do not require much additional capital investment. Their markets are stable, and their share leadership position usually means they enjoy economies of scale and relatively high profit margins. Consequently, the corporation can use the cash from these businesses to support its question marks and stars (as shown in Exhibit 2.11). However, this does not mean the firm should necessarily maximize the business’s short-term cash flow by cutting R&D and marketing expenditures to the bone—particularly not in industries where the business might continue to generate substantial future sales. Dogs. Low-share businesses in low-growth markets are called dogs because although they may throw off some cash, they typically generate low profits or losses. Divestiture is one option for such businesses, although it can be difficult to find an interested buyer. Another common strategy is to harvest dog businesses. This involves maximizing short-term cash flow by paring investments and expenditures until the business is gradually phased out. Limitations of the Growth-Share Matrix Because the growth-share matrix uses only two variables as a basis for categorizing and analyzing a firm’s businesses, it is relatively easy to understand. But while this simplicity helps explain its popularity, it also means the model has limitations: ● ● ● ● ● Market growth rate is an inadequate descriptor of overall industry attractiveness. Market growth is not always directly related to profitability or cash flow. Some high-growth industries have never been very profitable because low entry barriers and capital intensity have enabled supply to grow even faster, resulting in intense price competition. Also, rapid growth in one year is no guarantee that growth will continue in the following year. Relative market share is inadequate as a description of overall competitive strength. Market share is more properly viewed as an outcome of past efforts to formulate and implement effective business-level and marketing strategies than as an indicator of enduring competitive strength.36 If the external environment changes, or the SBU’s managers change their strategy, the business’s relative market share can shift dramatically. The outcomes of a growth-share analysis are highly sensitive to variations in how growth and share are measured.37 Defining the relevant industry and served market (i.e., the targetmarket segments being pursued) can also present problems. For example, does Pepsi-Cola compete only for a share of the cola market, or for a share of the much larger market for nonalcoholic beverages, such as iced tea, bottled water, and fruit juices? While the matrix specifies appropriate investment strategies for each business, it provides little guidance on how best to implement those strategies. While the model suggests that a firm should invest cash in its question mark businesses, for instance, it does not consider whether there are any potential sources of competitive advantage that the business can exploit to successfully increase its share. Simply providing a business with more money does not guarantee that it will be able to improve its position within the matrix. The model implicitly assumes that all business units are independent of one another except for the flow of cash. If this assumption is inaccurate, the model can suggest some inappropriate resource allocation decisions. For instance, if other SBUs depend on a dog business as a source of supply—or if they share functional activities, such as a common plant or salesforce, with that business—harvesting the dog might increase the costs or reduce the effectiveness of the other SBUs. Alternative Portfolio Models In view of the above limitations, a number of firms have attempted to improve the basic portfolio model. Such improvements have focused Chapter Two The Marketing Implications of Corporate and Business Strategies 55 primarily on developing more detailed, multifactor measures of industry attractiveness and a business’s competitive strength and on making the analysis more future-oriented. Corporate managers must first select factors most appropriate for their firm and weight them according to their relative importance. They then rate each business and its industry on the two sets of factors. These multifactor models are more detailed than the simple growth-share model and consequently provide more strategic guidance concerning the appropriate allocation of resources across businesses. They are also more useful for evaluating potential new-productmarkets. However, the multifactor measures in these models can be subjective and ambiguous, especially when managers must evaluate different industries on the same set of factors. Also, the conclusions drawn from these models still depend on the way industries and product-markets are defined.38 Value-Based Planning As mentioned, one limitation of portfolio analysis is that it specifies how firms should allocate financial resources across their businesses without considering the competitive strategies those businesses are, or should be, pursuing. Portfolio analysis provides little guidance, for instance, in choosing which of several competitive strategies a particular business unit should pursue. Value-based planning is a resource allocation tool that attempts to address such questions by assessing the shareholder value a given strategy is likely to create. Thus, valuebased planning provides a basis for comparing the economic returns to be gained from investing in different businesses pursuing different strategies or from alternative strategies that might be adopted by a given business unit. A number of value-based planning methods are currently in use, but all share three basic features.39 First, they assess the economic value a strategy is likely to produce by examining the cash flows it will generate, rather than relying on distorted accounting measures, such as return on investment.40 Second, they estimate the shareholder value that a strategy will produce by discounting its forecasted cash flows by the business’s riskadjusted cost of capital. Finally, they evaluate strategies based on the likelihood that the investments required by a strategy will deliver returns greater than the cost of capital. The amount of return a strategy or operating program generates in excess of the cost of capital is commonly referred to as its economic value added, or EVA.41 This approach to evaluating alternative strategies is particularly appropriate for use in allocating resources across business units because most capital investments are made at the business-unit level, and different business units typically face different risks and therefore have different costs of capital. Discounted Cash Flow Model Perhaps the best-known and most widely used approach to value-based planning is the discounted cash flow model. In this model, as Exhibit 2.12 indicates, shareholder value created by a strategy is determined by the cash flow it generates, the business’s cost of capital (which is used to discount future cash flows back to their present value), and the market value of the debt assigned to the business. The future cash flows generated by the strategy are, in turn, affected by six “value drivers”: the rate of sales growth the strategy will produce, the operating profit margin, the income tax rate, investment in working capital, fixed capital investment required by the strategy, and the duration of value growth. The first five value drivers are self-explanatory, but the sixth requires some elaboration. The duration of value growth represents management’s estimate of the number of years over which the strategy can be expected to produce rates of return that exceed the cost of capital. This estimate, in turn, is tied to two other management judgments. First, the manager must decide on the length of the planning period (typically three to five years); he or 56 Section One The Role of Marketing in Developing Successful Business Strategies Exhibit b t 2.12 . Factors Affecting the Creation of Shareholder Value Corporate objective Creating shareholder value V Valuation components Cash flow from operations Discount rate Debt • Sales growth • Operating profit margin • Income tax rate • Working capital investment • Fixed capital investment • Cost of capital Operating Investment Financing V Value drivers Management decisions • Value V growth duration Shareholder return • Dividends • Capital gains Source:: Reprinted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Creating Shareholder Value, Revised and Expanded Edition (p. 76), by Alfred Rappaport. Copyright © 1986, 1996 by Alfred Rappaport. All rights reserved. she must then estimate the residual value the strategy will continue to produce after the planning period is over. Such decisions are tricky, for they involve predictions of what will happen in the relatively distant future.42 Some Limitations of Value-Based Planning Value-based planning is not a substitute for strategic planning; it is only one tool for evaluating strategy alternatives identified and developed through managers’ judgments. It does so by relying on forecasts of many kinds to put a financial value on the hopes, fears, and expectations managers associate with each alternative. Projections of cash inflows rest on forecasts of sales volume, product mix, unit prices, and competitors’ actions. Expected cash outflows depend on projections of various cost elements, working capital, and investment requirements. While good forecasts are notoriously difficult to make, they are critical to the validity of value-based planning. Unfortunately, there are Strategic Issue natural human tendencies to overvalue the financial projections assoSom ome e kiin nds ds off ssttrat ra eg egyy al a te terna native ivess are re ciated with some strategy alternatives and to undervalue others. For consis co sisten tently tly un unde derva value ued.. Par Particu cular arly worrris r om ome e frro om m a mark arketi eting g vie viewpo wpoin int is instance, managers are likely to overestimate the future returns from a tthe e te en nde den ncy cy to under erest stima mate te the he va value ue of currently successful strategy. Evidence of past success tends to carry kee eepin ping g curr curren nt cu custo stome mers. s. more weight than qualitative assessments of future threats. Chapter Two The Marketing Implications of Corporate and Business Strategies 57 Some kinds of strategy alternatives are consistently undervalued. Particularly worrisome from a marketing viewpoint is the tendency to underestimate the value of keeping current customers. Putting a figure on the damage to a firm’s competitive advantage from not making a strategic investment necessary to maintain the status quo is harder than documenting potential cost savings or profit improvements that an investment might generate. And, finally, value-based planning can evaluate alternatives, but it cannot create them. The best strategy will never emerge from the evaluation process if management fails to identify it.43 Using Customer Equity to Estimate the Value of Alternative Marketing Actions A recent variation of value-based planning attempts to overcome some of the above limitations—particularly the inaccuracy of subjective forecasts and managers’ tendency to over- or underestimate the value of particular actions—and is proving useful for evaluating alternative marketing strategies. This approach calculates the economic return for a prospective marketing initiative based on its likely impact on the firm’s customer equity, which is the sum of the lifetime values of its current and future customers.44 Each customer’s lifetime value is estimated from data about the frequency of their purchases in the category, the average quantity purchased, and historical brand-switching patterns, combined with the firm’s contribution margin. The necessary purchase data can be gotten from the firm’s sales records, while brand-switching patterns can be estimated either from longitudinal panel data or survey data similar to that collected in customer satisfaction studies. Because market and competitive conditions, and therefore customer perceptions and behaviors, change over time, however, the underlying data needs to be updated on a regular basis—perhaps once or twice a year. The impact of a firm’s or business unit’s past marketing actions on customer equity can be statistically estimated from historical data. This enables managers to identify the financial impact of alternative marketing “value drivers” of customer equity, such as brand advertising, quality or service improvements, loyalty programs, and the like. And once a manager calculates the implementation costs and capital requirements involved, it is then possible to estimate the financial return for any similar marketing initiative in the near future. Sources of Synergy A final strategic concern at the corporate level is to increase synergy across the firm’s various businesses and product-markets. As mentioned, synergy exists when two or more businesses or product-markets, and their resources and competencies, complement and reinforce one another so that the total performance of the related businesses is greater than it would be otherwise. Knowledge-Based Synergies Some potential synergies at the corporate level are knowledge-based. The performance of one business can be enhanced by the transfer of competencies, knowledge, or customer-related intangibles—such as brand-name recognition and reputation—from other units within the firm. For instance, the technical knowledge concerning image processing and the quality reputation that Canon developed in the camera business helped ease the firm’s entry into the office copier business. In part, such knowledge-based synergies are a function of the corporation’s scope and mission—or how its managers answer the question, What businesses should we be in? When a firm’s portfolio of businesses and product-markets reflects a common mission based on well-defined customer needs, market segments, or technologies, the company is more likely to develop core competencies, customer knowledge, and strong brand franchises that can 58 Section One The Role of Marketing in Developing Successful Business Strategies be shared across businesses. However, the firm’s organizational structure and allocation of resources also may enhance knowledge-based synergy. A centralized corporate R&D department, for example, is often more efficient and effective at discovering new technologies with potential applications across multiple businesses than if each business unit bore the burden of funding its own R&D efforts. Similarly, some argue that strong corporatelevel coordination and support are necessary to maximize the strength of a firm’s brand franchise, and to glean full benefit from accumulated market knowledge, when the firm is competing in global markets. Corporate Identity and the Corporate Brand as a Source of Synergy Corporate identity—together with a strong corporate brand that embodies that identity—can help a firm stand out from its competitors and give it a sustainable advantage in the market. Corporate identity flows from the communications, impressions, and personality projected by an organization. It is shaped by the firm’s mission and values, its functional competencies, the quality and design of its goods and services, its marketing communications, the actions of its personnel, the image generated by various corporate activities, and other factors.45 In order to project a positive, strong, and consistent identity, firms as diverse as Caterpillar, Walt Disney, and The Body Shop have established formal policies, criteria, and guidelines to help ensure that all the messages and sensory images they communicate reflect their unique values, personality, and competencies. One rationale for such corporate identity programs is that they can generate synergies that enhance the effectiveness and efficiency of the firm’s marketing efforts for its individual product offerings. By focusing on a common core of corporate values and competencies, every impression generated by each product’s design, packaging, advertising, and promotional materials can help reinforce and strengthen the impact of all the other impressions the firm communicates to its customers, employees, shareholders, and other audiences, and thereby generate a bigger bang for its limited marketing bucks. For example, by consistently focusing on values and competencies associated with providing high-quality family entertainment, Disney has created an identity that helps stimulate customer demand across a wide range of product offerings— from movies to TV programs to licensed merchandise to theme parks and cruise ships. The Marketing Implications of Business-Unit Strategy Decisions The components of a firm engaged in multiple industries or businesses are typically called strategic business units, or SBUs. Managers within each of these business units decide which objectives, markets, and competitive strategies to pursue. Top-level corporate managers typically reserve the right to review and approve such decisions to ensure their overall consistency with the company’s mission, objectives, and the allocation of resources across SBUs in its portfolio. However, SBU-level managers, particularly those in marketing and sales, bear the primary responsibility for collecting and analyzing relevant information and generating appropriate strategies for their businesses. Those managers are more familiar with a given SBU’s products, customers, and competitors and are responsible for successfully implementing the strategy. The rationale for breaking larger firms into semiautonomous SBUs usually stems from a market-oriented desire to move strategic decision making closer to the customers the business is trying to reach. The first step in developing business-level strategies, then, is for the firm to decide how to divide itself into SBUs. The managers in each SBU must then make recommendations Chapter Two The Marketing Implications of Corporate and Business Strategies 59 about (a) the unit’s objectives, (b) the scope of its target customers and offerings, (c) which broad competitive strategy to pursue to build a competitive advantage in its product-markets, and (d) how resources should be allocated across its product-market entries and functional departments. How Should Strategic Business Units Be Designed? Ideally, strategic business units have the following characteristics: ● ● ● ● A homogeneous set of markets to serve with a limited number of related technologies. Minimizing diversity across an SBU’s product-market entries enables the unit’s manager to better formulate and implement a coherent and internally consistent business strategy. A unique set of product-markets, in the sense that no other SBU within the firm competes for the same customers with similar products. Thus, the firm avoids duplication of effort and maximizes economies of scale within its SBUs. Control over those factors necessary for successful performance, such as production, R&D and engineering, marketing, and distribution. This does not mean an SBU should not share resources, such as a manufacturing plant or a salesforce, with one or more other business units. But the SBU should determine how its share of the joint resource is used to effectively carry out its strategy. Responsibility for their own profitability. As you might expect, firms do not always meet all of these ideals when designing business units. There are usually trade-offs between having many small homogeneous SBUs versus large but fewer SBUs that top managers can more easily supervise. What criteria should managers use to decide how product-markets should be clustered into a business unit? The three dimensions that define the scope and mission of the entire corporation can also define individual SBUs: 1. Technical compatibility, particularly with respect to product technologies and operational requirements, such as the use of similar production facilities and engineering skills. 2. Similarity in the customer needs or the product benefits sought by customers in the target markets. 3. Similarity in the personal characteristics or behavior patterns of customers in the target markets. In practice, the choice is often between technical/operational compatibility on the one hand and customer homogeneity on the other. Frequently management defines SBUs by product-markets requiring similar technologies, production facilities, and employee skills. This minimizes the coordination problems involved in administering the unit and increases its ability to focus on one or a few critical competencies. In some cases, however, the marketing synergies gained from coordinating technically different products aimed at the same customer need or market segment outweigh operational considerations. In these firms, managers cluster product-market entries into SBUs based on similarities across customers or distribution systems. General Foods Corporation, for instance, includes Cool Whip and Jell-O in the same SBU even though they require different production technologies because they are marketed as dessert products. The Business Unit’s Objectives As we discussed earlier, corporate objectives are typically broken down into subobjectives for each SBU. Those subobjectives often vary according to the attractiveness of the SBU’s industry, the strength of its competitive position, and the like. 60 Section One The Role of Marketing in Developing Successful Business Strategies Similarly, breaking down an SBU’s objectives into subobjectives for each of its productmarket entries is often a major part of developing business-level strategy. Those subobjectives need to add up to the accomplishment of the SBU’s overall goals; yet they should vary across product-market entries to reflect differences in the attractiveness and growth potential of individual market segments and the competitive strengths of the SBU’s product in each market. The Business Unit’s Competitive Strategy The essential question in formulating a business strategy is, How will the business unit compete to gain a sustainable competitive advantage within its industry? Achieving a competitive advantage requires a business unit to make two choices: ● ●• What is the SBU’s competitive domain or scope? Which market segments can it target, and which customer needs can it satisfy? These are stated in more general terms than is the case with marketing strategy. They serve as guidelines for the formulation of strategies for the individual product-market entries. How can the business unit distinguish itself from competitors in its target market(s)? What distinctive competencies can it rely on to achieve a unique position relative to its competitors? Decisions about an SBU’s Scope A business’s strategic scope can be defined either broadly or narrowly. It can pursue a range of market segments within its industry or focus on only one or a few target segments. The decision about how many customer segments to serve usually hinges on a combination of factors, including the business’s objectives and available resources, characteristics of the market (e.g., the number and size of different customer segments), and the SBU’s strengths and weaknesses relative to its competitors. We will examine these decisions about strategic scope and the variables that influence them in more detail in Chapters 15 and 16 where we discuss strategies for different kinds of industries at varying stages in their life cycles. For now, the important point to recognize is that the scope of a business’s strategic focus has ramifications for nearly every component of its marketing program, including the breadth of its product line; the audience for its advertising, promotion, and personal selling efforts; the design of its distribution system; and the range of prices that are viable. For example, when IBM decided to expand the target market for its services to include a wider range of small business and dot-com start-ups, it had to develop many new service offerings to meet the needs of such customers. But it also had to abandon its strategy of charging only premium prices, change the content of its advertising, and redirect a significant portion of its personal selling and promotional efforts toward its new customer segments. Allocating Resources within the Business Unit Once SBU managers decide on the scope of market segments and product-market entries to pursue, they allocate the financial and human resources provided by corporate management across those productmarkets. Because this process is similar to allocating corporate resources across SBUs, many firms use similar portfolio analysis or customer equity tools for both. Gaining a Competitive Advantage There are many ways in which a business unit might attempt to gain an advantage over its competitors within the scope of its strategic domain. To be successful over the long haul, however, a competitive strategy should have three characteristics.46 ●• It should generate customer value. It should give potential customers a good reason to purchase from the SBU instead of its competitors. The strategy should be predicated on providing one or more superior benefits at a price similar to what competitors charge or delivering comparable benefits at lower cost. Chapter Two 61 The Marketing Implications of Corporate and Business Strategies ● ● The superior value must be perceived by the customer. Even if an SBU’s product or service is better than the competition, if the customer is not aware of that—or doesn’t attach much value to the additional benefits—it does not gain a competitive advantage. For example, as the technical and performance differences among PCs narrowed, IBM’s competitive strategy of charging premium prices for technically superior products became untenable. The advantage should be difficult for competitors to copy. The easier it is for competitors to copy a successful strategy, the more short-lived the SBU’s competitive advantage. For instance, Minnetonka, Inc., gained an advantage by introducing Check-Up, the first plaquefighting toothpaste. But because its unique ingredients could not be patented, more than two dozen competing brands reached the market within a year; many from much bigger companies such as Procter & Gamble and Colgate-Palmolive. Marketing Resources and Competitive Advantage The trick, then, is for the business unit to develop a competitive strategy that converts one or more of its unique resources or competencies into something of value to customers. While one can conceive of a nearly infinite assortment of such strategies, most can be classified into a few “generic” types. For example, Treacy and Wiersema argue that market leaders tend to pursue one of three categories of competitive strategy. They either stress operational excellence, which typically translates into lower costs and prices, or differentiate themselves through product leadership or customer intimacy and superior service.47 These generic strategies are summarized in Exhibit 2.13, together with some traits and competencies of businesses that are able to implement each strategy effectively. Note how many of the core business processes underlying all three strategy types are related to the marketing function. Other authors suggest additional ways to categorize business strategies.48 No matter how such strategies are defined, though, the key points are (a) that competitive strategies are built—at least in part—on marketing resources and competencies and (b) the competitive strategy pursued by an SBU, in turn, helps determine what strategic marketing programs are viable for its various product-market entries. We examine this symbiotic relationship between marketing resources and competencies, business-level competitive strategies, and marketing programs for individual products and services in more detail in Chapter 9. Exhibit 2.13 Three Competitive Strategies and the Traits and Competencies of Businesses That Implement Them Effectively D ISCIPLINES Company traits Operational excellence Product leadership Customer intimacy Core business processes Sharpen distribution systems and provide no-hassle service Nurture ideas, translate them into products, and market them skillfully Provide solutions and help customers run their businesses Structure Has strong, central authority and a finite level of empowerment Acts in an ad hoc, organic, loosely knit, and ever-changing way Pushes empowerment close to customer contact Management systems Maintain standard operating procedures Reward individuals’ innovative capacity and new product success Measure the cost of providing service and of maintaining customer loyalty Culture Acts predictably and believes “one size fits all” Experiments and thinks “out-of-the-box” Is flexible and thinks “have it your way” 62 Section One The Role of Marketing in Developing Successful Business Strategies Take aways Take-aways 1. Marketing perspectives lie at the heart of strategic decision making, whether at the corporate, businessunit, or product-market levels. All managers who aspire to general management roles need marketing concepts and tools in their repertoire. 2. Market-oriented firms—those that plan and coordinate company activities around the primary goal of satisfying customer needs—tend to outperform other firms on a variety of dimensions, including sales growth, return on assets, and new product success. 3. Unethical behavior by a firm’s employees can damage the trust between a firm and its suppliers and customers, thereby disrupting the development of long-term relationships and reducing sales and profits over time. 4. The four major paths to corporate growth—market penetration, market development, product development, and diversification strategies—imply differences in a firm’s strategic scope, require different competencies and marketing actions, and involve different types and amounts of risk. Decisions about which path(s) to pursue should consider all of these factors. 5. A strong corporate brand makes sense when companylevel competencies are primarily responsible for generating the benefits and value customers receive from its various product offerings. 6. The ultimate goal in formulating business-unit strategies is to establish a basis for a sustainable competitive advantage that provides superior value to customers. Doing so requires the development of resources—often marketing resources, such as brand names, marketing information systems and databases, long-term customer relationships, and so on—that other firms do not have and that are hard to acquire. 7. Successful new firm formation typically requires a competitive strategy that delivers superior value to a narrowly defined target segment in a way that either avoids direct confrontation with established competitors or is difficult for them to emulate. Therefore, market sensing and analysis, market segmentation and targeting, and market positioning skills are usually crucial in helping new firms surmount the long odds against survival. Endnotes o s 1. This opening example is based on material found in Steve Hamm, “Big Blue Goes for the Big Win,” BusinessWeekk, March 10, 2008, pp. 63–65; Steve Hamm, “International Isn’t Just IBM’s First Name,” www.businessweek.com m, January 17, 2008; Steve Hamm, “Beyond Blue,” BusinessWeek, April 18, 2005, pp. 68–76; Steve Lohr, “Big Blue’s Big Bet: Less Tech, More Touch,” The New York Times, Money & Business Section, Sunday, January 25, 2004, pp. 1, 10; Spencer E. Ante, “The New Blue,” BusinessWeek, March 17, 2003; Jon Fortt, “How IBM’s Analytics Software Saves Lives,” www.fortune.com, March 15, 2010; and IBM’s 2009 Annual Report at www.ibm.com m. 2. Christian Homburg, John P. Workman, Jr., and Harley Krohmer, “Marketing’s Influence within the Firm,” Journal of Marketing 63 (April 1999), pp. 1–17. Also see Peter C. Verhoef and Peter S. H. Leeflang, “Understanding the Marketing Department’s Influence within the Firm,” Journal of Marketing 73 (March 2009), pp. 14–37. 3. Quoted in Katherine Z. Andrews, “Still a Major Player: Marketing’s Role in Today’s Firms,” Insights from MSII, Winter 1999, p. 2. 4. Frederick E. Webster, Jr., “Executing the New Marketing Concept,” Marketing Managementt 3 (1994), pp. 9–16. 5. Rajendra K. Srivastava, Tasadduq A. Shervani, and Liam Fahey, “Marketing, Business Processes, and Shareholder Value: An Organizationally Embedded View of Marketing Activities and the Discipline of Marketing,” Journal of Marketing 63 (Special Issue 1999), pp. 168–79. 6. For example, see John C. Narver and Stanley F. Slater, “The Effect of a Market Orientation on Business Profitability,” Journal of Marketing 54 (April 1990), pp. 1–18; Bernard J. Jaworski and Ajay Kohli, “Market Orientation: Antecedents and Consequences,” Journal of Marketing 57 (July 1993); Stanley F. Slater and John C. Narver, “Market Orientation, Performance, and the Moderating Influence of Competitive Environment,” Journal of Marketing 58 (January 1994), pp. 46–55; and Ahmet H. Kirca, Satish Jayachandran, and William O. Bearden, “Market Orientation: A Meta-Analytic Review and Assessment of Its Antecedents and Impact on Performance,” Journal of Marketing 69 (April 2005), pp. 24–41. 7. Rohit Deshpande, Elie Ofek, and Sang-Hoon Kim, “Preempting Competitive Risk via Customer Focus: Entrepreneurial Firms in Japan and the U.S.” Report #03-114, (Cambridge, MA: Marketing Science Institute, 2003). 8. Slater and Narver, “Market Orientation”; and John P. Workman, Jr., “When Marketing Should Follow instead of Lead,” Marketing Management 2 (1993), pp. 8–19. 9. Charles H. Noble, Rajiv K. Sinha, and Ajith Kumar, “Market Orientation and Alternative Strategic Orientations: A Longitudinal Assessment of Performance Implications,” Journal of Marketing 66 (October 2002), pp. 25–39. 10. For many examples, see Valarie Zeithaml, Mary Jo Bitner, and Dwayne Gremler, Services Marketing, 5th ed. (New York: McGraw-Hill, 2009). 11. E. Jerome McCarthy and William D. Perreault, Jr., Basic Marketing: A Global Managerial Approach, 11th ed. (Burr Ridge, IL: Richard D. Irwin, 1993), chap. 2. Chapter Two The Marketing Implications of Corporate and Business Strategies 12. This is a slightly modified form of the definition in Charles W. Hofer and Dan Schendel, Strategy Formulation: Analytical Concepts (St. Paul, MN: West, 1978), p. 25. However, our definition differs in that we view the setting of objectives as an integral part of strategy formulation, whereas they see objective setting as a separate process. Because a firm or business unit’s objectives are influenced and constrained by many of the same environmental and competitive factors as the other elements of strategy, however, it seems logical to treat both the determination of objectives and the resource allocations aimed at reaching those objectives as two parts of the same strategic planning process. 13. However, while such corporate-level synergies are often used to justify mergers, acquisitions, and forays into new businesses, they sometimes prove elusive. For example, see Laura Landro, “Giants Talk Synergy but Few Make It Work,” The Wall Street Journal, September 25, 1995, p. B1. 14. C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review 68 (May–June 1990), pp. 79–91. 15. Katrina Brooker, “The Pepsi Machine,” Fortune, February 6, 2006, pp. 68–72; Betsy Morris, “The Pepsi Challenge: Can This Snack and Soda Giant Go Healthy?” Fortune, March 3, 2008, pp. 55–66; and Beth Kowitt, “PepsiCo’s Indra Nooyi: Niche Brands Are the Future,” www.fortune.cnn.com, October 5, 2010. 16. Theodore Levitt, “Marketing Myopia,” Harvard Business Review (July–August 1960), pp. 455–56. 17. Pete Engardio, “Beyond the Green Corporation,” BusinessWeekk, January 29, 2007, p. 52. For additional examples, see Daniel Franklin, “Just Good Business,” A Special Report on Corporate Social Responsibility, The Economistt, January 19, 2008, pp. SR3–SR22. 18. Pete Engardio, “Beyond the Green Corporation.” 19. “Good Grief,” The Economist, t April 8, 1995, p. 57; “Doing Well by Doing Good,” The Economist, t April 22, 2000, pp. 65–67; and Joseph Weber, “The New Ethics Enforcers,” BusinessWeekk, February 13, 2006, pp. 76–77. 20. “Doing Well by Doing Good,” p. 66. 21. Robert A. Cooke, Ethics in Business: A Perspective (Chicago: Arthur Andersen, 1988). 22. I. Fredrick Trawick, John E. Swan, Gail W. McGee, and David R. Rink, “Influence of Buyer Ethics and Salesperson Behavior on Intention to Choose a Supplier,” Journal of the Academy of Marketing Science 19 (Winter 1991), pp. 17–23. 23. Maria Ermakova and Chris Spillane, “Corruption Rises over Three Years, More People Paid Bribes,” www.bloomberg.com/news, December 10, 2010. 24. Mina Kimes, “Fluor’s Corporate Crime Fighter,” Fortune, February 16, 2009. p. 26. See also Eamon Javers, “Steering Clear of Foreign Snafus,” Business week, k November 12, 2007, p. 76. 25. Y. K. Shetty, “New Look at Corporate Goals,” California Management Review 12 (Winter 1979), pp. 71–79; see also Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review 74 (January–February 1996), pp. 75–85. 26. Gordon Donaldson, Managing Corporate Wealth (New York: Praeger, 1984). See also, Kaplan and Norton, “Using the Balanced Scorecard,” and Srivastava, Shervani, and Fahey, “Marketing, Business Processes, and Shareholder Value.” 27. Daniel P. Finkelman, “Crossing the ‘Zone of Indifference,” Marketing Managementt 2, no. 3 (1993), pp. 22–31. See also, Jena McGregor, “Would You Recommend Us?” BusinessWeekk, January 30, 2006, pp. 94–95; and Paul E. Farris, Neil T. Bendle, Phillip E. Pfeifer, and David J. Reibstein, Marketing Metrics: 50 + Metrics Every Executive Should Masterr (Philadelphia: Wharton School Publishing, 2006). 28. Jay B. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Managementt 17 (1991), pp. 99–120; and Margaret A. Peteraf, “The Cornerstone of Competitive Advantage: A Resource-Based View,” Strategic Management Journal 14 (1993), pp. 179–92. 29. George S. Day, “The Capabilities of Market-Driven Organizations,” Journal of Marketing 58 (October 1994), pp. 37–52; George S. Day and Prakash Nedungadi, “Managerial Representations of Competitive Advantage,” Journal of Marketing 58 (April 1994), pp. 31–44; and George S. 63 Day, Creating a Superior Customer-Relating Capability, Report No. 03-101 (Cambridge, MA: Marketing Science Institute, 2003). 30. Interview with Mr. Utz-Hellmuth Felcht transcribed on Knowledge@ Wharton, www.knowledge.wharton.upenn.edu, September 7, 2005. 31. Mariko Yasu, “Foreign Makers Tune In to China’s TV Market,” www. businessweek.com, August 12, 2010. 32. Clay Chandler, “China Deluxe: Armani, Mercedes, Dior, Cartier— Luxury Brands Are Rushing into China’s Red-Hot Market,” Fortune, July 26, 2004, pp. 148–156; and Carol Matlack and Eugene Tang, “Luxury Clothier Zegna’s Macro Polo Moment,” Bloomberg BusinessWeekk, June 14, 2010, pp. 18–19. 33. Robert D. Buzzell and Bradley T. Gale, The PIMS Principles: Linking Strategy to Performance (New York: Free Press, 1987), chap. 8. 34. For a more comprehensive review of the evidence concerning the effects of diversification on firm performance, see Roger A. Kerin, Vijay Mahajan, and P. Rajan Varadarajan, Contemporary Perspectives on Strategic Market Planning (Boston: Allyn and Bacon, 1990), chap. 6. 35. For example, see Ravi S. Achrol and Philip Kotler, “Marketing in the Network Economy,” Journal of Marketing 63 (Special Issue 1999), pp. 146–63. 36. Robert Jacobson argues that market share and profitability are joint outcomes from successful strategies and, further, that management skills likely have the greatest impact on profitability. See “Distinguishing among Competing Theories of the Market Share Effect,” Journal of Marketing 52 (October 1988), pp. 68–80. 37. Yoram Wind, Vijay Mahajan, and Donald J. Swire, “An Empirical Comparison of Standardized Portfolio Models,” Journal of Marketing 47 (Spring 1983), pp. 89–99. 38. For a more detailed discussion of the uses and limitations of multifactor portfolio models, see Kerin, Mahajan, and Varadarajan, Contemporary Perspectives on Strategic Market Planning, chap. 3. 39. The discounted cash flow model is the approach focused on in this chapter. It is detailed in Alfred Rappaport, Creating Shareholder Value: A New Standard for Business Performance (New York: Free Press, 1986). 40. For a detailed discussion of the shortcomings of accounting data for determining the value created by a strategy, see Rappaport, Creating Shareholder Value, chap. 2. 41. For a more detailed discussion of EVA and some practical examples, see Shawn Tully, “The Real Key to Creating Wealth,” Fortune, September 20, 1993, pp. 38–50; and Terrence P. Pare, “The New Champ of Wealth Creation,” Fortune, September 18, 1995, pp. 131–32. 42. A more in-depth discussion of the forecasts and other procedures used in value-based planning can be found in Rappaport, Creating Shareholder Value, or Kerin, Mahajan, and Varadarajan, Contemporary Perspectives on Strategic Market Planning, chap. 9. 43. The limitations of value-based planning are discussed in more detail in George S. Day and Liam Fahey, “Putting Strategy into Shareholder Value Analysis,” Harvard Business Review, March–April, 1990, pp. 156–62. 44. Roland T. Rust, Katherine N. Lemon, and Valarie Zeithaml, “Return on Marketing: Using Customer Equity to Focus Marketing Strategy,” Journal of Marketing 68 (January 2004), pp. 109–27. Also see Verena Vogel, Heiner Evanschitzky, and B. Ramaseshan, “Customer Enquity Drivers and Future Sales,” Journal of Marketing 72 (November 2008), pp. 98–108; and Robert W. Palmatier, “Interfirm Relational Drivers of Customer Value,” Journal of Marketing 72 (July 2008), pp. 76–89. 45. Wally Olins, Corporate Identity (Cambridge, MA: Harvard Business School Press, 1993). 46. David A. Aaker, Strategic Market Management, 5th ed. (New York: Wiley, 1998), chap. 8. 47. Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (Reading, MA: Addison-Wesley, 1995). 48. For example, see Michael E. Porter, Competitive Advantage (New York: Free Press, 1985); and Robert E. Miles and Charles C. Snow, Organizational Strategy, Structure, and Process (New York: McGraw-Hill, 1978). The American Marketing Association’s Code of Ethics Code of Ethics 4. Appropriate internal methods exist for equitable adjustment and/or redress of grievances concerning purchases. Members of the American Marketing Association (AMA) are committed to ethical professional conduct. They have joined together in subscribing to this Code of Ethics embracing the following topics: It is understood that the above would include, but is not limited to, the following responsibilities of the marketer. Responsibilities of the Marketer Marketers must accept responsibility for the consequences of their activities and make every effort to ensure that their decisions, recommendations, and actions function to identify, serve, and satisfy all relevant publics: customers, organizations, and society. Marketers’ professional conduct must be guided by: 1. The basic rule of professional ethics: not knowingly to do harm. In the area of product development and management: ● Disclosure of all substantial risks associated with product or service usage. ● Identification of any product component substitution that might materially change the product or impact on the buyer’s purchase decision. ● Identification of extra-cost added features. In the area of promotions: ● Avoidance of false and misleading advertising. 2. The adherence to all applicable laws and regulations. ● 3. The accurate representation of their education, training, and experience. Rejection of high-pressure manipulations or misleading sales tactics. ● Avoidance of sales promotions that use deception or manipulation. 4. The active support, practice, and promotion of this Code of Ethics. In the area of distribution: Honesty and Fairness ● Marketers shall uphold and advance the integrity, honor, and dignity of the marketing profession by: Not manipulating the availability of a product for purpose of exploitation. ● Not using coercion in the marketing channel. ● Not exerting undue influence over the reseller’s choice to handle a product. 1. Being honest in serving consumers, clients, employees, suppliers, distributors, and the public. 2. Not knowingly participating in a conflict of interest without prior notice to all parties involved. 3. Establishing equitable fee schedules including the payment or receipt of usual, customary, and/or legal compensation for marketing exchanges. Rights and Duties of Parties in the Marketing Exchange Process Participants in the marketing exchange process should be able to expect that: 1. Products and services offered are safe and fit for their intended uses. 2. Communications about offered products and services are not deceptive. 3. All parties intend to discharge their obligations, financial and otherwise, in good faith. 64 In the area of pricing: ● Not engaging in price-fixing. ● Not practicing predatory pricing. ● Disclosing the full price associated with any purchase. In the area of marketing research: ● Prohibiting selling or fund-raising under the guise of conducting research. ● Maintaining research integrity by avoiding misrepresentation and omission of pertinent research data. ● Treating outside clients and suppliers fairly. Organizational Relationships Marketers should be aware of how their behavior may influence or impact on the behavior of others in organizational relationships. They should not demand, encourage, or apply Chapter Two The Marketing Implications of Corporate and Business Strategies coercion to obtain unethical behavior in their relationships with others, such as employees, suppliers, or customers. 1. Apply confidentiality and anonymity in professional relationships with regard to privileged information. 2. Meet their obligations and responsibilities in contracts and mutual agreements in a timely manner. 3. Avoid taking the work of others, in whole, or in part, and representing this work as their own or directly benefiting 65 from it without compensation or consent of the originator or owner. 4. Avoid manipulation to take advantage of situations to maximize personal welfare in a way that unfairly deprives or damages the organization or others. Any AMA members found to be in violation of any provision of this Code of Ethics may have his or her Association membership suspended or revoked. This page intentionally left blank Section Two Market Opportunity Analysis Ch ap t e r 3 Understanding Market Opportunities Ch ap t e r 4 Understanding Consumer Buying Behavior Ch ap t e r 5 Understanding Organizational Markets and Buying Behavior C h apter 6 Measuring Market Opportunities: Forecasting and Market Knowledge C h apter 7 Targeting Attractive Market Segments C h apter 8 Differentiation and Brand Positioning 67 C HAPTER T HREE Understanding Market Opportunities The Cellular Telephone Business: Increasing Competition in a Growing Market1 F ROM LONDON TO TOKYO to Nairobi to Chicago, cell phones have become a “can’t do without it” tool of time-pressed businesspeople, hip teenagers, rural farmers, fishermen in Africa, and just about anyone else who wants to stay in touch. The market for mobile telephone service is growing rapidly. In 1983, when the first cellular phone system began operations, it was projected that by 2000, fewer than 1 million people would subscribe. As a result of dramatic growth among both business and household users, however, by 2005, the number of cell phone users had reached more than 2 billion worldwide! By 2007, there were more cell phone subscriptions than people in the world’s developed economies and by 2011, three-quarters of the world’s 5 billion people had cell phone subscriptions. The continuing growth in demand for mobile voice and data services generates numerous opportunities in the cell phone manufacturing and cell phone service industries, among others. Prospective entrants and current players considering additional investments should consider, however, just how attractive these markets and industries really are. The Mobile Telephony Market By all accounts, the market for mobile telephony has been an attractive one. New features such as color 68 screens, built-in cameras, and web browsers have attracted new users and encouraged existing users to upgrade their phones. As a result, the penetration of the newest third and fourth generation (3G and 4G) smartphones has risen sharply, especially in Asia. Users of 3G services represented 30 percent of all mobile phone users in Japan and a whopping 93 percent in Korea in 2005, compared to only 5 percent in Italy and the United Kingdom. In the developing world, with plummeting prices that have made basic cell phones affordable to almost everyone, cell phone penetration passed the 50 percent mark in 2006. Not to be outdone, in the business world, a growing legion of businesspeople of all kinds began using their new smartphones to stay in touch and online, no matter where they went. Given torrid growth on all fronts, most observers agree that the market for cell phone service and cell phones themselves has been and continues to be attractive indeed. But how attractive are the industries that serve this market? Cell Phone Manufacturing Rapid-fire technological advances from Nokia, BlackBerry, and many others brought countless new features to the market, including software to access the internet the ability to send and receive photographic images, and various location-based services that take advantage of global positioning technology. Nokia rocketed to world leadership in cell phones, leaving early and longtime leader Motorola in the dust. Nokia saw its global market share grow to 40 percent by 2007, based on its continuing strength in developed markets and its growing dominance of the market for low-priced handsets in the developing world. As industry analyst Neal Mawston noted, “Nokia has a world-class product portfolio and very few rivals can compete with that. They are now enjoying huge economies of scale that success conveys. Anybody who tries to get in a handset war with them is going to get hurt.” But in the turbulent mayhem that has characterized the global cell phone industry since its inception, Nokia’s success did not last. The coming of Apple’s touch-screen iPhone in 2007 took traditional competitors like Nokia and Motorola as well as other smartphone makers like BlackBerry’s Research in Motion by storm. In 2010, amid a slowdown in overall unit sales globally, Apple’s 30 percent share of global operating profits among cell phone makers nearly matched Nokia’s 40 percent share. Nokia’s stock dropped to €8, off by two-thirds from €25 in 2008, as its worldwide cell phone market share fell to 25 percent. Motorola and Sony Ericsson fell into loss-making territory. In June 2011, Nokia warned analysts that it would earn no profit at all in that quarter and its stock slipped below €5. Nokia’s phones were simply no longer competitive with the likes of Apple, nor with other smartphones running Google’s Android operating system. And with low-cost Chinese cell phone makers growing in clout in the low-priced markets, the chances for a quick turnaround for Nokia looked slim. This recent history in the hotly competitive cell phone manufacturing industry suggests that a rapidly growing market does not necessarily provide a smooth path to success. Growing markets are one thing, but turbulent industries serving those markets are quite another. Cell Phone Service Providers In 2007, European leader Vodaphone bought into India’s rapidly growing market by acquiring 67 percent of India’s third-largest operator, Hutchinson Essar. CEO Arun Sarin was delighted. “We are going to learn as much from India as we are going to take from India,” he crowed. “Prices there are two-and-ahalf cents a minute, and they make a 35 percent margin. How do you do that?” Just two and a half years later, the price of a cell phone minute in India had collapsed to 1 U.S. cent per minute. Sarin moved on and in came cost-cutter Vittorio Collao as Vodaphone’s new CEO. Despite (or as a result of) the fact that India’s cell phone operators installed in one year as much network capacity as Germany had built in the last 15 years, the pressure on prices and profits was relentless. Newcomer Uninor, a unit of Norway’s Telenor, introduced a plan that offered calls for as little as 0.20 rupees per minute, about half of 1 U.S. cent. Network Equipment Down, Too Another industry that had raced to keep pace with the growing cell phone market—makers of network equipment like switches, towers, and more—also hit the skids. Longtime stalwarts Alcatel-Lucent and Nokia Siemens Networks were both running losses in 2010, in the face of waning demand for 3G technology and stiff competition from Ericsson and China’s Huawei. They were hoping that orders for new 4G equipment would bail them out. Thus, while the rapidly growing market for mobile telephone service has been an attractive one, the industries that serve this market face significant challenges. 69 70 Section Two Market Opportunity Analysis Marketing Challenges Addressed in Chapter 3 As the examples of the cellular phone manufacturing and service industries show, serving a growing market hardly guarantees smooth sailing. Equally or more important are industry conditions and the degree to which specific players in the industry can, like Nokia or Apple, establish and sustain competitive advantage at least for a while. Thus, as entrepreneurs and marketing decision makers ponder an opportunity to enter or attempt to increase their share of a growing market like that for mobile phones, they also must carefully examine a host of other issues, including the conditions that are currently prevailing in the industry in which they would compete and the likelihood that favorable conditions will prevail in the future. Similarly, such decisions require a thorough examination of trends that are influencing market demand and are likely to do so in the future, whether favorably or otherwise. Thus, in this chapter, we address the 4 Cs that were identified in Chapter 1 as the analytical foundation of the marketing management process. We provide a framework to help managers, entrepreneurs, and investors comprehensively assess Strategic Issue the attractiveness of opportunities they encounter, in terms of the comHow attractive is the market we serve or pany and its people, the environmental context in which it operates, the propose to serve? How attractive is the competition it faces, and the wants and needs of the customer it seeks industry in which we would compete? Are the right resources—in terms of people to serve. We do so by addressing the three questions crucial to the and their capabilities and connections—in assessment of any market opportunity: How attractive is the market place to effectively pursue the opportunity we serve or propose to serve? How attractive is the industry in which at hand? we would compete? Are the right human resources—in terms of people and their capabilities and connections—in place to effectively pursue the opportunity at hand? We frame our discussion of opportunity assessment using the seven domains shown in Exhibit 3.1. As the seven domains framework suggests and the cellular telephony story shows, in today’s rapidly changing and hotly competitive world it’s not enough to have a large and growing market. The attractiveness of the industry and the company’s or entrepreneurial team’s resources are equally important. Before digging more deeply into the framework, however, we clarify the difference between two oft-confused terms: market and industry. Markets and Industries: What’s the Difference? We define a market as being composed of individuals or organizations who are interested in and willing to buy a good or service to obtain benefits that will satisfy a particular want or need and have the resources to engage in such a transaction. One such market consists of college students who get hungry in the middle of the afternoon and have a few minutes and enough spare change to buy a snack between classes. An industry is a group of firms that offer a product or class of products that are similar and are close substitutes for one another. What industries serve the student snack market? At the producer level, there are the salty-snack industry (makers of potato and corn chips and similar products); the candy industry; the fresh produce industry (growers of apples, oranges, bananas, and other easy-to-eat fruits); and others too numerous to mention. Distribution channels for these products include the supermarket industry, food service industry, coin-operated vending industry, and so on. Clearly, these industries differ and offer varying bundles of benefits to hungry students. Chapter Three 71 Understanding Market Opportunities Exhibit 3.1 The Seven Domains of Attractive Opportunities Market Domains Market Attractiveness Industry Domains Industry Attractiveness Macro Level Mission, Aspirations, Propensity for Risk Ability to Execute on CSFs Team Domains Micro Level Connectedness up, down, and across Value Chain Target Segment Benefits and Attractiveness Sustainable Advantage Source: John Mullins, The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan (London: FT/Prentice Hall, 2010). Strategic Issue Thus, markets are comprised of buyers; industries are comprised of sellers. The distinction, often overlooked, is an important one because both markets and industries can vary substantially in their attractiveness, as we’ve seen in the cellular arena. Further, sellers who look only to others in their own industry as competitors are likely to overlook other very real rivals and risk having their markets undercut by innovators from other industries. Should Kodak have been more concerned with Fuji, Agfa, and other longtime players in the film and photoprocessing industries, or should it have worried about Hewlett-Packard, Sony, and various online players whose digital technologies are making photography’s century-old silver halide chemistry go the way of the buggy whip? With unit sales of digital cameras now far outstripping sales of cameras that use film, Kodak’s competitive landscape has certainly changed.2 Markets are comprised of buyers; industries are comprised of sellers. The distinction is often overlooked. Assessing Market and Industry Attractiveness The seven domains framework, among other things, enables marketers to answer two important questions in an evidence-based manner: How attractive is the market? How attractive is the industry? For a comparison of this approach to an older way of assessing the 4 Cs, see Exhibit 3.2. 72 Section Two Exhibit 3.2 Market Opportunity Analysis Why Not a SWOT? F or many years, strategy textbooks have taught students to conduct a SWOT analysis that enumerates the strengths, weaknesses, opportunities, and threats faced by the firm in a particular market and industry setting. Doing so is useful, of course, but it fails to organize the output into answers to important strategic questions, such as those of market or industry attractiveness or the ability of the firm or its offering to achieve sustainable competitive advantage. The seven domains framework organizes similar information as a SWOT, and more, and does so in a manner that addresses such questions explicitly. As Exhibit 3.1 shows, markets and industries must be assessed at both the macro and micro levels of analysis. But what do these levels really mean? On both the market and industry sides, the macro-level analyses are based on environmental conditions that affect the market or industry, respectively, as a whole, without regard to a particular company’s strategy, target market, or its role in its industry. These external and largely uncontrollable forces or conditions must be reckoned with in assessing and shaping any opportunity and, indeed, in developing any coherent marketing strategy. At the micro level, the analyses look not at the market or the industry overall but at individuals in that market or industry, that is, specific target customers and companies themselves, respectively. We develop and apply the relevant analytical frameworks for the macro-level analyses first; then we address the micro-level analyses. Macro Trend Analysis: A Framework for Assessing Market Attractiveness, Macro Level Assessing market attractiveness requires that important macroenvironmental trends— or macro trends for short—be noticed and understood. The macroenvironment can be divided into six major components: demographic, sociocultural, economic, regulatory, technological, and natural environments. The key question marketing managers and strategists must ask in each of these arenas is what trends are out there that are influencing demand in the market of interest, whether favorably or unfavorably. The Demographic Environment As the saying goes, demography is destiny. All kinds of things—from sales of music CDs to the state of public finances to society’s costs of health care to the financing of pensions—are governed to a significant extent by demographic Strategic Issue changes. While the number of specific demographic trends that might Demography is destiny. All kinds of things influence one marketer or another is without limit, there are currently are governed to a significant extent by five major global demographic trends that are likely to influence the demographic changes. fortunes of many companies, for better or worse: the aging of the world’s population, the effect of the AIDS plague on demography, a rapidly growing middle class in emerging a countries, increased levels of immigration, and the decline in married households in developed countries. Aging Exhibit 3.3 shows the projected increase in the portion of the population aged over 60 in several of the world’s most developed countries. The chart shows that in Italy, Chapter Three 73 Understanding Market Opportunities Exhibit 3.3 Aging Populations: % of the Population Aged over 60 U.S. Australia 2000 2040* Canada UK France Germany Sweden Japan Italy 0 10 20 30 40 50 *Projection Source: Norma Cohen and Clive Cookson, “The Planet Is Ever Greyer: But as Longevity Rises Faster than Forecast, the Elderly Are Also Becoming Healthier,” Financial Times, January 19, 2004, p. 15. for example, about half the population will be over 60 by the year 2040, according to current projections. Providers of health care, vacation homes, life insurance, and other goods and services have taken note of the graying of the world’s population and are taking steps to develop marketing strategies to serve this fast-growing market. Doing so, however, isn’t always easy. Many people do not wish to be pigeonholed as elderly, and some who are getting older may not be very attracted to goods or services that remind them of their age. One marketer dealing with this challenge is Ferrari, whose average customer is nearing 50 and getting older with each passing year. “The profile of our customers means we have to pay attention to practicality and functionality without compromising the sportiness,” says Giuseppe Bonollo, Ferrari’s strategic marketing director. “The way the doors open on the Enzo, for example, allows part of the roof and part of the door undermolding to come away as well, making it easier to enter the car.”3 The implications of the aging trend are not as clear-cut as they might appear. Surprisingly, perhaps, some 25 percent of the early buyers of Apple’s hot new iPhones—a “cool,” cutting-edge product if there ever was one—were people over 50.4 Further, there is evidence that today’s elderly generation is both healthier and fitter than its predecessors. Thus, fears that health and other facilities will be swamped by hordes of ailing pensioners may be misplaced. “New data demolish such concerns,” reports Raymond Tillis, professor of geriatric medicine at Manchester University in the United Kingdom. “There is a lot of evidence that disability among old people is declining rapidly.”5 AIDS The death toll due to HIV/AIDS in Africa, the hardest hit region, was some 8 million from 1995 to 2000,6 and the pandemic continues. In 2005, an estimated 24 million adults and children died from AIDS in sub-Saharan Africa.7 Across Africa, grandparents are raising an entire generation of children, since the parents have died. Pharmaceutical companies and world health organizations are struggling to develop strategies to deal with the AIDS challenge, one that presents a huge and rapidly growing market, but one in which there is little ability to pay for the advanced drug therapies that offer hope to AIDS victims. But progress is being made, and the pandemic may soon be contained. 74 Section Two Market Opportunity Analysis Growing Middle Class In the emerging economies of Asia and Latin America, the pace of economic development in recent years has led to a rapid increase in the number of consumers deemed by demographers to be middle class. Though the definition of what constitutes middle class varies (for example, not living from hand to mouth, job to job, or season to season—as the poor do—is one definition), there is no dispute that their numbers have risen dramatically, to more than 50 percent of the world’s total population by 2006.8 Asia is now home to 60 percent of the world’s middle class, compared to just 20 percent in 1980.9 We take a closer look at the implications of this trend in Chapter 6. For marketers, though, it is clear that no longer can they view emerging economies as consisting of a few rich people, and huddling masses of the poor. Even in the crowded, impoverished favelas of São Paolo, Brazil, and in rural villages in India, where there is little running water or electricity, satellite dishes are popping up on tin roofs. Increased Immigration Not surprisingly, the increasing imbalance between the economic prospects for those living in more developed versus less developed countries is leading to increased levels of immigration. With the 2004 enlargement of the European Union from 15 to 25 countries, fears have grown that some countries in the “old EU” will be swamped with immigrants from the accession countries in Eastern Europe, where per capita GDP is only 46 percent of the EU 15 average.10 In one sense, this wave of immigration is nothing new, for melting pot countries such as the United States and the United Kingdom have for centuries welcomed immigrants to their shores (see Exhibit 3.4). In the United States, many years of immigration from Mexico and Latin America have made the Sun Belt a bilingual region, and many now view Miami as the crossroads of Latin America. The implications for marketers seeking to gain market share among Hispanic Americans are obvious. Exhibit 3.4 MELTING POT BRITAIN: PAST, PRESENT, AND FUTURE 1600s: About 50,000 French Protestants, known as Huguenots, admitted after religious persecution in France. The Huguenots give the word “refugee” to the English language. 1840s: An estimated 1m Irish flee famine and flock to Britain’s new industrial centres. 1890s: About 100,000 Jews arrive in Britain from central and eastern Europe. 1930s: 56,000 Jews fleeing from Nazi persecution join the earlier group. 1955–62: 472,000 Commonwealth citizens, primarily from the Caribbean and southern Asia move to Britain. Many were actively recruited abroad by big employers including the London Underground. 1970s: 30,000 Asians forced out of Uganda by General Idi Amin allowed to settle in UK by Edward Heath. Turnstile Britain: how migration is increasing 500 000s 400 The line, and right-hand scale, show the net number of people coming into the UK 250 200 300 150 200 100 100 50 INFLOW 0 0 OUTFLOW 100 –50 200 300 400 –100 The bars, and the left-hand scale, show the total number both entering and leaving –200 500 1971 76 81 86 91 94 97 2000 01 02 Source: Chart: “Melting Pot Britain: Past, Present, and Future,” The Sunday Times (London), November 16, 2003, Focus, p. 16. Original source: National Statistics. Chapter Three Understanding Market Opportunities 75 Declining Marriage Rates A generation ago, a single, 30-something professional woman out with her single friends for a night on the town would have been considered an aberration. No more. Marriage in much of the Western world is on the wane. In the United States, married couples, 80 percent of households in the 1950s, now account for just 50.7 percent.11 Young couples are delaying marriage, cohabitating in greater numbers, forming same-sex partnerships, and are remarrying less after a wedding leads to divorce. Later in life, they are living longer, which is increasing the number of widows. Implications for marketers? For one, consider the implications of marrying in one’s 30s, well into one’s career, rather than in one’s 20s. It’s less likely that the parents of the bride will handle the wedding arrangements—not to mention the hefty bills that must be paid—so couples are planning and managing their weddings themselves. In the United Kingdom a new magazine, Stag & Groom, hit the market in 2004 to take the fear out of the wedding process for the clueless grooms who must now play a more important role. But would anyone really buy a wedding magazine for men? Despite the hilarious publicity its launch generated, Stag & Groom suffered an early demise. Macro trends alone don’t guarantee the success of a new venture. The Sociocultural Environment Sociocultural trends are those that have to do with the values, attitudes, and behavior of individuals in a given society. Cultures tend to evolve slowly, however, so some sociocultural trends can take a generation or more to have significant impact, Strategic Issue as people tend to carry for a lifetime the values with which they grow Sociocultural trends can take a generation up. Within this broadly stable pattern, however, sociocultural trends can or more to have significant impact. Within and do exert powerful effects on markets for a great variety of goods and this broadly stable pattern, however, sociocultural trends can and do exert services. Two trends of particular relevance today are greater interest in powerful effects. ethical behavior by businesses and trends toward fitness and nutrition. Business Ethics For years, the world’s leading coffee marketers, including Kraft and Nestlé, resisted calls to pay premium prices for coffee grown in a sustainable manner, on farms that pay their workers a living wage and that respect the environment. In 2003, Kraft, running neck and neck with Nestlé for the number one spot in market share globally, reached agreement with the Rainforest Alliance, a nonprofit organization that seeks to improve the working, social, and environmental conditions in agriculture in the third world. The agreement called for Kraft to buy £5 million of Rainforest Alliance–certified coffee from Brazil, Colombia, Mexico, and Central America in 2004, paying a 20 percent premium to the farmers. Why did Kraft take this step? “This is not about philanthropy,” says Kraft’s Annemieke Wijn. “This is about incorporating sustainable coffee into our mainstream brands as a way to have a more efficient and competitive way of doing business.”12 In short, Kraft made the jump because consumers demanded it. Fitness and Nutrition Running. Working out. Fitness clubs. The South Beach and Atkins diets. These days, natural and organic foods are in (see Exhibit 3.5). Sugar and cholesterol—at least the bad LDL cholesterol—are out.13 The implications of these sociocultural trends are playing out in grocery store produce departments, where entire sections are now devoted to organic produce; in the farming communities of North America and Europe, where fields formerly farmed with fertilizers are being transformed into organic ones; and on restaurant menus, where selections are being revamped to make them appeal to customers who have adopted new eating habits. The 20-ounce T-bone steak is a thing of the past, at least in some circles. 76 Section Two Exhibit 3.5 T Market Opportunity Analysis Health Trends Give Kraft a Stomach Ache racey Daugherty, a 33-year-old mother from Pittsburgh, grew up eating Kraft macaroni and cheese. Today, though, Kraft’s marketing strategists have queasy stomachs because Daugherty and others won’t feed it to their own children. “Kraft’s products definitely have a childhood nostalgia,” she says, “so it’s hard to completely give up on them, but they’re not on my shopping list.” When she’s pressed for time, Daugherty is more likely to pull an organic frozen dinner out of the freezer than boil up a batch of Kraft Mac and Cheese. On most nights, what’s on her family’s dinner table includes fresh produce and chicken or fish from Whole Foods, the fast-growing American grocery chain that built its reputation on natural and organic foods. To cope with Americans’ growing preference for fresh and natural foods rather than prepackaged and processed ones, the big food companies are having to rethink their businesses, find new suppliers, and augment their product lines with new, healthier versions of their longstanding best-sellers. Kraft, which owns brands such as Oscar Mayer (hot dogs, with their high animal fat content, are not exactly known as a health food), Jell-O gelatin (mostly sugar, a no-no on today’s low carbohydrate diets), and Nabisco (whose cookies and crackers are laden with both carbs and trans-fats, the latest addition to health experts’ “avoid” lists), has struggled to meet their double-digit growth targets, as consumers increasingly shift their food dollars to healthier fare. As Wharton Marketing Professor Patricia Williams points out, the question for the food giants is: “To what extent is the Atkins diet and the whole low-carb thing a fad, and to what extent is it a genuine shift in consumption patterns that will remain with us for a significant period of time?” It’s a question that Kraft and others in the food industry cannot afford to take lightly. Sources: Sarah Ellison, “Finicky Shoppers Pose Problems for Kraft Foods,” The Wall Street Journal Europe, May 24, 2004, p. A7; and Knowledge@Wharton, “Low-Carb, High-Carb: What’s a Baker/Pasta Maker to Do?” http://knowledge.wharton.upenn.edu/ index.cfm?fa=printArticle&ID=994. For more on Kraft, see www .kraftfoodscompany.com/welcome.aspx. These trends are driving more than just the food business, however. Attendance at health and fitness clubs is booming. Sales of home exercise equipment are up, along with advice on how to purchase and use it to best advantage.14 The Economic Environment Among the most far-reaching of the six macro trend components is the economic environment. When people’s incomes rise or fall, when interest rates rise or fall, when the fiscal policy of governments results in increased or decreased government spending, entire sectors of economies are influenced deeply, and sometimes suddenly. As we write, with some Western economies struggling to bounce back from recession, the near-term future of the developed economies appears to lie in the factories of exporters or in the purses and wallets of their—or China’s or India’s—shoppers. The implications of trends like these in consumer spending can be dramatic for marketers, to be sure, but they can be far subtler than one might imagine. Take robust economic health, for example. It’s good for everyone, right? Not if you’re the Strategic Issue operator of a chain of check-cashing outlets or pawn shops, which Take robust economic health, for example. thrive when times are tough and people need to turn unwanted assets It’s good for everyone, right? into cash quickly. Or what about discount airlines? Shouldn’t they be thriving in the recently troubled economic environment? Ryanair, Europe’s largest airline by passenger count, announced that it would cut its capacity—grounding 80 of its 300 jets—for its winter season beginning in October 2011. “It’s the first time ever that we’ll go negative on traffic,” CEO Michael O’Leary said in an interview. “We take Chapter Three 77 Understanding Market Opportunities delivery of 50 aircraft this winter so instead of running around trying to open up new bases and routes in November and December we’ll sit them on the ground. There will still be strong growth next summer but trying to open up new routes with high oil prices is stupid in the winter”15 The hundred-dollar price per barrel of oil has forced even the discounters like Ryanair and Southwest to raise prices, and cash-strapped travelers are finding other ways to get around (see Exhibit 3.6). Economic trends often work, to pronounced effect, in concert with other macro trends. For example, the move of the baby-boomer generation into middle age in the 1990s, a demographic trend, combined with a strong global economy and low interest rates, both economic trends, led to booming demand for condominiums and vacation homes in resort areas such as the Rocky Mountains of Colorado and the south of Spain and Portugal. But prices in many resort areas have plummeted in the downturn. The Regulatory Environment In every country and across some countries—those that are members of the EU, for example— there is a regulatory environment within which local and multinational firms operate. As with the other macro trend components, political and legal trends, especially those that result in regulation or deregulation, can have powerful impact on market attractiveness. In September 2003, voters in Sweden resoundingly rejected the euro, preferring to maintain their own Swedish currency and thereby retain independent domestic control of their country’s fiscal and monetary policy and remain freer than those in the euro-zone of what some see as stifling overregulation from Brussels.16 For marketers involved in Swedish import or export businesses, the implications may prove significant, as uncertainties inherent in predicting foreign exchange rates make trade and investment decisions more tenuous. The power of deregulation to influence market attractiveness is now well-known. Government, business, and the general public throughout much of the world have become increasingly aware that overregulation protects inefficiencies, restricts entry by new competitors, and creates inflationary pressures. In the United States, airlines, trucking, railroads, telecommunications, and banking have been deregulated. Markets also are being liberated in western and eastern Europe, Asia, and many developing countries. Trade barriers are crumbling due to political unrest and technological innovation. Deregulation has typically changed the structure of the affected industries as well as lowered prices, creating rapid growth in some markets as a result. For example, the period following deregulation of the U.S. airline industry (1978–1985) gave rise to a new airline category—the budget airline. The rise of Southwest and other budget airlines led to lower Exhibit 3.6 L No Pat-Downs on Megabus ong distance discount bus operators like Megabus and BoltBus, with their easy internet booking, free WiFi, and power outlets on board, are winning customers like Chicago’s Bobbie Joe Crail. “The bus can be inconvenient,” says Crail, “but it’s so much cheaper to string bus trips together than to fly.” Professor of transportation Joseph Schwieterman at DePaul University is not surprised. “It’s not just high fuel prices—it’s the hassle factor at the airports that has left many fliers disenchanted.” On Megabus, passengers don’t have to take their shoes off unless they want to, and there’s no security patdown either! Source: Brian Burnsed, “Suddenly It’s Cool to Take the Bus,” BusinessWeek European Edition, September 29, 2008, p 64. For more on Megabus or Boltbus, see www.megabus.com or www .boltbus.com/default.aspx. 78 Section Two Market Opportunity Analysis fares across all routes and forced the major carriers to streamline operations and phase out underperforming routes. A similar story has followed in the European market, where discount airlines Ryanair, easyJet, and others have made vacation destinations places to fly to rather than drive to. As regulatory practices wax and wane, the attractiveness of markets often follows suit. For example, the deregulation of telecommunications in Europe, following earlier deregulation in the United States, opened markets to firms seeking to offer new services and take market share from the established monopolies. The rise of internet retailing and internet telephony has policy-makers arguing over the degree to which these internet activities should be subject to state and federal tax in the United States. The outcome of these arguments may have considerable effect on consumers’ interest in buying and calling on the web. The Technological Environment In the past three decades, an amazing number of new technologies has created new markets for such products as video recorders, compact disks, ever-more-powerful and eversmaller computers, smartphones, new lightweight materials, and genetically engineered drugs. Technological progress is unlikely to abate. Technology can also change how businesses operate (banks, airlines, retail stores, and marketing research firms), how goods and services as well as ideas are exchanged, how crops are grown, and how individuals learn and earn as well as interact with one another. Consumers today enjoy check-free banking, the death of the invoice, and ticketless air travel. Many of these innovations are the result not only of changes in computing systems, but also of reduced costs in communicating (voice or data). For example, the cost of processing an additional telephone call is so small it might as well be free. Distance is no longer a factor—it costs about the same to make a trans-Atlantic call as one to your next-door neighbor. If you place the call on Skype, it can cost nothing at all! At the dawn of the new millennium, developments in telecommunications and computing have led to the rapid convergence of the telecommunications, computing, and entertainment industries. Music-hungry consumers have been downloading music from legal and illegal sites thereby hammering the music industry (see Exhibit 3.7) and have forced the industry to change the way it distributes music. Apple’s iPod led the way with an Exhibit 3.7 F The Music Industry Sings the Blues or seven years running, sales of compact discs have fallen due to the seismic shift in the way consumers obtain their music. Though CDs still account for most of all music sold, the sharp decline in their sales as a consequence of digital downloads has dramatically outweighed increases in CD revenues. Even the hits aren’t what they used to be. Norah Jones’s “Not Too Late” sold 1.1 million copies in its first six weeks in early 2007, compared to twice that figure for her “Feels Like Home” CD over its same postrelease period in 2004. Music retailers are also feeling the pain, with more than 200 music stores closing in the United States in 2006 alone. Tower Records closed its 89 stores following a bankruptcy filing, and Musicland Holding Corp., owner of the Sam Goody chain, has shuttered more than half of its 900 locations in recent years. Pali Research analyst Richard Greenfield is not optimistic that industry conditions will get better. “Even when you have a good release like Norah Jones,” he says, “maybe the environment is so bad you can’t turn it around.” Source: Ethan Smith, “For the Music World, the Tune Gets Sadder,” The Wall Street Journal European Edition, March 22, 2007, p. 16. Chapter Three 79 Understanding Market Opportunities estimated 83 percent share of legal music downloads in the fourth quarter of 2005,17 and its music revenues have continued to grow rapidly. Smartphone users check their e-mail, sports scores, breaking news, stock quotes, and more. Savvy marketers and entrepreneurs who follow technological Strategic Issue trends are able to foresee new and previously unheard of applications Savvy marketers and entrepreneurs who such as these and thereby place themselves and their firms at the forefollow technological trends are able to foresee new and previously unheard front of the innovation curve, sometimes earning entrepreneurial forof applications, sometimes earning tunes in the process. For others, though, like the music industry, the entrepreneurial fortunes in the process. challenges brought on by these winds of change can be daunting. In addition to creating attractive new markets, technological developments are having a profound impact on all aspects of marketing practice, including marketing communication (ads on the web or via e-mail), distribution (books and other consumer and industrial goods bought and sold via the web), packaging (use of new materials), and marketing research (monitoring supermarket purchases with scanners or internet activity with digital “cookies”). We explore the most important of these changes in the ensuing chapters in this book. The Natural Environment Everything ultimately depends on the natural environment, including marketing. Changes in the earth’s resources and climate can have significant and far-reaching effects. The world’s supply of oil is finite, for example, leading automakers to develop new hot-selling hybrid gas-electric vehicles such as the Toyota Prius, which can go more than 50 miles on a gallon of gas. The skyrocketing price of oil has caused demand for gas-guzzling sport utility vehicles to plummet.18 In general, discussion of the problems in the natural environment has stressed the threats and penalties facing business throughout the world. But business can do a number of things to turn problems into opportunities. One is to invest in research to find ways to save energy in heating and lighting. Another is to find new energy sources such as wind farms and hydroelectric projects. In virtually every corner of the clean-tech and green-tech arenas, entrepreneurs and marketers are looking for ways to save the planet and deliver shareholder returns at the same time. There is a growing recognition that creating a more sustainable natural environment is an important job, one to which newly educated marketers can contribute (see Exhibit 3.8). Exhibit 3.8 F Clean-Tech, Green-Tech Sustainability and You uel-efficient cars are once again in favor, Tesla’s electric cars are cool (www.teslamotors.com) and solar energy is hot. Clean-tech and green-tech investment funds have sprung up in Silicon Valley, London, Mumbai, and seemingly everywhere else to invest in companies that hope to create a more sustainable future. Green-tech outfits like Spain’s T-Solar (www .tsolar.com), U.S. green energy producer Ameresco (www.amerescosolar.com); and the renewable unit of the Italian utility Enel (www.enel.com) have recently raised capital in hot IPOs. Business school students, too, are getting in on the sustainability game. Business plan competitions for socially and environmentally friendly ventures, like the Global Social Venture Competition (www .gsvc.org) held annually at the Haas School of Business at the University of California, Berkeley, and fed from a network of business schools around the world, now motivate students to think in triple bottom-line terms, rather than solely about profit. Social returns, environmental returns, and economic returns: Wouldn’t the world be a better place if we had more of all three? Sources: Mark Scott and Alex Morales, “A Gold Rush in Green Technology,” Bloomberg Businessweek European Edition, April 25, 2010, p. 24; the Global Social Venture Competition website at www .gsvc.com. 80 Section Two Market Opportunity Analysis Businesses have seen opportunities in developing thousands of green products (those that are environmentally friendly) such as phosphate-free detergents, tuna caught without netting dolphins, organic fertilizers, high-efficiency LED lighting, recycled paper, and clothes made from 100 percent organic cotton and colored with nontoxic dyes. DuPont, long synonymous with petrochemicals, is reinventing itself as an eco-conscious company. More than $5 billion of its $29 billion in revenue now comes from sustainable products, including a new corn-based fiber called Sorona, which can be used to make clothing, carpet, and other products.19 Trends in the natural environment are creating opportunities for companies like DuPont. On the other hand, if global warming continues, it may play havoc with markets for winter vacationers, snowmobiles, and other products and services whose demand depends on the reliable coming of Old Man Winter. Other natural trends, such as the depletion of natural resources and fresh groundwater, may significantly impact firms in many industries serving a vast array of markets. Tracking such trends and understanding their effects is an important task. Your Market Is Attractive: What about Your Industry? As we saw at the outset of this chapter, consumers and businesspeople have become hooked on cell phones, and the market for mobile communication has grown rapidly. By most measures, this is a large, growing, and attractive market. But are cell phone manufacturing and cellular services attractive industries? An industry’s attractiveness at a point in time can best be judged by analyzing the five major competitive forces, which we address in this section. Porter’s Five Competitive Forces20 Five competitive forces collectively determine an industry’s long-term attractiveness—rivalry among present competitors, threat of new entrants into the industry, the bargaining power of suppliers, the bargaining power of buyers, and the threat of substitute prodStrategic Issue ucts (see Exhibit 3.9). This mix of forces explains why some industries are Five competitive forces collectively consistently more profitable than others and provides further insights into determine an industry’s long-term attractiveness. which resources are required and which strategies should be adopted to be successful. A useful way to conduct a five forces analysis of an industry’s attractiveness is to construct a checklist based on Porter’s seminal work.21 The strength of the individual forces varies from industry to industry and, over time, within the same industry. In the fast-food industry, the key forces are rivalry among present competitors (for example, Wendy’s versus Burger King versus McDonald’s) and substitute products (neighborhood delis, salad bars, all-you-can-eat buffet restaurants, and frozen meals). The growing popularity of healthier fast-food alternatives has brought new entrants like Prêt A Manger in the United Kingdom and Chipotle and Panera in the United States, making rivalry even more fierce. Rivalry among Present Competitors Rivalry occurs among firms that produce products that are close substitutes for each other, especially when one competitor acts to improve its standing or protect its position. Thus, firms are mutually dependent: What one firm does affects others and vice versa. Ordinarily, profitability decreases as rivalry increases. Rivalry is greater under the following conditions: Chapter Three 81 Understanding Market Opportunities Exhibit 3.9 THE MAJOR FORCES THAT DETERMINE INDUSTRY ATTRACTIVENESS Threat of new entrants Bargaining power of suppliers Rivalry among existing competitors Bargaining power of buyers Threat of substitute products ● There is high investment intensity; that is, the amount of fixed and working capital required to produce a dollar of sales is large. High intensity requires firms to operate at or near capacity, thereby putting strong downward pressure on prices when demand slackens. Thus, high-investment–intensity businesses are, on average, much less profitable than those with a lower level of investment. More than 15 years ago, Bob Crandall, the then CEO of American Airlines, described the airline industry as being “intensely, vigorously, bitterly, savagely competitive.”22 The number of U.S. airlines going into bankruptcy over the past decade suggests that the industry’s challenges are even more difficult today. As the noted investor Warren Buffett observed, the entire airline industry has not made a dime for investors in its century of existence.23 ● There are many small firms in an industry or no dominant firms exist. The restaurant industry is a good example. ● There is little product differentiation—for example, gasoline, major appliances, TV sets, and passenger-car tires. ● It’s easy for customers to switch from one seller’s products to those of others (low switching cost for buyers). The greater the competitive rivalry in an industry, the less attractive it is to current players or would-be entrants. Consider cell phone service. The cellular service industry is capital intensive. Though there are several dominant firms whose products are differentiated through rapid technological change, consumers’ switching costs to change cell phone service providers or handsets are low. Thus, rivalry among service providers, as well as for cell phone manufacturers, is brutal (see Exhibit 3.10). Threat of New Entrants A second force affecting industry attractiveness is the threat of new entrants. New competitors add capacity to the industry and bring with them the need to gain market share, thereby making competition more intense. For Strategic Issue cellular telephone operators, license requirements and the huge cost of The greater the threat of new entrants, the obtaining bandwidth in government auctions make threat of entry into less will be an industry’s attractiveness. the cellular service industry relatively low. The greater the threat of new entrants, the less will be an industry’s attractiveness, so this is good news for cellular operators. Entry is more difficult under the following conditions: ● When strong economies of scale and learning effects are present, since it takes time to obtain the volume and learning required to yield a low relative cost per unit. If existing firms are vertically 82 Section Two Exhibit 3.10 Market Opportunity Analysis Shakeout in Cell Phones A brutal price war for 3G subscribers in Japan led to market leader NTT DoCoMo’s first-ever drop in annual revenue and operating profit in its year ended March 2005. Japanese cell phone carriers had introduced new fixed-price data plans that undercut earlier 3G offerings. With talking now more expensive than sending an e-mail or text message, some consumers changed their behavior. “Using the phone to talk seems like a waste because e-mailing and Web browsing are so much easier,” said Hiroki Wakabayashi, a 27-year-old computer engineer whose high-speed mobile service from DoCoMo cost him $100 or more each month, a sum he was happy to spend. In March 2006, Britain’s Vodafone threw in the towel, agreeing to sell its Japanese cell phone unit. Its exit after six years in Japan, following customer losses and falling profits, attests to the hotly competitive environment that it was unable to conquer. On the manufacturing side, average selling prices of cell phones have fallen sharply, reflecting the growing importance of emerging markets where simpler handsets are all that consumers can afford. Some 42 percent of market leader Nokia’s handsets in 2007 sold for less than €50, compared to 23 percent a year earlier. The story is no better at Motorola, Sony Ericsson, Samsung, or LG, where operating margins are being eroded. Attractive markets? Perhaps. Attractive industries? Think again. Sources: Ken Belson, “Advances in Phones No Panacea for Firms,” International Herald Tribune, June 6, 2005, p. 9; Martin Fackler, “Vodafone Bruised, Hangs Up on Japan,” International Herald Tribune, March 18–19, 2006, p. 1; The Lex Column, “Nokia Bucks the Trend,” Financial Times, January 26, 2007, p. 18. integrated, entry becomes even more expensive. Also, if the existing firms share their output with their related businesses, the problem of overcoming the cost disadvantage is made even more difficult. ● If the industry has strong capital requirements at the outset. ● When strong product differentiation exists among current players. ● If gaining distribution is particularly difficult. A recent study suggests, however, that establishing entry barriers may be overrated as a mechanism for sustaining one’s competitive advantage.24 Entry barriers may well deter me-too entries, but they are less likely to deter more innovative entries. The results of this study suggest that a combination of effectively managing innovation cycles while building entry barriers through cost advantages or proprietary technologies can enhance incumbents’ ability to sustain competitive advantage over time. Bargaining Power of Suppliers The bargaining power of suppliers over firms in an industry is the third major determinant of industry attractiveness. It is exercised largely through increased prices or more onerous terms and conditions of sale. Its impact can be significant, particularly when there is a limited number of suppliers serving an industry. Their power is increased under the following conditions: ● If the cost of switching suppliers is high. ● If prices of substitutes are high. ● If suppliers can realistically threaten forward integration. ● When the supplier’s product is a large part of the buyer’s value added—as is the case with metal cans, where the cost of tin plate is over 60 percent of the value added. Chapter Three Understanding Market Opportunities 83 In recent years, the bargaining power of suppliers in many industries has changed dramatically as more companies seek a partnership relationship with their suppliers. What was once an arm’s-length adversarial relationship has turned into a cooperative one resulting in lower transaction costs, improved quality derived primarily from using a supplier’s technological skills to design and manufacture parts, and decreased transaction time in terms of inventory replenishments through just-in-time procurement systems. The greater the bargaining power of the key suppliers to an industry, the less will be the overall attractiveness of the industry. The newly discovered power that governments worldwide have exerted by auctioning bandwidth for new cellular services has raised their bargaining power as suppliers of bandwidth to the cellular industry, thereby reducing the attractiveness of this industry. Bargaining Power of Buyers An industry’s customers constantly look for reduced prices, improved product quality, and added services and thus can affect competition within an industry. Buyers play individual suppliers against one another in their efforts to obtain these and other concessions. This is certainly the case with some large retailers such as Walmart and Carrefour in their dealings with many of their suppliers. The extent to which buyers succeed in their bargaining efforts depends on several factors, including these: ● The extent of buyer concentration, as when a few large buyers that account for a large portion of industry sales can gain concessions. Automakers’ power over suppliers of tires is a good example. ● Switching costs that reduce the buyer’s bargaining power. ● The threat of backward integration, thereby alleviating the need for the supplier. ● The product’s importance to the performance of the buyer’s product—the greater the importance, the lower the buyer’s bargaining power. ● Buyer profitability—if buyers earn low profits and the product involved is an important part of their costs, then bargaining will be more aggressive. The greater the power of the high-volume customers served by an industry, the less attractive will be that industry. One attractive dimension of the cellular phone service industry is that its customers have relatively little power to set terms Strategic Issue and conditions for cellular phone service. Buyers are numerous and not The greater the power of the high-volume customers served by an industry, the less very concentrated, and their cell phone costs are typically not of great attractive will be that industry. importance or expense, relatively speaking. Threat of Substitute Products Substitutes are alternative product types (not brands) that perform essentially the same functions, as plastic bottles versus aluminum cans, digital photography over silver-halide film, and the faxing or e-mailing of documents versus overnight express delivery. Substitute products put a ceiling on the profitability of an industry by limiting the price that can be charged, especially when supply exceeds demand. Thus, in food-packaging, aluminum cans are substitutes for plastic bottles and conversely, and each constrains the prices that can be charged by the other. A Five Forces Analysis of the Cellular Phone Service Industry A useful way to summarize a five forces industry analysis is to construct a chart like that shown in Exhibit 3.11. There, we summarize one analyst’s judgment of the favorability of the five forces for the European cellular phone service industry in the year 2011. This 84 Section Two Market Opportunity Analysis Exhibit 3.11 Five Forces Analysis of the European Cell Phone Service Industry in 2011 Five Forces Score Rationale Rivalry among present competitors Rivalry is high leading to high customer churn: unfavourable Products are differentiated through new features and services; customer switching costs are low. Threat of new entrants Threat of new entrants is low: moderately favorable While rapid pace of technological change may bring new entrants based on new technologies (e.g., packet switching, satellites), new service providers must purchase a bandwidth license by spending billions. Supplier power Supplier power is high: moderately unfavorable Governments in developed markets have raised the price of additional bandwidth through auctions. Buyer power Buyer power is low: very favorable Even large customers have little power to set terms and conditions in this industry. Threat of substitutes Threat of substitutes is high: moderately unfavorable PDAs and laptops using Wi-Fi networks to access the web could cannibalize sales of 3G wireless network cell phones. Overall conclusion: Only two of the five forces are favorable, while three are unfavorable. Thus, the cellular phone service industry, at least in the European market, is not very attractive at this time. In emerging markets, supplier power and threat of substitutes are more favorable, since governments are more welcoming of telecom development, and substitutes are not likely to enter anytime soon. Thus industry attractiveness is regarded as brighter therein. analysis indicates that, consistent with the preceding discussion, compared to earlier in the industry’s history when there were fewer players (thus, less rivalry), no threatening substitutes on the horizon, and a cozier relationship with governments to provide bandwidth, the industry in 2011 was probably less attractive than some industries, for which four or five of the forces might be favorable. Thus, marketers who must decide whether to enter or continue to invest in this industry must make a judgment as to whether the rapid growth of the market—a favorable environmental context—is sufficient to offset the deteriorating attractiveness of the industry—the not-so-favorable competitive situation. Given this mixed outlook, strategists would consider other factors, including the degree to which they believe they are likely to be able to establish and sustain competitive advantage. We further develop this theme later in this chapter. Challenges in Macro-Level Market and Industry Analysis Strategic Issue Markets can be measured in various ways—in numbers of qualified potential customers or in terms of value. In order to analyze the attractiveness of one’s market or industry, one must first identify, of course, exactly which market or industry is to be analyzed. On the market side and recalling that markets consist of customers—whether individual consumers, trade customers like retailers, or business users in B2B markets—the challenge often lies Chapter Three 85 Understanding Market Opportunities in sizing the relevant market. Markets can be measured in various ways—in numbers of qualified potential customers (those that are potentially willing and able to buy), in units consumed of a class of goods or services, in terms of value (their aggregate spending on a class of goods or services) and so on. It is informative to measure market size and growth rates in customer numbers and in unit and value terms. On the industry side, there’s the question of how narrowly or broadly to define one’s industry. Are Ball, a maker of aluminum beverage cans, and AMCOR, a maker of plastic beverage bottles, in the same industry (the packaging industry) or different industries (aluminum containers and plastic packaging)? Are Ford and Mack truck in the same industry (automotive) or different industries (autos and trucks)? There are no simple answers here, but a good way to identify the most suitable definition of the industry you are in is to consider whether the kinds of key suppliers, the processes by which value is added, and the kinds of buyers are the same for your company and other companies whose industry you may consider yourself a part of. If two or all three of these value chain elements are similar, it’s probably appropriate to say you are all in the same industry. If two or more of them are different, you probably are in different industries, as is the case for Ball and AMCOR, where many of the customers are the same, but key suppliers (aluminum versus petroleum-based plastics) and value-adding processes (aluminum cans and plastic bottles are made very differently) differ. Thus, a five forces analysis of the aluminum can industry would consider the threat of substitutes from the plastic, glass, and paper packaging industries. For an approach to strategic thinking that avoids the constraints of traditional industry definitions, see Exhibit 3.12. Information Sources for Macro-Level Analyses In the developed economies, there is an endless supply of information about macro trends and industry forces, including the popular and business press, the internet, supplier and customer contacts, and so on. In emerging economies, however, such information is more difficult to find and can, in many cases, be misleading (see Exhibit 3.13). Thus, Exhibit 3.12 C Competing in Blue Oceans han Kim and Renée Mauborgne argue that one way out of today’s hotly contested industry spaces defined by conventional boundaries is to develop what they call blue oceans, previously unknown market spaces as yet undiscovered by existing competition. Rather than focusing on “beating the competition,” they argue, managers should focus more of their strategic efforts on finding markets where there is little competition—blue oceans— and then take steps to exploit and protect these oceans. Their research found that companies that were effective in creating blue oceans never used the competition as a benchmark. Instead, they made competition irrelevant by creating a huge leap in value for both the company and for the new buyers it served. Henry Ford’s Model T automobile created a blue ocean, an automotive industry that barely existed at the time. So, too, did Federal Express in overnight package delivery, Cirque du Soleil in circus (or is it theater?), and CNN in news broadcasting. A key tenet of all these companies is that they rejected the notion that there must be a trade-off between value and cost, an inherent assumption that’s all too frequent in strategic circles. Rejecting the tired strategic logic of red oceans—overcrowded industries where companies seek ways of beating one another—can lead, they found, to rapid, profitable, and often uncontested growth for a decade or more. Source: W. Chan Kim and Renée Mauborgne, “Blue Ocean Strategy,” Harvard Business Review, October 2004. For more on Blue Ocean Strategy, see www.blueoceanstrategy.com. 86 Section Two Exhibit 3.13 Market Opportunity Analysis Safaricom Outruns the Data I n October 2000, Michael Joseph, the newly arrived CEO of Safaricom, was pondering how best to relaunch Safaricom’s mobile phone service in Kenya. Safaricom had taken over the formerly government-owned cell phone operation, which had only 15,000 high-priced cell phone lines serving the business and government elite. Joseph wondered if there was enough buying power to enable his company to target the mass market in Kenya. The secondary data were not encouraging, since there were only 10 landbased telephone lines per 1,000 people in Kenya and only 26 televisions per 1,000. GDP per capita was a paltry $360, according to government figures. He gambled that the data were wrong and there was more buying power in Kenya than the figures foretold. Joseph’s gamble paid off. Safaricom’s launch was a hit from the start, and by 2006, more than 5 million Kenyans had cell phones, nearly one in every six Kenyans. Source: Charles Mayaka, “Safaricom (A),” United States International University, 2005. For more on Safaricom, see www.safaricom.co.ke. gathering relevant data is not difficult, but it does take time and effort. A good place to start is with trade associations and trade magazines, both of which typically track and report on trends relevant to the industries they serve. Most local, state, and federal governments provide demographic data easily accessible at their websites, such as www.census.gov in the United States. Government sources and the business press are good places to look for economic trends and data from Eurostat, the statistical office of the European Union (www. europa.eu.int/comm/eurostat). Almost all sources of information are now readily available on the Web. Search engines such as Google are a powerful tool in the quest for information. A list of some of the most useful sources of secondary data for macro-level market and industry analyses is provided in Exhibit 3.14. The key outputs of a competent macro trend analysis for any market should include both quantitative and qualitative data. Quantitative data should provide evidence of the market’s size and growth rate, for the overall market as well as for key segments. Qualitative data should include factors that will likely influence these figures in the future, whether favorably or unfavorably. Understanding Markets at the Micro Level A market may be large and growing, but that does not mean customers will buy whatever it is that is proposed to be offered if a particular opportunity is pursued. Most new products, including those targeted at large and growing markets, fail because not enough customers buy them. A clear version of Pepsi-Cola—without the caramel coloring—test-marketed unsuccessfully by Pepsi in the 1990s is but one of thousands of examples that capable marketers have brought to market with little success. Thus, in assessing market opportunities at the micro level, one looks individually at customers—whether trade customers or end consumers or business users—to understand the attractiveness of the target segment itself. While we devote an entire later chapter to market segmentation and targeting (Chapter 7), it’s worthwhile to take a brief look at the relevant issues for opportunity attractiveness here. Opportunities are attractive at the micro level on the market side (see Exhibit 3.1) when the market offering meets most or all of the following tests.25 ● There’s a clearly identified source of customer pain, for some clearly identifiable set of target customers, which the offering resolves. Thus, customer need is established. Chapter Three 87 Understanding Market Opportunities Exhibit 3.14 Some Information Sources for Market and Industry Analysis Type of Information Library Sources Internet Sources To find trade associations and trade magazines Gale Directory of Publications; Encyclopedia of Associations; UK Trade Association Forum; European Trade Associations www.gale.com www.taforum.org Information on specific companies Hoover’s Online Business; Ward’s Business Directory; Dun and Bradstreet Million Dollar Directory; Moody’s Industrial Manual www.hoovers.com www.sec.gov/edgarhp.htm www.dnbmdd.com/mddi U.S. demographic and lifestyle data Lifestyle Market Analyst www.census.gov Demographic data on a specific region or local trade area in the United States Sourcebook of County Demographics; Sourcebook of Zip Code Demographics; Survey of Buying Power in Sales and Marketing Management; Claritas, 1-800-234-5973 (fee) International demographics and world trade Predicasts F&S Index United States, Europe, and International www.instat.com www.stat-usa.gov www.cia.gov/cia/publications/ factbook/index.html www.i-trade.com ec.europa.eu/ eurostat Macro trends Statistical Abstract of the United States; Business Periodicals Index www.unescap.org/stat/ (Asia) www.stat-usa.gov E-commerce Red Herring magazine Proprietary providers of research reports www.thestandard.com www.ecommercetimes.com www.comscore.com www.emarketer.com www.forrester.com www.gartner.com Market share information Market Share Reporter Average financial statements by industry Annual Statement Studies, Risk Management Association, formerly, Robert Morris and Associates www.scarborough.com www.rmahq.org/RMA/Rmauniverse/ productsandservices/RMAbookstore/ statementstudies/default.htm Given the rate of change on the web, some of the preceding internet addresses may change, and some print sources may add websites. Source: Adapted from pp. 27, 63, 124, and 158 of Find It Fast, Fourth Edition, by Robert I. Berkman. Updated July 2009. ● The offering provides customer benefits that other solutions do not. Thus, customers are likely to buy your solution! ● The target segment is likely to grow. ● There are other segments for which the currently targeted segment may provide a springboard for subsequent entry. For most companies and most goods or services, meeting the first two of these tests is all about delivering what Patrick Barwise and Seán Meehan call generic category benefits—the basics that customers expect a good marketer to provide in a particular product category.26 Often, doing so involves effective implementation—something some companies are not very good at—rather than a fancy strategy. 88 Section Two Market Opportunity Analysis So, can an opportunity in a market that’s stagnant or declining at the macro level be an attractive one? The answer is an emphatic yes! Starbucks transformed a Strategic Issue boring and stagnant American market for coffee into a growth machine. Can an opportunity in a market that’s Nike did likewise in athletic shoes. Deliver what the customer wants and stagnant or declining at the macro level be needs—that others don’t deliver effectively—and promote it successan attractive one? fully, and the world will beat a path to your door. On the flip side, what about me-too products, mere knock-offs of others that are already successful? While there’s often room for imitators and followers in fast-growing markets, as we’ll see in Chapter 15, even they typically need to do something different—better, faster, or cheaper—in order to win a meaningful share of the market. Understanding Industries at the Micro Level We’ve seen that, on the market side (see Exhibit 3.1), a particular opportunity may look attractive at the macro level but quite unattractive at the micro level—or vice versa, of course. Does the same pattern hold on the industry side of the picture? On the industry side, the key micro-level question to ask is whether whatever competitive advantage there might be as a result of the benefits offered to the target market—the market side, micro-level assessment, as we’ve just seen—can be susStrategic Issue tained over a significant period of time. Who wants to enter a market Entering a market without a source of with something new, only to have competitors quickly follow and steal sustainable competitive advantage is a your thunder? Entering a market without a source of sustainable comtrap! petitive advantage is a trap! In Chapter 15, we address strategies for new and growing markets. Here, though, let’s examine how one should determine whether to get into such a situation in the first place. To do so, we’ll look, at the micro level, at the company itself rather than the broader industry of which it is a part, which we examined earlier at the macro level. Opportunities are attractive at the micro level on the industry side when the company itself meets most or all of the following tests.27 ● It possesses something proprietary that other companies cannot easily duplicate or imitate.28 Patents, at least defensible ones, can provide this, as can a well-known brand. ● The business has or can develop superior organizational processes, capabilities, or resources that others would find it difficult to imitate or duplicate. In the 1970s, before the Gap stores became a fashion brand in their own right, they sold only Levi-Strauss merchandise, most of which was also available in department stores. Gap’s competitive advantage was that its systems ensured that virtually every item in its huge assortment of Levi’s was in stock in every size every day, something other stores simply found too difficult to match in the days prior to bar codes and point-of-sale cash registers. Other stores had piles of Levi’s, but often seemed to be out of the customer’s size. As Gap’s early advertising proclaimed, “Four tons of Levi’s, in just your size!” ● The company’s business model is economically viable—unlike the many dot-com businesses that went bust at the dawn of the millennium! For an example of a situation in which there appeared to be—but was not—a sustainable competitive advantage, based on proprietary recipes for micro-brewed beer, see Exhibit 3.15. Chapter Three 89 Understanding Market Opportunities Exhibit 3.15 The Craft Beer Industry Loses Its Fizz A good example of the “no sustainable advantage” problem is that encountered by American microbrewers in the late 1990s. In the early 1990s, craft brewing was all the rage in the United States, and beer-loving entrepreneurs everywhere opened craft breweries and brew-pubs where they brewed hoppy ales and porters that consumers loved. Alas, recipes for great-tasting beers may be proprietary, but they are easily imitated, and a plethora of followers entered the fast-growing craft beer industry in pursuit of their share of the fast-growing micro-brew market. When growth in this segment came to a screeching halt in 1997, a shakeout ensued, and many craft brewers went out of business. Their customer benefits—great tasting beer—had been imitated and did not deliver sustainable competitive advantage. Source: Carol Brown and John W. Mullins, “Challenges Brewing at Breckenridge Brewery,” Case Research Journal, Spring 2003. The Team Domains: The Key to the Pursuit of Attractive Opportunities Opportunities are only as good as the people who will pursue them. Thus, even if some combination of market and industry factors renders an opportunity attractive at first blush, there remain some crucial questions: ● Does the opportunity fit what we want to do? ● Do we have the people who can execute on whatever it takes to be successful in this particular industry? ● Do we have the right connections? As the saying goes, “It’s not what you know, it’s who you know.” These three questions address the remaining three of the seven domains in our opportunity assessment framework. Mission, Aspirations, and Risk Propensity These days, every company has a mission statement, and every entrepreneur has a pretty good idea of what she wants to do—software, business process outsourcing, running a retail shop, or whatever. Similarly, everyone has some idea about what size opportunity is deemed attractive. For some companies, if an opportunity lacks the potential to reach, say, $100 million in sales, it’s too small. For some entrepreneurs who wish to run lifestyle businesses, if an opportunity will require more than 20 people to pursue it, it’s too big. Finally, everyone and every company has views on how much risk is acceptable. Are we prepared to bet the ranch, mortgage the house, or risk a shortfall in the progression of our ever-increasing quarterly earnings that we deliver to Wall Street? Notwithstanding the merits of a particular opportunity in market and industry terms, it must also measure up to the expectations of the people who will pursue it, or they’ll say, “No, this one’s not for us.” Most airline caterers probably will not pursue opportunities in fast-food retailing, despite their ability to source meals in a consistent—if not the tastiest—manner. Most large companies will not pursue opportunities to serve very small niche markets. It’s not worth their time and attention to 90 Section Two Market Opportunity Analysis do so. Many entrepreneurs—or at least their spouses—are unwilling to mortgage the house. Whatever the tests for a given individual or company, they must be met if an opportunity is to be deemed attractive. Ability to Execute on the Industry’s Critical Success Factors In every industry, there’s variation in performance. Some firms outperform others in their industry year after year. In most industries, in addition to hard-to-imitate elements that are firm specific, there are also a small number of critical factors that Strategic Issue tend to separate the winners from the also-rans. These few factors are In most industries, there are a small that industry’s critical success factors, or CSFs for short. As the saying number of critical factors that tend to goes in retailing, there are three such factors in that industry: location, separate the winners from the also-rans. location, and location. How might one’s CSFs be identified? There are two key questions to ask: ● Which few decisions or activities are the ones that, if gotten wrong, will almost always have severely negative effects on company performance? In retailing, location is such a factor. Good customer service, for example, while important, is not a CSF, since there are many retailers whose customer service is nothing special—or downright nonexistent—but whose performance in financial terms is quite good. ● Which decisions or activities, done right, will almost always deliver disproportionately positive effects on performance? Again, in retailing, location qualifies. Certain high-traffic locations can be licenses to print money, no matter how well or poorly the business is run. Thus, to assess opportunities, one must identify the industry’s few CSFs, which generally do not include money, either (see Exhibit 3.16). Then one must ask a simple question: Do we have on our team—or can we attract—the competencies and capabilities necessary to deliver what’s called for by our industry’s CSFs?29 It’s Who You Know, Not What You Know The familiar saying holds true in assessing opportunities, as well as in other arenas, but for a different reason. Despite the insights to be gleaned from the seven domains, reality dictates that there will remain considerable uncertainty about just how attractive a particular Exhibit 3.16 W Is Cash a Critical Success Factor? hat about money, the reader may ask? Aren’t the financial resources needed to pursue the opportunity just as important as the people? Most entrepreneurs and most venture capital investors would argue that the money is actually the easy part. If you have an opportunity to serve an attractive market, in an attractive industry, that’s consistent with the kinds of things the people involved want to do, and with a team that can show they’ve done it before with the same CSFs, finding the money is not very difficult. The same holds true for prying money loose from the corporate coffers in established organizations. Source: John W. Mullins, The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan (London: Prentice Hall/FT, 2011). For more on John Mullins and his books, see http://faculty.london.edu/jmullins/. Chapter Three Understanding Market Opportunities 91 opportunity really is. Can we really deliver what we promise? Will customers really buy? Will macro trends change course, for better or worse? Will the structural characteristics of the industry change, favorably or otherwise? Will an unanticipated competitor arrive on our doorstep, or will a new market suddenly open up? Any or all of these things can happen, and the people who are the best connected—up the value chain, to insightful suppliers with a broad view of what’s happening in their customer markets; down the value chain, to customers who can tell you Strategic Issue about their changing needs; and across the value chain, among fellow Having a well-connected team in place players in your own industry who face the same challenges you do— enhances the attractiveness of the opportunity itself because the team is are the ones who will first see the winds of change shifting direction. In more likely to be able to ride out the turn, they’ll be the ones who are best placed to change strategy before inevitable winds of change. others know the winds have changed. Put simply, networks count! Having a well-connected team in place enhances the attractiveness of the opportunity itself because the team is more likely to be able to ride out the inevitable winds of change. Putting the Seven Domains to Work In the words of noted investor Warren Buffett, “When a management with a reputation for brilliance takes on a business with a reputation for bad economics, it’s the reputation of the business that remains intact.”30 If you or your company choose unattractive opportunities to pursue, you’ll face tough sledding, no matter what you learn from the rest of this book. Thus, it’s worth keeping the lessons of this chapter in mind as you learn about the rest of the task of developing compelling marketing strategies in succeeding chapters. It’s also worth noting that the seven domains are not additive. A simple checklist on which you score each domain and sum the scores won’t do, for an opportunity’s strength on some domains—especially at the micro level—can outweigh weaknesses on others. Starbucks has done quite nicely in what was a boring and stagnant coffee market when it got started. Finally, it’s worth noting that opportunities don’t just sit there; they change and may be further developed. Damaging flaws found in the opportunity assessment process are there to be mitigated or remedied by various means.31 Thus, the seven domains provide a useful and integrative lens through which to examine the fundamental health of a business and the opportunities it has chosen to pursue at any stage in its products’ life cycles, a topic to which we devote considerable attention in Chapters 15 and 16, where we explore the various strategies that are best suited to different stages in the development of markets. To close this chapter, we wrap up with a brief look at a tool for coping with the reality of the changing world around us, and we consider the perils of swimming against the changing tide. Anticipating and Responding to Environmental Change Critical changes in macroenvironmental conditions often call for changes in the firm’s strategy. Such changes can be proactive or reactive, or both. To the extent that a firm identifies and effectively deals with key trends before its competitors do, 92 Section Two Market Opportunity Analysis it is more likely to win and retain competitive advantage. In any case, management needs systems to help identify, evaluate, and respond to environmental events that may affect the firm’s longer-term profitability and position. One such approach uses an opportunity/threat matrix to better assess the impact and the timing of an event, followed by the development of an appropriate response strategy. This approach is discussed as follows. Impact and Timing of Event In any given period, many environmental events that could have an impact on the firm—either positively or negatively—may be detected. Somehow, management must determine the probability of their occurrence and the degree of impact (on profitability and/or market share) of each event. One relatively simple way to accomplish these tasks is to use a 2 × 2 dimensional opportunity/threat matrix such as that shown in Exhibit 3.17. This example contains four potential environmental events that the highspeed access division of a large UK telecommunications company might have identified as worthy of concern in 2011. The probability of each occurring by the year 2016 was rated, as was the impact on the company in terms of profitability or market share. The event likely both to occur by 2016 and to have the greatest impact appears in the upper left-hand box. At the very least, such an event should be examined closely, including estimating with as much precision as possible its impact on profitability and market share. The opportunity/threat matrix enables the examination of a large number of events in such a way that management can focus on the most important ones. Thus, events such as number 4 in the exhibit with a high probability of occurring and having a high impact should be closely monitored. Those with a low probability of occurrence and low impact, such as number 3 in the exhibit, should probably be dropped, at least for the moment. Events with a low probability/high impact (number 1) should be reexamined less frequently to determine whether the impact rating remains sound. Exhibit 3.17 Opportunity/Threat Matrix for a Telecommunications Company in the UK in 2011 Probability of Occurrence (2016) Level of Impact on Company* High Low High 4 1 Low 2 3 1. Wireless communications technology will make networks based on fiber and copper wires redundant. 2. Technology will provide for the storage and accessing of vast quantities of data at affordable costs. 3. Consumers will move most of their TV viewing from televisions to personal computers. 4. Voice-over-Internet Protocol (VoIP) will become the dominant force in the telecommunications industry. *Profits or market share or both Chapter Three 93 Understanding Market Opportunities Swimming Upstream or Downstream: An Important Strategic Choice Fitness is a social trend. The graying of the world population is a demographic one. Global warming and increased attention to sustainability are trends related to our natural environment. All these trends influence the fortunes of some companies, but not others. As we have seen, the influence of macro trends like these can be pervasive and powerful. In general, life is better swimming downstream, accompanied by favorable trends, than upstream, running counter to such trends. Like mosquitoes or cooling breezes on a humid summer evening, trends will always be present, whether marketing managers like them or not. The question is what managers can do about them. For some trends, marketers and other managers can do Strategic Issue little but react and adapt. In the 1990s, manufacturers of products sold Like mosquitoes or cooling breezes on a in spray containers were required to find new propellants less harmful humid summer evening, trends will always be present, whether marketing managers to the ozone layer. Governments concerned about global warming manlike them or not. The question is what dated this change. For other trends, such as the shift toward or away managers can do about them. from casual dress in the workplace, favorable moves can be reinforced through effective marketing. Similarly, sometimes, unfavorable ones can be mitigated. But doing these things requires that important trends be noticed and understood. The seven domains framework introduced in this chapter sets the market and competitive context—the 4 Cs—for the marketing decisions to be addressed in the remainder of this book. Such decisions cannot be made in a vacuum; for without a deep understanding of the context in which one goes to market, one simply cannot develop effective strategies that take into account the market and competitive realities. Gaining such an understanding requires information, of course. We deal with the challenges in gathering such information through marketing research and its use in forecasting in Chapter 6. But first in Chapters 4 and 5, we examine how to better understand buyer behavior. Take-aways 1. Macro trends can and will profoundly influence the success of any business. Serving attractive markets, where trends are favorable—swimming with the tide—is likely to bring more success than serving markets where trends are unfavorable. 2. Similarly, competing in structurally attractive industries—those where the five forces are, on balance, favorable—is likely to generate better returns than in less attractive industries. 3. Notwithstanding the first two points above, the degree to which a company’s goods or services resolve genuine customer needs of a clearly defined target market and the degree to which its competitive advantage is sustainable over time are probably even more crucial to long-term success. 4. Understanding market opportunities is about more than understanding customers, competitors, and the environmental context. The capabilities and resources brought by the company itself are also important and are often overlooked. 5. The seven domains are not additive—simply scoring each domain and summing the scores won’t do. Strong scores, especially at the micro level or on the team domains, can outweigh the effects of flat or declining markets or structurally unattractive industries. 94 Section Two Market Opportunity Analysis Endnotes 1. Information on the cellular telephone business in the 21st century comes from the following sources: Moon Ihlwan, “Asia Gets Hooked on Wireless,” BusinessWeek, June 19, 2000, p. 109; Stephen Baker, “The Race to Rule Mobile,” BusinessWeek International Edition, February 21, 2000; Stephen Baker, “Smart Phones,” BusinessWeek International Edition, October 18, 1999; “Online Overseas,” New York Times, June 7, 2000, p. H8; Steve Frank, “Darling to Dog to. . . ,” The Wall Street Journal Sunday, June 18, 2000; Bea Hunt, “Basking in 3G’s Rays,” Financial Times, February 14, 2005, FTIT Review, p. 1; Andy Reinhardt, “Cell Phones for the People,” BusinessWeek, November 14, 2005, p. 65; Andrew Parker and Paul Taylor, “Mobile Businesses Send out Differing Signal,” Financial Times, February 15, 2010, p. 18; Joe Leahy, “A Tough Call,” Financial Times, May 25, 2010, p. 13; “The Lex Column,” Financial Times, September 19, 2010, p. 18; “Not Just Talk,” The Economist, January 29, 2011, pp. 65–66; Christopher Lawton, “Nokia Warns as Margins Take a Big Hit,” The Walt Street Journal European Edition, June 1, 2011, p. 1; and Hester Plumridge, “Nokia Chief Faces an Uphill Battle,” The Wall Street Journal European Edition, June 1, 2011, p. 32. 14. Liz Neporent and Michele Bibbey, “The Ten Tricks of Buying Home Exercise Equipment,” www.ivillage.co.uk/dietandfitness/getfit/cardio/articles/ 0,,254_157720.00.html. 2. Amy Yee, “Banishing the Negative: How Kodak Is Developing Its Blueprint for a Digital Transformation,” Financial Times, January 26, 2006, p. 15. 21. For an example of such a checklist, see John W. Mullins, The New Business Road Test, chap. 13 (London: Prentice Hall/FT, 2010). 3. Dan Roberts, “The Ageing Business: Companies and Marketers Wrestle with Adapting Their Products to Older Consumers’ Demands,” Financial Times, January 20, 2004, p. 19. 4. Francesco Guerrera and Jonathan Birchall, “Boom Time,” Financial Times, December 6, 2007, p. 13. 5. Norma Cohen and Clive Cookson, “The Planet Is Ever Greyer: But as Longevity Rises Faster Than Forecast, the Elderly Are Also Becoming Healthier,” Financial Times, January 19, 2004, p. 15. 6. Martin Wolf, “People, Plagues, and Prosperity: Five Trends that Promise to Transform the World’s Population within 50 Years,” Financial Times, February 27, 2003, p. 17. 7. “AIDS Epidemic Update,” December 2005, p. 17, UNAIDS, www.unaids. org. 8. John Parker, “Burgeoning Bourgeoisie,” The Economist, February 14, 2009, p. 5. 9. ibid. 10. The Economist, “A Club in Need of a New Vision,” April 29, 2004. 11. Michelle Conlin, “Unmarried America,” BusinessWeek European Edition, October 20, 2003, p. 106. 12. Sara Silver, “Kraft Blends Ethics with Coffee Beans,” Financial Times, October 7, 2003, p.106. 13. Arthur Agatson, The South Beach Diet (Rodale, 2003). 15. Steve Rothwell, “Ryanair’s First-Ever Capacity Reduction Marks End of Discount-Airline Boom,” Bloomberg, at http://www.bloomberg. com/news/2011-05-23/23/ryanair-expects-similar-profit-this-yearon-fuel-slower-traffic-growth-html. 16. Stanley Reed, “The Euro: How Damaging a Hit?” BusinessWeek European Edition, September 29, 2003, p. 63. 17. Kevin Allison and Richard Waters, “Demand for iPods Puts Apple Shares at New High,” Financial Times, January 11, 2006, p. 21. 18. David Welch, “GM: Live Green or Die,” BusinessWeek European Edition, May 26, 2008, pp. 36–41. 19. Nicholas Varchaver, “Chemical Reaction,” Fortune European Edition, April 2, 2007, pp. 41–44. 20. Michael Porter, Competitive Strategy (New York: Free Press, 1980). 22. Wendy Zellner, Andrea Rothman, and Eric Schine, “The Airlines Mess,” BusinessWeek, July 6, 1992. 23. “Airlines and the Canine Features of Unprofitable Industries,” Financial Times, September 27, 2005, p. 23. 24. Jin K. Han, Namwoon Kim, and Hong-Bumm Kim, “Entry Barriers: A Dull-, One-, or Two-Edged Sword for Incumbents? Unraveling the Paradox from a Contingency Perspective,” Journal of Marketing 65 (January 2001), pp. 1–14. 25. For more detail on micro-market attractiveness, see Mullins, The New Business Road Test, chap. 2. 26. Patrick Barwise and Seán Meehan, Simply Better: Winning and Keeping Customers by Delivering What Matters Most (Cambridge, MA: Harvard Business School Press, 2004). 27. Mullins, The New Business Road Test, chap. 5. 28. Ibid. 29. For the classic articles on competencies and capabilities, see George S. Day, “The Capabilities of Market-Driven Organizations,” Journal of Marketing 58 (October 1994), pp. 37–52; and C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review 68 (May–June 1990), pp. 79–91. 30. Quoted in Herb Greenburg, “How to Avoid the Value Trap,” Fortune, June 10, 2002, p. 194. 31. For more on how crucial flaws may be mitigated or resolved, see Mullins, The New Business Road Test, chap. 9. This page intentionally left blank C HAPTER F OUR Understanding Consumer Buying Behavior Cruise Ships—Not Just for Grandma and Grandpa Anymore1 N OT TOO LONG AGO, a sea cruise was widely viewed as a rather dull and sedate vacation alternative, appealing mostly to well-to-do elderly people who enjoyed playing shuffleboard, sipping tea, and dressing for dinner. But that perception began to change in the 1980s. As a result, the global cruise industry experienced rapid growth in both revenues and profits during the 1990s and into the new century. Due to concerns about terrorism, rising energy costs, increased pollution of harbors, and the like, industry growth slowed a bit after 2002. And the global financial crisis also took a bite out of sales. Nevertheless, Carnival Corporation, the industry’s market share leader and parent of several lines—including Carnival, Princess, Holland America, and Seabourn in North America, P&O Cruises, Cunard and Ocean Village in the United Kingdom, AIDA Cruises in Germany, and Costa Cruises in Asia and South America—served over 8.5 million passengers in 2009. The firm made $1.8 billion in net income on revenues of 13.1 billion. Nearly half the firm’s revenues, and over one-third of its passengers, came from outside the United States. Savvy Marketing Helped Fuel Industry Growth A number of factors helped change consumer perceptions and build demand for cruise vacations. Perhaps 96 most important, the major players in the industry strengthened all aspects of their marketing programs to appeal to a wider variety of customer segments. First, firms invested heavily in improving their physical facilities. Many new ships were built that were not only much bigger and steadier than their predecessors, but also incorporated amenities such as casinos, shopping arcades, theaters, health spas, internet access in every stateroom, suites with private balconies, and even a skating rink and a water park. Shorter and cheaper cruises were added to attract more price-sensitive customers. Ships were located in more ports around the world—from Southampton in the United Kingdom to Hong Kong, Majorca, Australia, Dubai, and even Galveston, Texas—to draw passengers from a wider geographic area. And major sums were devoted to advertising and promotion programs. Perhaps the biggest factor underlying the industry’s growth, however, was the ability of the major competitors to understand and cater to the differing needs, desires, and purchase criteria of different customer segments. Ship designs, onboard amenities and activities, food and beverage options, itineraries, and prices were all tailored to specific demographic, social, and lifestyle groups. For instance, P&O Princess launched “Ocean Village” cruises in the Mediterranean. They are targeted at younger couples who enjoy sports and educational activities and offer passengers the chance to participate in such things as scuba diving, Exhibit 4.1 TYPES OF CRUISES, BENEFITS OFFERED, AND MAJOR COMPETITORS Type of Cruise Rates Amenities/benefits Major competitors Contemporary/ Resort class $100 to $300 (per person per day) Value-oriented cruises of 3–7 days; casual environment; newer or recently renovated ships; lots of open deck and pool space; organized activities, sports, etc.; “Vegas”- or “Broadway”-style productions, dancing, etc.; both sitdown and buffet-style meals. Carnival, Royal Caribbean, Norwegian Cruise Line Premium $200 to $600 Semiformal, premium-quality Holland America, P&O Princess cruises of 7 days or longer; ships designed to offer more space per passenger; more attentive service; theme lounges, theaters, cigar bars, etc.; supervised activities, games, fitness facilities; premium food and beverage offerings. Luxury $600 to $1,500 Cruises emphasize greater choice of food, beverage, and entertainment options in a more formal atmosphere; more spacious and luxurious accommodations; more exotic itineraries. Cunard Line; Crystal Cruises Exclusive $1,000 plus Exclusive, yacht-like environment with only 100–200 passengers; high staff-to-customer ratio allows highly individualized service Seabourn Cruise Line, Silversea Cruises, Swan Hellenic Sources: “Cruises by Cruise Line,” The Cruise Company, www.cruisecompany.net; and www.carnival.com. gourmet cooking, and wine tasting. Some lines offer “romantic” cruises targeted at honeymooners; others appeal to the singles crowd; and many lines, including the ships launched by Disney focus on families with young children by offering multiroom suites and lots of supervised activities for various age groups. Even within the traditional target audience for cruises— relatively upscale retirees in their 50s and 60s—lines offer cruises with unique benefits to appeal to subsegments with different interests and preferences. At one extreme, for instance, Hapag-Lloyd Cruises offers a 165-day excursion that leaves Dubai in November, visits islands in the Indian ocean and South Pacific, South Africa, Patagonia, Australia and Asia, and returns to Dubai in April. Rates start at $86,570. Some categories of cruises, the benefits they promise, and major lines that offer them, are summarized in Exhibit 4.1. Future Challenges Political unrest around the world poses a threat for some popular destinations, and rising energy costs are likely to squeeze industry profits. And since cruises are discretionary purchases, economic conditions can have a major impact on revenues. For instance, Carnival’s net income declined by $600 million from 2007 through 2009 due largely to the global financial crisis. One of the industry’s biggest potential challenges, though, is over-capacity. You might think that the 97 98 Section Two extensive capital investment required to launch a new cruise ship would raise substantial barriers to entry and restrain industry competitiveness, but the substantial growth and profits cruise lines have enjoyed spurred them to build more and bigger ships at an increasing rate. Carnival alone is scheduled to bring 10 new ships into service by 2014, raising its total to 108. And two of those ships will be behemoths capable of accommodating more than 6,300 passengers each. The primary challenge, then, is for firms in the industry to increase the growth in passenger bookings to fill the growing capacity and recoup the huge investment in new ships. One way to do this is to Market Opportunity Analysis develop long-term relationships with past customers in the hopes of generating more repeat business. Carnival, for instance, offers substantial discounts to past customers. Given that the vast majority of vacationers around the world have never gone on a cruise, however, the greatest potential for growth involves converting nonusers into new customers. As Micky Arison—Carnival’s CEO—points out, “In Germany they sell 80 million packaged holidays a year, but only 250,000 of them are cruises.” But attracting new customers will require an even better understanding of what those people want from a vacation and how they make their leisure purchase decisions. Marketing Challenges Addressed in Chapter 4 The ability of the global cruise industry to generate substantial new and profitable growth in a market that had been stagnant for years illustrates why examining the needs, desires, and purchasing behavior of existing and potential customers is a critical step in analyzing market opportunities. Consumers buy goods and services as means to an end, as potential solutions to their unsatisfied needs and wants. And they select particular brands or deal with a specific supplier (Carnival Cruise Line) because they perceive them to offer desirable benefits (an interesting itinerary, great food, attentive service, romantic atmosphere, programs for the kids, etc.) and superior value. Consumer decision making is essentially a problem-solving process. Most customers, whether individual consumers or organizational buyers, go through similar mental processes in deciding which products and brands to buy. Despite this similarity, different customers often end up buying different things. Some vacationers take two-week luxury cruises, some take four-day “contemporary” cruises, while many others go to Disney World or visit Paris instead. These differences reflect variations in consumers’ personal characteristics—their needs, benefits sought, attitudes, values, past experiences, and lifestyles—and their social influences—their social class, reference groups, and family situations. The more marketers know about the factors affecting their customers’ buying behavior, the greater their ability to design attractive product or service offerings, to define and target meaningful market segments, and to develop marketing programs to fit the concerns and desires of those segments. This chapter provides a framework to help organize an analysis of the mental processes individual consumers go through when making purchase decisions and the individual and environmental factors affecting those decisions. Not all purchase decisions are equally important or psychologically involved. The decision to spend several thousand dollars on a cruise is a bigger deal for most people than the decision to add bananas to their shopping cart. The first question we explore, then, is whether consumers’ mental processes are different when they purchase high-involvement goods or services than when they buy more mundane, low-involvement products. If so, what are the implications of those decision-making differences for the marketing manager or entrepreneur charged with developing the strategic marketing plan for a particular product or service? Chapter Four 99 Understanding Consumer Buying Behavior Regardless of their involvement with a particular purchase decision, different people often choose different products or brands. This fact raises two important questions that we’ll explore later in the chapter. How do a person’s psychological processes and traits— such as perception, memory, attitudes, personality, and lifestyle—affect his or her buying behavior? And what impact do social influences—like culture, social class, reference groups, and the family—have on purchase decisions? The Psychological Importance of the Purchase Affects the Decision-Making Process From an individual consumer’s point of view, some purchase decisions are more important, and therefore more psychologically involving, than others. High-involvement purchases involve goods or services that are psychologically important to the buyer because they address social or ego needs and therefore carry social and psychological risks (e.g., the risk of looking foolish to one’s family or friends). They may also involve a lot of money and therefore financial risk. Because a consumer’s level of involvement with a particular purchase depends on the needs to be satisfied and the resources available, however, a high-involvement product for one buyer may be a low-involvement product for another. The decision processes involved in purchasing high- and low-involvement products and services are quite different. As Exhibit 4.2 indicates, the decision process pursued by a given consumer can be classified into one of four categories depending on whether (1) the consumer has a high or low level of Strategic Issue product involvement, and (2) he or she engages in an extensive search The decision processes involved in purchasing high- and low-involvement for information and evaluation of alternative brands or makes the products and services are quite different. decision routinely.2 How Do Consumers Make High-Involvement Purchase Decisions? When purchasing high-involvement products or services, consumers go through a problemsolving process involving five mental steps: (1) problem identification, (2) information search, (3) evaluation of alternatives, (4) purchase, and (5) postpurchase evaluation. These five steps are diagrammed in Exhibit 4.3 and discussed in the context of buying a Exhibit 4.2 Types of Consumer Decision Making Extent of Involvement Extent of analysis High Low Extended (information search; consideration of brand alternatives) Complex decision making (cars, homes, vacations) Limited decision making, including variety seeking and impulse purchasing (adult cereals and snack foods) Habit/routine (little or no information search; focus on one brand) Brand loyalty (athletic shoes, cologne, deodorant) Inertia (frozen vegetables, paper towels) 100 Section Two Market Opportunity Analysis Exhibit 4.3 Steps in the High-Involvement, Complex Decision-Making Process Problem identification Information search Evaluation of alternatives Routine or habitual purchases (brand loyalty) Feedback Purchase Postpurchase evaluation Caribbean cruise by a hypothetical person—Paul MacDonald, who is 33 years old and single. Problem Identification Consumers’ purchase-decision processes are triggered by unsatisfied needs or wants. Individuals perceive differences between ideal and actual states on some physical or sociopsychological dimension. This motivates them to seek products or services to help bring their current state more into balance with the ideal. Given that most of us have limited time and financial resources, it is impossible for us to satisfy all our needs at once. Instead, we tend to focus on those that are strongest. The size of the gap between our current and our desired state largely determines the strength of a particular need. A need can become stronger and be brought to our attention by a deterioration of our actual state or an upward revision of our ideal state. A change in a consumer’s actual state can occur for several reasons: ● ● ● For physical needs, a natural deterioration of the actual state occurs all the time. A person’s body burns energy and nutrients. Thus, periodically we get hungry and tired and are motivated to find something to eat and some place to go to sleep. A person’s actual state may change as the result of the depletion of the current solution to a need. Our hypothetical consumer might be motivated to buy a cruise package because the condo in Florida he usually rents for his winter vacation is not available this year. In some cases consumers can anticipate a decline in their actual state. If Paul MacDonald knew that the condo owner was trying to find someone to lease the condo for the entire season, he would likely investigate alternatives for his winter vacation. Chapter Four Understanding Consumer Buying Behavior 101 Similarly, a change in a consumer’s desired state may occur for several reasons: ● ● The desired state may be revised upward because of new information. Thus, MacDonald may have seen an ad showing how much fun a person can have on a cruise or received such information from a friend. As one need is satisfied, the desired state on other need dimensions increases and becomes more demanding. Information Search Having recognized that a problem exists and might be satisfied by the purchase and consumption of a product or service, the consumer’s next step is to refer to information gained from past experience and stored in memory for possible later use. To continue with our example, MacDonald’s knowledge about cruises derives primarily from advertising, his mother and father who recently took a cruise, and friends—most of whom are married. Since he has no firsthand knowledge of cruises, he will need to seek additional information, especially regarding accommodations, schedules, and fares. For a listing of the factors that are likely to increase information search, see Exhibit 4.4. Because services are intangible, difficult to standardize, and their production and consumption inseparable, they are more difficult to evaluate than products. Thus, most services are hard to assess until they are being consumed after purchase (cruises and restaurant meals). Some services are difficult to assess even after they have been consumed (legal services, medical diagnosis, etc.). These assessment difficulties can force consumers to rely on different cues, such as the provider’s credentials or reputation, when evaluating services.3 How Much Information Will a Consumer Seek? People seek additional information about alternative brands until they perceive that the costs of obtaining more information are equal to the additional value or benefit derived from the information. Information is Exhibit 4.4 Factors That Are Likely to Increase Prepurchase Search Product factors Long interpurchase time (a long-lasting or infrequently used product); frequent changes in product styling; frequent price changes, volume purchasing (large number of units); high price; many alternative brands; much variation in features. Situational factors Experience: First-time purchase; no past experience because the product is new; unsatisfactory past experience within the product category. Social acceptability: The purchase is for a gift; the product is socially visible. Value-related considerations: Purchase is discretionary rather than necessary; all alternatives have both desirable and undesirable consequences; family members disagree on product requirements or evaluation of alternatives; product usage deviates from important reference group; the purchase involves ecological considerations; many sources of conflicting information. Personal factors Demographic characteristics of consumer: Well-educated; high income; white-collar occupation; under 35 years of age. Personality: Low dogmatic (open-minded); low-risk perceiver (broad categorizer); other personal factors, such as high product involvement and enjoyment of shopping and search. 102 Section Two Market Opportunity Analysis valuable to consumers to the extent that it helps make a more satisfying purchase and avoids the negative consequences associated with a poor choice. Thus, consumers are likely to place a higher value on—and seek more—information when the purchase is important. This importance derives from (a) the strength of a person’s need for the product; (b) the person’s ego-involvement with the product; and (c) the severity of the social and financial consequences of making a poor choice. This is why people tend to seek more information about high-priced, socially visible products that reflect their self-image (cars, home, clothing, and, for some, cruises) than for lower-priced products that other people seldom notice, such as furnace filters or paper towels. Even when products are very expensive and ego-involving, some consumers are unlikely to conduct an exhaustive search for information before making a decision because of the costs involved. Perhaps the biggest cost for most people is the opportunity cost of the time involved in seeking information. They give up the opportunity to use that time for other, more important or interesting activities, such as working or taking trips. For some people, however, the opportunity costs of shopping are low because they enjoy wandering through stores or scanning newspaper ads or websites for bargains. Also, as we’ll see later, the internet is reducing the opportunity costs of obtaining at least some kinds of product information. There are also psychological costs involved in searching for information. Collecting information can be a frustrating task, often involving crowded stores, rude salespeople, or slow websites. Also, some consumers become frustrated and confused when they have a lot of complex information to evaluate before making a choice. And paradoxically, the more brands, models, and styles that are available in a product category, the more likely the consumer will experience information overload. In other words, increasing the choices available can make it harder for people to make a choice, and thereby increase the likelihood they will postpone a decision and not buy anything.4 Because services, more than products, are associated with greater perceived risk, the individual involved is likely to use more information sources in the attempt to better cope with the risk. This often leads to an extended information-acquisition process, which may include purchase postponement. Sources of Information Assume that switching from renting a condo to a cruise is important and costly enough for Paul MacDonald to seek additional information before doing so. Which sources can he use? The three broad categories of information sources are personal, commercial, and public. Personal sources include family members, friends, and members of the consumer’s reference group. Commercial sources refer to various information disseminated by service providers, marketers, and manufacturers and their dealers. They include media advertising, promotional brochures, package and label information, salespersons, and various in-store information, such as price markings and displays. Public sources include noncommercial and professional organizations and individuals who provide advice for consumers, such as doctors, lawyers, governmental agencies, travel agencies, consumer-interest groups and web blogs. Consumers are usually exposed to more information from commercial sources than from personal or public sources. However, many consumers are influenced more by personal sources when deciding which service, product, or brand to buy. Consumers use information from different sources for different purposes and at different stages within the decision process. In general, commercial sources perform an informing function for consumers. Personal and public sources serve an evaluating and legitimizing function. Thus, MacDonald might rely on advertising and discussions with his travel agent to learn what cruises are available, what the schedules are for each, the kind and size ship used, Chapter Four Understanding Consumer Buying Behavior 103 how much each cruise costs, and the details concerning the various types of entertainment offered. It is highly likely that MacDonald would also seek the opinions of friends in deciding whether to take a cruise and in selecting a particular one. In doing so, he is consistent with the general proposition that consumers choose more personal sources for services than for goods because service consumption is highly personal and must be experienced to be understood.5 How Is the Web Affecting Consumers’ Search for Information? The internet is reducing the opportunity costs of information gathering, thus making it easier for people to make informed decisions. As we saw in Chapter 1, nearly 60 percent of American consumers report searching for product information online. And a recent survey of people shopping for consumer electronics products—which are high-involvement purchases for most people—found that more than 80 percent searched for information online even though a majority went to a conventional retail store to make the purchase.6 And while the internet may reduce the opportunity costs of information search, most consumers still spend a great deal of time researching their electronics purchases: 15 hours for televisions, 12 for digital cameras, and so on.7 Many manufacturers and service providers have established their own sites. Some of these sites not only provide information about product options and characteristics, but also offer tutorials about how to use the product, help lines, and other information geared to helping customers obtain full value from their purchases. For instance, the outdoor gear retailer REI provides hundreds of “how-to” articles and videos, as well as iPhone and Android apps for such things as finding out about snow conditions at ski areas around the world, on its site at www.rei.com. More important, many new sites have taken over much of the search Strategic Issue for information about alternative offerings in a product category in Many new sites have taken over much exchange for a small fee from the consumer or advertising from manuof the search for information about facturers or dealers in the category. For example, www.cruisecompany alternative offerings in a product category in exchange for a small fee .net provides detailed information on cruises organized by type of from the consumer or advertising from cruise, itinerary, or cruise line, in exchange for a commission on any manufacturers or dealers in the category. cruise a consumer books through the site. While such sites facilitate the consumer’s search for information about high-involvement products and services, they do not solve all the consumer’s problems. Most of the information provided by such sites is obtained from commercial and public, rather than personal, sources. Therefore, some consumers may not consider it very useful for evaluating alternative choices, particularly when it comes to choosing intangible services. Also, sensory information such as touch and smell, which can be important for evaluating foods, fashion items, and similar products, cannot be displayed on the web. These shortcomings help explain why some sites, such as Expedia.com, and amazon.com, publish product reviews and evaluations submitted by individual customers. A more recent development has blurred the distinction between public and personal information sources. Personal web logs—or blogs—provide a way for individuals to share their own experiences and opinions with a large public audience, and for potential customers to obtain personal insights from a vast number of product users. The potential impact of blogs on buyer behavior is illustrated by the experience of the Kryptonite division of Ingersoll-Rand. On September 12, 2004, someone with the moniker “unaesthetic” posted in a group discussion site for bicycle enthusiasts the observation that the ubiquitous, U-shaped Kryptonite bike lock could be easily picked with a ballpoint pen. Within days, a number of blogs posted a video demonstrating the problem. Kryptonite responded with a bland statement arguing that the locks remained a “deterrent to theft,” but 104 Section Two Market Opportunity Analysis more and more bloggers began writing about the issue and their experiences. By September 19, according to one internet measurement firm, about 1.8 million people saw postings about the lock’s shortcomings in a single day. Finally, on September 22, Kryptonite was forced to announce it would exchange a new, redesigned product for any affected lock for free, a move that was estimated to cost the firm 100,000 new locks and more than $10 million (about 40 percent of the division’s annual revenue).8 The impact of blogs on buyer behavior and firms’ marketing programs is growing rapidly since an estimated 23,000 new web logs are started around the world every day. And other disgruntled consumers are posting videos to YouTube and similar sites illustrating their problems and frustrations with products or service providers. For instance, more than 340,000 people have watched Michael Whitford smash his nonfunctioning Apple Macbook with a sledgehammer. It is important to note, though, that even very dissatisfied customers can be salvaged if the company takes quick and positive action. After Apple replaced his laptop, for example, Mr.Whitford wrote on his blog “I’m very happy now. Apple has regained my loyalty.”9 Consequently, one authority advises that “there should be somebody at every company whose job is to put into Google and blog search engines the name of the company [or one of its brands], followed by the word ‘sucks,’ just to see what customers are saying.”10 Of course, firms might also try to take advantage of the growing influence of blogs by creating one of their own, but this can raise some ethical issues, as discussed in Ethical Perspective 4.1. Evaluation of Alternatives11 Consumers find it difficult to make overall comparisons of many alternative brands because each brand might be better in some ways but worse in others. Instead, consumers simplify their evaluation in several ways. First, they seldom consider all possible brands; rather, they focus on their evoked set—a limited number they are familiar with that are likely to satisfy their needs. Second, consumers evaluate each of the brands in the evoked set on a limited number of product dimensions or attributes. They also judge the relative importance of these Ethical Perspective 4.1 Company Blogs—Honesty Is the Best Policy Given the growing popularity and influence of consumer blogs in many industries, firms are trying to get in on the act by sponsoring company blogs or encouraging employees to start their own. Most companies that want to blog try to walk a fine line: telling employee bloggers to be honest but also encouraging evangelism for the firm’s products or services. Unvarnished corporate propaganda almost always drives readers away, but honest people with real opinions keep them coming back. One ethical no-no that can have severe economic consequences is trying to hide the identity of the company behind the blog. For instance, Mazda—hoping to reach young potential car buyers—crafted a blog supposedly run by a 22-year-old hipster named Kid Halloween. He posted links to three videos he said a friend had recorded off-public-access TV. One showed a Mazda 3 attempting to break dance, and another had it driving off a ramp like a skateboard. Inevitably, the cars were totaled. Other bloggers quickly sensed a phony in their midst—the expensive videos were a tip-off—and began criticizing Mazda on a number of widely read blogs addressed to auto enthusiasts. Consequently, the firm was forced to pull the site after only three days. The lesson, according to Steve Hayden, who helps create blogs for clients of advertising giant Ogilvy & Mather, is that “if you fudge or lie on a blog you are biting the karmic weenie. The negative reaction will be so great that, whatever your intention was, it will be overwhelmed. . . . You’re fighting with very powerful forces because it’s real people’s opinions.” Source: David Kirkpatrick and Daniel Roth, “Why There’s No Escaping the Blog,” Fortune, January 10, 2005, pp. 44–50. Chapter Four Understanding Consumer Buying Behavior 105 attributes, or the minimum acceptable performance of each. The set of attributes used by a particular consumer and the relative importance of each represent the consumer’s choice criteria. In the case of our cruise example, the dates of the cruise, the ports of call, the entertainment offered, and the costs are examples of MacDonald’s choice criteria for selecting a specific cruise. Third, consumers combine evaluations of each brand across attributes, taking into account the relative importance of those attributes. This multiattribute assessment of a brand results in an overall attitude toward that brand. The brand toward which consumers have the most favorable attitude is the one they are most likely to buy. Product Attributes and Their Relative Importance Consumers use many dimensions or attributes when evaluating alternative products and services. Thus, in addition to the above service attributes, MacDonald might also use the newness and size of ship, types of food served, availability of an exercise room, and kinds of gambling as additional ways of comparing his options. Usually, however, consumers base their evaluations on half a dozen dimensions or less. Exhibit 4.5 contains a general list of product attributes consumers might use to evaluate alternatives. Different consumers may use different sets of attributes to evaluate brands within the same product category. But even when two people use the same set of attributes, they may arrive at different decisions because they attach varying degrees of importance to the attributes. Paul MacDonald is primarily interested in entertainment, demographics of those taking the cruise, and cost, whereas another traveler might attach greater importance to gambling, ports of call, and food. A consumer’s personal characteristics and social influences—needs, values, personality, social class, and reference groups, among other things—help determine which attributes are considered and their relative importance. Environmental factors and the usage situation can also affect the perceived importance of various product benefits. For instance, some people buy more prestigious and expensive brands of beer or wine for their party guests than for their own everyday consumption. Forming Attitudes toward Alternative Brands Even if two consumers use the same attributes and attach the same relative importance to them when evaluating product offerings, they may not necessarily prefer the same brand. They might rate the various brands differently on specific attributes. Differences in brand perceptions are based on past experience, the information collected, and how that information is perceived and processed. And as we shall see later, technology is making it increasingly possible for consumers to interact with manufacturers and suppliers during the production process so that product and service offerings can be customized to meet a customer’s preferences on Exhibit 4.5 Selected Attributes Consumers Use to Evaluate Alternative Products or Services Category Specific attributes Cost attributes Purchase price, operating costs, repair costs, cost of extras or options, cost of installation, trade-in allowance, likely resale value. Performance attributes Durability, quality of materials, construction, dependability, functional performance (acceleration, nutrition, taste), efficiency, safety. Social attributes Reputation of brand, brand personality, status image, popularity with friends, popularity with family members, design, style, fashion. Availability attributes Carried by local stores, credit terms, quality of service available from local dealer, delivery time. 106 Section Two Market Opportunity Analysis important attributes.12 Consequently, brand attitudes may also depend on which manufacturer can be most flexible in customizing its product. Purchase Even after a consumer has collected information about alternative brands, evaluated them, and decided which is the most desirable, the decision process still is not complete. The consumer must now decide where to buy the product. Choosing a source from which to buy the product involves essentially the same mental processes as does a product-purchase decision. The source is usually a retail store but may also be a mailorder catalog such as L. L. Bean or a website like RedEnvelope.com. Consumers obtain information about alternative sources from personal experience, advertising, comments of friends, and the like. Then they use this information to evaluate sources on such attributes as lines of merchandise carried, services rendered, price, convenience, personnel, and physical characteristics. Consumers usually select the source they perceive to be best on those attributes most important to them. If their experiences with a source are positive over time, they may develop patronage loyalty and routinely shop that source—similar to the way consumers develop brand loyalties. Consumers shopping in a retail store intent on purchasing one brand sometimes end up buying something different. MacDonald, for example, could be switched from one cruise to another by the travel agent. This happens because the consumer’s ultimate purchase can be influenced by such factors as out-of-stocks (no outside cabins on a particular cruise), a special display, or a message from a salesperson (“I can get you a better deal on a similar cruise if you can go two weeks later”). Postpurchase Evaluation Whether a particular consumer feels adequately rewarded following a purchase depends on two things: (1) the person’s aspiration or expectation level—how well the product was expected to perform (delivery of a quality pizza while it is hot)—and (2) the consumer’s evaluation of how well the product actually did perform (the pizza arrived cold). Consumers’ expectations about a product’s performance are influenced by several factors. These include the strength and importance of each person’s need and the information collected during the decision-making process. In the case of MacDonald, a persuasive ad or an enthusiastic endorsement of a given cruise by a friend who is a frequent cruise-goer may have caused him to expect more from his cruise than he would have otherwise. He may, however, attribute part of any dissatisfaction to his own actions—an unwillingness to participate in some of the entertainment. The fact that consumers are part of the service production process makes self-blame a real possibility.13 Nevertheless, even with services there is a danger for marketers in using exaggerated claims in product advertising. Such claims can produce inflated expectations the product cannot live up to—resulting in dissatisfied customers. It is important to note that, as the diagram in Exhibit 4.3 indicates, the consumer’s evaluation of a purchase feeds back into memory where the information can be recalled for a similar purchase decision. Stored information about one or more negative past experiences with a brand or supplier will reduce the odds that the consumer will make the same purchase again. Consistent positive experiences can ultimately lead to brand loyalty—the routine repurchase of the same brand with little consideration of any alternatives. Some experts argue that consumers more often develop loyalty to service providers than to physical products because of the difficulty of evaluating alternatives before actually experiencing the service. Also, repeated patronage can bring additional benefits, such as discounts, or more customized service as the provider gains more insights into the customer’s preferences.14 This helps explain why about 25 percent of all cruise passengers are repeat customers. Chapter Four Understanding Consumer Buying Behavior 107 Low-Involvement Purchase Decisions Because low-involvement products are not very important to consumers, the search for information to evaluate alternative brands is likely to be minimal. As a result, decisions to buy products such as cookies or cereals often are made within the store, either impulsively on the basis of brand familiarity, or as a result of comparisons of the brands on the shelf. The consumers’ involvement and their risks associated with making poor decisions are low for such products. Therefore, consumers are less likely to stay with the same brand over time. They have little to lose by switching brands in a search for variety. Even so, many consumers develop loyalty to a given brand, as in the continued popularity of such low-involvement products as Wrigley Doublemint chewing gum and Gold Medal flour, which have been around for years. Most purchase decisions are low in consumer involvement—the consumer thinks the product or service is insufficiently important to identify with it. Thus, the consumer does not engage in an extensive search for information for such a purchase. Information involving such products is received passively as in, for example, seeing an ad for Green Giant frozen vegetables, which is neither interpreted nor evaluated, but simply noticed and filed away in memory. Later, the consumer identifies a need to buy some frozen vegetables. On the next trip to the supermarket, the consumer sees the Green Giant brand in the frozen-foods section and buys several packages. The familiarity generated by exposure to earlier advertising (and/or word-of-mouth information) was sufficient to stimulate the purchase of Green Giant though the consumer does not have a strong, positive brand association. After buying and using the product, the consumer may decide Green Giant vegetables are either good or bad. This attitude will be likely to affect future purchases of frozen vegetables. However, such brand evaluations occur only after an initial purchase has been made. This is the opposite of complex decision making. Inertia As Exhibit 4.2 indicated, there are two low-involvement buying decisions. When there are few differences between brands and little risk associated with making a poor choice, consumers either buy brands at random or buy the same brand repetitively to avoid making a choice. Marketers must be careful not to confuse such repeat inertialpurchasing with brand loyalty because it is relatively easy for competitors to entice such customers to switch brands by offering cents-off coupons, special promotions, or in-store displays. Highly brand-loyal customers, on the other hand, resist such efforts on account of their strong brand preference. Impulse Purchasing and Variety Seeking The second low-involvement purchase process is impulse buying, when consumers impulsively decide to buy a different brand from their customary choice or some new variety of a product. The new brand is probably one they are familiar with through passive exposure to advertising or other information, however. Their motivation for switching usually is not dissatisfaction but a desire for change and variety. Understanding the Target Consumer’s Level of Involvement Enables Better Marketing Decisions The preceding discussion clearly indicates that consumers employ different decisionmaking processes and may be influenced by different psychological, social, and situational factors, depending on their level of involvement with the product or service they are 108 Section Two Market Opportunity Analysis buying. These differences between high- and low-involvement consumer behavior are summarized in Exhibit 4.6. Such behavioral differences have a major implication for marketers. A given marketing strategy, or decisions concerning any of the 4 Ps in a marketing plan, will not be equally effective for both high- and low-involvement products. Even though Strategic Issue consumers may have differing degrees of psychological involvement A given marketing strategy, or decisions concerning any of the 4 Ps in a marketing with a given product category, the marketer needs to determine whether plan, will not be equally effective for both the majority of potential customers in his or her target segment are high- and low-involvement products. likely to be highly involved with the purchase decision or not. The various elements of the strategic marketing plan can then be tailored to the overall level of involvement of people in the target market. Exhibit 4.7 summarizes some major differences in marketing actions appropriate for high- versus low-involvement product or service offerings. These differences are briefly discussed in the following sections. Product Design and Positioning Decisions Consumers evaluate both highand low-involvement products on criteria that reflect the benefits they seek. Both types of products and services must offer at least one compelling and valued benefit to continue to win acceptance in the market. Because consumers tend to evaluate high-involvement products and services before purchasing, however, it is particularly important that such offerings be designed to provide at least some benefits that are demonstrably superior to those offered by major competitors, and that marketing communications are effective in making potential customers aware of those benefits. For low-involvement goods and services, on the other hand, much brand evaluation occurs after the purchase is made. Consumers tend to be most positive about—and more likely to repurchase—brands that don’t disappoint them or cause unexpected problems. Consequently, firms that market low-involvement products or services need to pay Exhibit 4.6 High-Involvement versus Low-Involvement Consumer Behavior High-involvement consumer behavior Low-involvement consumer behavior ● Consumers are information processors. ● Consumers learn information at random. ● Consumers are information seekers. ● Consumers are information gatherers. ● Consumers represent an active audience for advertising. ● Consumers represent a passive audience for advertising. ● Consumers evaluate brands before buying. ● ● Consumers seek to maximize expected satisfaction. They compare brands to see which provides the most benefits related to their needs and buy based on a multiattribute comparison of brands. Consumers buy first. If they do evaluate brands, it is done after the purchase. ● Consumers seek an acceptable level of satisfaction. They buy the brand least likely to give them problems and buy based on a few attributes. Familiarity is the key. ● Personality and lifestyle characteristics are related to consumer behavior because the product is closely tied to the person’s self-identity and belief system. ● Personality and lifestyle are not related to consumer behavior because the product is not closely tied to the person’s selfidentity and beliefs. ● Reference groups influence consumer behavior because of the importance of the product to group norms and values. ● Reference groups exert little influence on consumer behavior because products are not strongly related to their norms and values. Source: Adapted from Consumer Behavior and Marketing Action, 5th edition by ASSAEL, 1995. Chapter Four 109 Understanding Consumer Buying Behavior Exhibit 4.7 Marketing Decisions for High-Involvement versus Low-Involvement Products or Services Marketing mix element Marketing decisions where the consumer exhibits high involvement Marketing decisions where the consumer exhibits low involvement Product decisions For long-term success, one or more compelling product benefits are necessary, regardless of the level of consumer involvement. For long-term success, one or more compelling product benefits are necessary, regardless of the level of consumer involvement. Pricing decisions Price, unless substantially lower, is likely to be of secondary importance to performance criteria. High price may suggest high quality or status, to the seller’s benefit. Demonstrable consumer benefits are more likely than price to drive consumer choice. Price offers can be effective in gaining trial. A sustained low price, compared to competitors (such as for private-label goods in supermarkets), may provide sufficient inertia for repeat purchase. Promotional decisions Consumers are interested in the information that sellers provide. Promotional vehicles that communicate in greater detail (e.g., print advertising, internet, infomercials, personal selling) are likely to be effective. Consumers are not interested in the information that sellers provide. Large advertising budgets and a clear focus on a single demonstrable consumer benefit are probably necessary to get the message across. Distribution decisions Consumers will be relatively less concerned with convenience in purchasing. Relatively less extensive distribution is necessary. Consumers will be relatively more concerned with convenience in purchasing. Relatively more extensive distribution is necessary. particular attention to basic use-related attributes, such as consistent product quality, reliability, convenient packaging, and user-friendliness. Pricing Decisions Highly involved consumers generally buy the brand they believe will deliver the greatest value. They are willing to pay a higher price for a brand if they believe it will deliver enough superior benefits relative to cheaper competitors to justify the difference. They may even use high price as an indicator of a brand’s superior quality or prestige, particularly in categories where quality is hard to evaluate objectively before purchase, such as professional services. Many consumers buy low-involvement products largely or solely on the basis of low price. Therefore, special sales or coupon offers can be effective in gaining trial of such goods and services. If no problems are experienced during consumption, consumers may continue to buy the brand out of inertia, at least until a competitor offers an attractive price promotion. Advertising and Promotion Decisions Highly involved consumers typically seek at least some information about alternative brands, retail outlets, and so on, before making a purchase decision. Therefore, promotional vehicles that communicate in greater detail— such as print advertising, company websites, infomercials, or a salesperson—are more likely to be attended to and be effective in marketing high-involvement goods and services. On the other hand, because low-involvement customers are usually passive information gatherers, advertising needs to focus on only a few main points and to deliver the message frequently in order to make it easy for consumers to gain Strategic Issue familiarity and positive associations with a brand. Television is often Because low-involvement customers are the primary medium for low-involvement products because it faciliusually passive information gatherers, tates passive learning. Distinctive package design is also important for advertising needs to focus on only a few main points and to deliver the message such products since it helps consumers recognize brands they’ve seen frequently. advertised. 110 Section Two Market Opportunity Analysis Distribution Decisions Extensive retail distribution is particularly important for low-involvement products because most consumers are unwilling to search for, or expend extra effort to obtain, a particular brand. Thus, the larger the proportion of available retail outlets, including websites, vending machines, and the like, a marketer can induce to carry a brand, the larger that brand’s market share is likely to be. Because consumers are more willing to spend some time and effort to acquire their favorite brand in a high-involvement category, extensive retail coverage is less critical for such products. The marketer may be better off being relatively choosy in selecting retailers to carry a brand, particularly if those retailers will play an important role in promoting the product or servicing it after the sale. The value of some exclusive, prestigious brands is clearly enhanced by the fact they are not available from every mass merchandiser in town. Strategies to Increase Consumer Involvement In some cases, a firm may try to increase consumers’ involvement with its brand as a way to increase revenues. Increased customer involvement can be attempted in several ways. The product might be linked to some involving issue, as when makers of bran cereals associate their products with a highfiber diet that may reduce the incidence of colon cancer. Of course, the involving issue might be social rather than personal. Thus, cause-related marketing is the practice of designating a portion of a brand’s sales or profits to a nonprofit cause—such as the Special Olympics or breast cancer research—and aggressively publicizing it.15 However, as causerelated marketing has become more popular, its effectiveness as a tool for increasing consumer involvement and brand preference may be declining, as discussed in Exhibit 4.8. Or the product can be tied to a personally involving situation, such as advertising a sleeping aid late in the evening when insomniacs are interested in finding something to help them sleep. Finally, an important new feature might be added to an unimportant product as when Revlon introduced its ColorStay Lipcolor, which promised a miracle for women—unsmeared lipstick all day long. Despite being double the price of other lipsticks, women responded to the claim that it “won’t smear off on your teeth, your glass, or him” so well that ColorStay became the number-one-selling brand in drugstores and other mass merchandisers.16 Exhibit 4.8 I Is Cause-Related Marketing Losing Its Impact? n recent years, many consumer products manufacturers and retail chains have sponsored marketing campaigns linking their brands or stores to a social issue. These caused-related campaigns include multicompany programs—such as (product) Red for the benefit of African AIDS Victims—as well as efforts by individual firms, like Avon’s breast cancer crusade. The popularity of such programs has grown partly because they often fit well with the social objectives detailed in corporate mission statements, but mostly because they are effective at increasing consumers’ involvement with and preference for the sponsoring brand or retail chain. Unfortunately, the popularity of cause-related marketing may be eroding its effectiveness, at least within the U.S. market. In a survey of 1,066 adults polled by a commercial research firm in 2007, 36 percent said they had bought a product in the previous 12 months after learning of its maker’s commitment to some social issue, but that figure was down from 43 percent in a similar survey in 2004. Only 14 percent said they paid more for a product because of its support for a cause, down from 28 percent. And just 30 percent told a family member or friend about a brand’s commitment to a cause, compared to 43 percent three years earlier. Carol Cone, whose brand strategy firm conducted the survey, speculates that so many brands are now linked to worthy causes the American consumers may be suffering from “cause fatigue.” Source: Conrad Wilson, “Shoppers without a Cause,” BusinessWeek, July 9, 2007, p. 14. Chapter Four Understanding Consumer Buying Behavior 111 Why People Buy Different Things: Part 1— The Marketing Implications of Psychological and Personal Influences Even when two consumers have equal involvement with a product, they often purchase different brands for varying reasons. The information they collect, the way they process and interpret it, and their evaluation of alternative brands are all influenced by psychological and personal characteristics. Some of the important psychological, or thought, variables that affect a consumer’s decision-making process include perception, memory, needs, and attitudes. The consumer’s personal characteristics, such as demographic and lifestyle variables, influence these psychological factors. Perception and Memory Perception is the process by which a person selects, organizes, and interprets information. When consumers collect information about a high-involvement service such as a cruise, they follow a series of steps, or a hierarchy of effects. Exposure to a piece of information, such as a new product, an ad, or a friend’s recommendation, leads to attention, then to comprehension, and finally to retention in memory. Once consumers have fully perceived the information, they use it to evaluate alternative brands and to decide which to purchase. The perception process is different for low-involvement products. Here, consumers have information in their memories without going through the sequence of attention and comprehension. Exposure may cause consumers to retain enough information so that they are familiar with a brand when they see it in a store. Two basic factors—selectivity and organization—guide consumers’ perceptual processes and help explain why different consumers perceive product information differently. Selectivity means that even though the environment is full of product information, consumers pick and choose only selected pieces of information and ignore the rest. For highinvolvement purchases, consumers pay particular attention to information related to the needs they want to satisfy and the particular brands they are considering for purchase. This perceptual vigilance helps guarantee that consumers have the information needed to make a good choice. For low-involvement products, consumers tend to selectively screen out much information to avoid wasting mental effort. The average consumer is exposed to over 1,000 ads every day plus information from other sources such as catalogs, websites, and friends. Consumers must be selective in perceiving this information to cope with the clutter of messages. Consumers also tend to avoid information that contradicts their current beliefs and attitudes. This perceptual defense helps them avoid the psychological discomfort of reassessing or changing attitudes, beliefs, or behaviors central to their self-images. For example, many smokers avoid antismoking messages, or play down their importance, rather than admit that smoking may be damaging to their health. Memory Limitations Even though consumers are selective in perceiving product information, they remember only a small portion of it. This limitation of the human memory concerns marketers since much marketing activity deals with communicating information to potential consumers to improve their attitudes toward a given brand. What can marketers do—if anything—to improve the memorability of their messages? There are different theories of how the human memory operates, but most agree that it works in two stages. Information from the environment is first processed by the 112 Section Two Market Opportunity Analysis short-term memory, which forgets most of it within 30 seconds or less because of inattention or displacement of new incoming information. Some information, however, is transferred to long-term memory, from which it can be retrieved later. Long-term memory has a nearly infinite storage capacity, but the amount of product information actually stored there is quite limited. For information to be transferred to long-term memory for later recall, it must be actively rehearsed and internalized. It takes from 5 to 10 seconds of rehearsal to place a chunk of information in long-term memory. This is a long time relative to the fraction of a second necessary to perceive that piece of information. Therefore, new pieces of information swamp the old one before it can be transferred unless consumers find it sufficiently relevant to warrant focusing their attention.17 This is why print media and interactive electronic media, such as websites, are good for communicating complex or technical information about high-involvement products. Consumers can control the pace at which such information is received and can take the time necessary to comprehend, rehearse, and remember it. Similarly, this explains why television advertising for low-involvement products should focus on a few simple pieces of information, such as brand name, symbol, or key product attributes, and be repeated frequently. Otherwise, the information will never make it into the consumer’s long-term memory. Perceptual Organization Another mental factor determining how much product information consumers remember and use is the way they organize the information. People do not view and remember each piece of information they receive in isolation. Instead, they organize information through the processes of categorization and integration. Categorization helps consumers process known information quickly and efficiently: “I’ve seen this ad before so I don’t have to pay much attention.” It also helps people classify new information by generalizing from past experience. An ad for a new cereal with a high vitamin and mineral content, for instance, is interpreted in light of consumers’ experience with other nutritional cereals. This can cause a problem if consumers’ experiences have not been very favorable. Integration means that consumers perceive separate pieces of related information as an organized whole. For example, the picture, headline, copy, and location of a magazine ad interact to produce a single overall reaction to the ad and the brand advertised. Similarly, consumers integrate information about various characteristics of a brand, such as its price and the retail stores that carry it, to form an overall image of the brand. Effects of Stimulus Characteristics on Perception Consumers’ personal characteristics—such as their particular needs, attitudes, beliefs, and past experiences with a product category—influence the information they pay attention to, comprehend, and remember. The characteristics of the message itself and the way it is communicated also influence consumers’ perceptions. The ad’s color, size, and position within a magazine or a TV program influence consumers’ attention to the message and the brand image the ad produces in consumers’ minds. We examine these factors in Chapter 13 when we discuss advertising and promotion decisions. Needs and Attitudes An attitude is a positive or negative feeling about an object (say, a brand) that predisposes a person to behave in a particular way toward that object. Attitudes derive from a consumer’s evaluation that a given brand provides the benefits necessary to help satisfy a particular need. These evaluations are multidimensional; consumers judge each brand on a set of dimensions or attributes weighted by their relative importance. Chapter Four 113 Understanding Consumer Buying Behavior Fishbein Model Martin Fishbein pioneered a model that specified how consumers combine evaluations of a brand across multiple attributes to arrive at a single overall attitude toward that brand. His model is expressed as follows: k Attitude A  ∑ Bi I i i 1 where AttitudeA  Consumer’s overall attitude toward Brand A Bi  Consumer’s belief concerning the extent to which attribute i is associated with Brand A Ii  The importance of attribute i to the consumer when choosing a brand to buy k  The total attributes considered by the consumer when evaluating alternative brands in the product category i  Any specific product attribute Exhibit 4.9 applies the Fishbein model to Paul MacDonald’s evaluation of alternative cruises. This application is compensatory because it assumes that MacDonald’s overall attitude toward a given cruise is determined by the weighted sum of the ratings for that cruise on all relevant attributes. Thus, a poor evaluation on one attribute is compensated for by a strong evaluation of another attribute. It also assumes that the cruise with the highest total score is the one MacDonald is predisposed to buy. Noncompensatory Attitude Models As suggested by Exhibit 4.9, the mental processes involved in forming an attitude are quite complex because consumers must evaluate each alternative brand on every attribute. In some purchase situations, particularly with low-involvement products, consumers may adopt a simpler approach and evaluate alternative brands on only one attribute at a time. Such an approach is noncompensatory because a poor evaluation of a brand on one attribute cannot be offset by a strong evaluation on another. For instance, one noncompensatory model, the lexicographic model, suggests that consumers evaluate brands on the most important attribute first. If one brand appears clearly superior on that dimension, the consumer selects it as the best possible choice. If no brand stands out on the most important attribute, the consumer evaluates the alternative brands on the second most important attribute, and so forth.18 Marketing Implications of Attitude Models Although the different attitude models provide insights into the ways consumers evaluate competitive product offerings, their implications for marketers are similar. The models suggest that to design appealing product offerings and structure effective marketing programs, marketers must have information about (1) the attributes or decision criteria consumers use to evaluate a particular product category, (2) the relative importance of those attributes to different consumers, and (3) how consumers rate their brand relative to competitors’ offerings on important attributes. Multiattribute models are especially helpful in formulating marketing strategies. They do so by showing the consumer’s ideal combination of product/service attributes, each of which is weighted as to its relative importance. Clustering those respondents with similar “ideals” enables the marketer to better understand not only what different sets of consumers want, but also how they perceive the various brands relative to the ideal brand. 114 Section Two Market Opportunity Analysis Exhibit 4.9 A Compensatory Multiattribute Model of Attitudes toward Alternative Cruises Our hypothetical consumer, Paul MacDonald, is interested in taking a Caribbean cruise lasting not more than seven days sometime during the months of January or February at a reasonable price. As the table indicates, he uses five attributes (choice criteria) to make a comparison between three alternative cruises. On the basis of information gathered from advertising, travel agents, promotional materials received from a number of cruiselines, and friends, he rates the three different cruises on each of the five attributes as follows: Ratings Service attribute Importance weight (0–10) A B C Demographics—other passengers 10 8 8 8 Entertainment 10 8 10 9 8 8 9 9 Low fares 7 9 8 8 Size/steadiness of ship 6 9 8 8 Ports of call Using the formula in the text, MacDonald calculates that an overall attitude score for Cruise A equals (10 × 8) + (10 × 8) + (8 × 8) + (7 × 9) + (6 × 9) = 341. His overall attitude scores for the other two cruises: Cruise B = 356 and Cruise C = 346. Consequently, MacDonald prefers and will be predisposed to buy Cruise B, the cruise toward which he has the most positive attitude. Although the demographics of other passengers was one of the most important attributes, it played no significant role in determining which cruise he would buy because there were no significant differences between the three cruises on that attribute. Instead the determinant attribute—that which had the biggest impact on which cruise MacDonald would prefer—was entertainment. The firm can then decide which segments to target and how best to position its productmarket entries. Attitude Change The multiattribute attitude models of consumer choice suggest various ways marketers might change consumer attitudes favorably for their brands versus competing brands. These are discussed briefly below. 1. Changing attitudes toward the product class or type to increase the total market—thereby increasing sales for a particular brand. For example, a frozen-orange-juice seller once attempted to make its product acceptable as a refreshing drink throughout the day. This type of attitude change involves primary demand and is difficult to accomplish. 2. Changing the importance consumers attach to one or more attributes. For instance, a number of food manufacturers have spent large sums warning about the dangers of high cholesterol. After increasing the importance consumers attach to lowering their cholesterol, manufacturers can then promote their brands as an appropriate part of a low-cholesterol diet. 3. Adding a salient attribute to the existing set. For instance, Colgate-Palmolive added triclosan, an antibiotic that fights gingivitis, to its Total brand of toothpaste and promoted it heavily. Similarly, a brand might be linked to a social cause, as discussed in Exhibit 4.8. 4. Improving consumers’ ratings of the brand on one or more salient attributes via more extensive or effective advertising and promotion. This is the most common attempt, particularly during a brand’s introduction to the market or after product improvements have been made. 5. Lowering the ratings of the salient product characteristics of competing brands. This can be attempted via comparative advertising, which has increased in recent years. For example, one nutritional cereal regularly compares the amount of vitamins and minerals its brand provides in an average serving with those provided by specific other brands. Chapter Four Understanding Consumer Buying Behavior 115 Demographics, Personality, and Lifestyle Demographics Demographics influence (1) the nature of consumers’ needs and wants, (2) their ability to buy products or services to satisfy those needs, (3) the perceived importance of various attributes or choice criteria used to evaluate alternative brands, and (4) consumers’ attitudes toward and preferences for different products and brands. For example, older consumers spend more on medical care and travel and less on home furnishings and clothing than do younger groups; the presence of young children obviously affects the purchasing of a variety of goods and services; and better-educated people spend more on reading materials and foreign travel than do those with less education. Personality and Self-Concept A consumer’s buying behavior is also influenced by his or her personality—the set of enduring psychological traits that lead a person to make distinctive and consistent responses to factors in his or her environment. An individual’s personality is usually described in terms of traits such as sociability, self-confidence, dominance, adaptability, introversion, and the like. Personality can be useful for explaining why different people buy different things because brands are also perceived to have personalities, and consumers are likely to choose brands whose personalities match their own. In a classic study, the following traits were commonly used to define brand personalities in the United States:19 ● ● ● ● ● Sincerity (honest, wholesome, down-to-earth, cheerful) Excitement (imaginative, spirited, daring, up-to-date) Competence (reliable, successful, intelligent) Sophistication (upper-class, charming) Ruggedness (tough, outdoorsy) Brand personalities in other countries are defined with some of these same traits, but other traits are unique to specific cultures. For instance, a “peacefulness” dimension replaces “ruggedness” in both Japan and Spain, and “competence” is overshadowed by “passionate” in Spain.20 Many well-known brands are perceived to be strong on one dimension, though some are seen as having multidimensional personalities. For instance, MTV is associated with excitement and Campbell soup with sincerity, while Levi’s jeans are seen as rugged, youthful, and authentic. Consumers tend to choose brands with personalities that match either their own self-concept (the way they actually see themselves) or their ideal self-concept (the kind of person they would like to be), but this tendency is probably stronger for highinvolvement, publicly consumed goods and services than for low-involvement items.21 Lifestyles Two people of similar age, income, education, and even occupations do not necessarily live their lives in the same way. They may have different opinions, interests, and activities. As a result, they are likely to exhibit different patterns of behavior—including buying different products and brands and using them in different ways and for different purposes. These broad patterns of activities, interests, and opinions—and the behaviors that result—are referred to as lifestyles. To obtain lifestyle data, consumers are asked to indicate the extent to which they agree/disagree with a series of statements having to do with such things as price consciousness, family activities, spectator sports, traditional values, adverturesomeness, and fashion. Lifestyle typologies or psychographic profiles have been developed by several advertising agencies and market research firms. Global Scan, developed by Backer Spielvogel & Bates ad agency, measures a variety of consumer attitudes, activities, and values among a sample of 3,500 consumers in the United States and 1,000 respondents from other countries.22 116 Section Two Market Opportunity Analysis Exhibit 4.10 Global Scan’s Lifestyle Psychographic Segments and the Proportion of People in Each Segment across Three Countries ● Strivers: Young people (median age 31) who live hectic, time-pressured lives. They strive hard for success. They are materialistic, seek pleasure, and demand instant gratification. ● Achievers: They have achieved some of the success that strivers aim for. They are affluent, assertive, and upward bound. They are very status conscious and buy for quality and are slightly older than strivers. ● Pressured: This group cuts across age groups and is composed mainly of women who face constant financial and family pressure. They do not enjoy life as much as they could and feel generally downtrodden. ● Adapters: These are older people who maintain time-honored values but keep an open mind. They live comfortably in a changing world. ● Traditional: They hold onto the oldest values of their countries and cultures. They resist change and prefer routines and familiar products. 2% 8% Unassigned 17% Adapters 16% Traditionals 12% Pressured 22% 18% Achievers 26% 29% Strivers United States United Kingdom 12% 22% 14% 18% 12% 14% 19% 17% 22% Japan Source: Going Global: International Psychographics (Ithaca, NY: American Demographics Books, 1991). These measures are then matched against respondents’ media viewing habits, product use, and purchase patterns. With this survey data, Global Scan has identified five lifestyle segments, summarized in Exhibit 4.10. The exhibit also shows the proportion of consumers that fall into each segment in the United States, the United Kingdom, and Japan. The size of the various segments varies across countries. For instance, Japan’s more traditional and stable culture includes a larger proportion of “Traditionals” and “Adapters” than the United States. An alternative lifestyle typology, called VALS 2, has been developed by the research firm Strategic Business Insights.23 We will examine the lifestyle profiles identified by these various typologies, and their usefulness for defining and understanding market segments, in greater detail in Chapter 7. Chapter Four 117 Understanding Consumer Buying Behavior Why People Buy Different Things: Part 2— The Marketing Implications of Social Influences Information and social pressures received from other people influence a consumer’s needs, wants, evaluations, and product or brand preferences. Social influences are particularly apparent when consumers purchase high-involvement, socially visible goods or services. The social influences affecting consumers’ purchase decisions include culture, subculture, social class, reference groups, and family. These five categories represent a hierarchy of social influences, ranging from broad, general effects on consumption behavior—such as those imposed by the culture we live in—to more specific influences that directly affect a consumer’s choice of a particular product or brand. For a simplified view of this hierarchy of social influences, see Exhibit 4.11. Culture Culture is the set of beliefs, attitudes, and behavior patterns (customs and folkways) shared by members of a society and transmitted from one generation to the next through socialization. Cultural values and beliefs tend to be relatively stable over time, but they can Exhibit 4.11 Simplified Hierarchy of Social Forces Affecting Consumer Behavior Culture–subculture Social Social class—reference groups—family Personal Demographics, including stage in family life cycle—lifestyle, personality Perception, memory, needs Psychological Attitudes toward product class Attitudes toward brands Consumption 118 Section Two Market Opportunity Analysis change from one generation to the next in response to changing conditions in society. For example, the baby boomers born in the United States between 1946 and 1960 have somewhat different values and behavior patterns from those of their parents. They tend to live a more health-conscious lifestyle (e.g., to eat less red meat) and to concern themselves more with personal grooming than did their parents at the same age. And as the boomers approach retirement age, they appear even more committed to maintaining healthy, active lifestyles—and less likely to fully retire at an early age—than previous generations of senior citizens.24 Cultural differences across countries create both problems and opportunities for international marketers. For example, Pillsbury wanted to take advantage of the cultural evolution concerning working women in Japan. About 50 percent of married women in Japan now work outside the home. Consequently, they represent an attractive market for convenience foods, such as Green Giant frozen vegetables. The problem is that many feel guilty about using such products because they seem inconsistent with traditional cultural values. Therefore, in addition to touting the convenience of Green Giant vegetables, Pillsbury’s advertising also stressed the nutrition and flavor benefits of freezing vegetables at the peak of ripeness. As a result, Green Giant’s Japanese sales increased 50 percent in the first year of the ad campaign.25 Subculture There are many groups of people in nearly every country who share common geographic, ethnic, racial, or religious backgrounds. They continue to hold some values, attitudes, and behavior patterns that are uniquely their own. Such groups are referred to as subcultures. For example, the average American family now has two wage earners who probably share decisions relating to vacations, car, financial instruments, and major furniture items. In contrast, Korean-Americans as a subculture in America are much more inclined to favor the male in almost all decisions, including food.26 Social Class Every society has its status groupings largely based on similarities in income, education, and occupation. Because researchers have long documented the values of the various classes (typically thought of as five—upper, upper-middle, middle, working, and lower), it is possible to infer certain behavior concerning some products and services, including class members’ reactions to advertising. For example, higher-status people are more critical of advertising, react better to more individualized messages, appreciate humor and sophistication, and look down a bit on ads that stress economy. Lower-status people respond to ads that are strongly visual and show practical solutions to their everyday problems. Reference Groups These include a variety of groups that affect consumer behavior through normative compliance, value-expressed influence, and informational influence. The first is most effective when there are strong normative pressures (for instance, from a college fraternity or exclusive club); when social acceptance is important (serving of certain foods to guests); and when the use of a product is conspicuous (women’s fashion clothing). Strategic Issue Value-expressive influence involves conforming to gain status within Over 40 percent of Americans seek the advice of family and friends when one’s group. shopping for doctors, lawyers, and Informational influence involves the use of certain influentials auto mechanics. Word of mouth is also to help assess the merits of a given product/service. The opinions of important with respect to restaurants, entertainment, banking, and personal such individuals often legitimize the purchase of a certain product or services. service. Over 40 percent of Americans seek the advice of family and Chapter Four Understanding Consumer Buying Behavior 119 friends when shopping for doctors, lawyers, and auto mechanics. Word of mouth is also important with respect to restaurants, entertainment, banking, and personal services.27 The Impact of Social Media Social media like YouTube, Facebook, and Twitter may be increasing the informational influence of reference groups, particularly among younger consumers. A recent survey found that, while most consumers start their online information search by going to a search engine like Google (58 percent of respondents) or a manufacturer’s website (24 percent), nearly half the respondents said they followed up with additional information from the social media. Thirty percent used social media to help eliminate from contention the brands their friends did not like and 28 percent said they relied on their friends for news about hot new products or brands.28 The Family The family is a reference group, but because of its importance, we discuss it separately. First, it serves as the primary socialization agent, helping members acquire the skills, knowledge, and attitudes to function as consumers in the marketplace. Consequently, it has a great and lasting influence on its younger members’ attitudes toward various brands and stores. It is likely that many of the product-purchase decisions by a given generation are influenced by parents, even grandparents. Children can also socialize their parents by introducing them to new products such as food, personal care items, and the personal electronics products like 4G phones. For example, nearly half of all young people age 12 to 19 sometimes cook meals for their family.29 Family members tend to specialize in the purchase of certain products either because of their interest or expertise or the role structure of the family. Wives, in most western societies, have the most say in the purchases of food and household products, children’s clothes and toys, and over-the-counter drugs. In a similar vein, joint decisions apply on the purchase of cars, homes, vacations, major appliances, furniture, home electronics, and long-distance telephone carriers. As education increases, more joint decision making occurs. The influence of various family members varies substantially across countries. Generally, the more traditional the society, the more men hold the power. In the more egalitarian countries, such as the Scandinavian nations, decisions are more likely to be made jointly. As women become better educated and more influential as wage earners in developing nations, more joint decision making will happen. Family Life Cycle When people leave home and start their own households, they progress through distinct phases of a family life cycle. The traditional cycle in the most industrialized nations includes young singles, young marrieds without children, young marrieds with children, middle-aged marrieds with children, middle-aged marrieds without dependent children, older marrieds, and older unmarrieds. Each phase of the life cycle brings changes in family circumstances and purchasing behavior. For example, young singles’ purchases tend to concentrate on nondurable items, including food away from home, clothing, and entertainment. Young marrieds without children are typically more affluent because both spouses usually work away from home. They are a major market for such durables as automobiles, furniture, and appliances. Young marrieds with children probably have the least discretionary income, but they are the major market for single-family dwellings, infant products and clothing, and child care services. Middle-aged couples without children usually have the most discretionary income. They are a major market for many luxury goods and services, such as expensive cars and international travel. Finally, the older marrieds and unmarrieds typically have 120 Section Two Market Opportunity Analysis less disposable income but are nevertheless an important market for medical products and services as well as hobby and craft items. Of course, there are exceptions to and elaborations of the traditional family life cycle, especially the growing number of single-parent families and affluent seniors. These groups are of increasing importance to marketers.30 Take-aways 1. Not all purchase decisions are equally important or psychologically involving for the consumer. People engage in a more extensive decision-making process, involving a more detailed search for information and comparison of alternatives, when buying highinvolvement goods and services than when purchasing more mundane, low-involvement items. 2. Because of the differences in the decision-making process, a given marketing strategy will not be equally effective for both high- and low-involvement products. The consumer marketer’s first task, then, is to determine whether the majority of potential customers in the target segment are likely to be highly involved with the purchase decision or not. 3. Because consumers are generally unwilling to spend much time or effort evaluating alternative brands in a low-involvement product category before making a purchase, marketers need to focus their promotional messages on only a few frequently repeated points and to distribute such products extensively to make them convenient for customers to buy. 4. Regardless of the consumer’s level of involvement with a product category, consumers often prefer different brands because of differences in their psychological or personal characteristics, such as their perceptions, memories, attitudes, and lifestyles. Understanding how such characteristics influence consumers’ decisions in a product category provides an important foundation for marketing decisions concerning the definition of market segments, the selection of target markets, and the design of marketing programs to appeal to those markets. 5. Regardless of the consumer’s level of involvement with a product category, consumers often prefer different brands because of differences in their social relationships, such as their culture, social class, reference groups, and family circumstances. Understanding how such social influences impact consumers’ decisions in a product category provides an important foundation for marketing decisions concerning the definition of market segments, the selection of target markets, and the design of marketing programs to appeal to those markets. Endnotes 1. Christopher Palmeri, “Carnival: Plenty of Ports in a Storm,” BusinessWeek, November 15, 2004, pp. 76–78; Amy Gunderson, “Oman, Anyone? More Ships, More Ports of Call,” New York Times, February 26, 2006, Section 5, pp. 7, 12; Nick Kaye and Hilary Howard, “Where Cruisers Are Headed,” and “Too Much of a Good Thing?” The New York Times, February 17, 2008, p. TR8; and “Damn the Torpedoes,” The Economist, February 11, 2010; and the Carnival Corporation 2009 Annual Report at www carnival.com. 2. Henry Assael, Consumer Behavior and Marketing Action (Cincinnati: South-Western College Publishing, 1995), chap. 1. 3. For a detailed discussion of how consumers perceive, evaluate, and buy services, see Valarie Zeithaml, Mary Jo Bitner, and Dwayne Gremler, Services Marketing, 5th ed. (New York: McGraw-Hill, 2009), chaps. 3–5. 4. “You Choose,” The Economist, December 18, 2010, pp. 123–125. 5. Keith B. Murray, “A Test of Services Marketing Theory: Consumer Information Acquisition Activities.” Journal of Marketing 55 (January 1991), p. 13. 6. Joseph Palenchar, “MarketSource Survey Finds What Drives People to Buy,” www.twice.com, September 13, 2010. 7. James Surowiecki, “A Buyer’s Christmas,” The New Yorker, December 24 and 31, 2007, p. 50. 8. David Kirkpatrick and Daniel Roth, “Why There’s No Escaping the Blog,” Fortune, January 10, 2005, pp. 44–50. 9. Jena McGregor, “Consumer Vigilantes,” BusinessWeek, March 3, 2008, pp. 39–42. 10. Kirkpatrick and Roth “Why There’s No Escaping The Blog.” … Also see Stephen Baker and Heather Green, “Beyond Blogs,” BusinessWeek, June 2, 2008, pp. 45–50. 11. For a detailed review of the academic literature concerning how consumers make decisions, see J. Edward Russo and Kurt A. Carlson, “Individual Decision Making,” in Bart Weitz and Robin Wensley, eds., Handbook of Marketing (London: Sage Publications, 2002), pp. 372–408. Chapter Four Understanding Consumer Buying Behavior 12. Julie Schlosser, “Cashing In on the New World of Me,” Fortune, December 13, 2004, pp. 244–50; Anthony Bianco, “The Vanishing Mass Market,” BusinessWeek, July 12, 2004, pp. 61–72; and “The Printed World.” The Economist, February 12, 2011, pp. 77–79. 13. Zeithaml, Bitner and Gremler, Services Marketing, chap. 13. 14. Ibid., chap. 7. 15. Aimee L. Stern, “Do The Right Thing,” BusinessWeek Online, January 31, 2000; and Conrad Wilson, “Shoppers without a Cause,” BusinessWeek, July 9, 2007, p. 14. 121 21. Timothy R. Graeff, “Consumption Situations and the Effects of Brand Image on Consumers’ Brand Evaluations,” Psychology and Marketing 14 (January 1997), pp. 49–70. 22. American Demographics, Going Global: International Psychographics (Ithaca, NY: American Demographics, 1991). 23. For more information about the VALS survey, see www.strategic businessinsights.com/vals. 24. Louise Lee, “Love Those Boomers,” BusinessWeek, October 24, 2005, pp. 94–102. 16. Yumiko Ono, “‘Non-smearing’ Lipstick Makes a Vivid Imprint for Revlon,” The Wall Street Journal, November 16, 1995, p. B1. 25. Jack Russell, “Working Women Give Japan Culture Shock,” Advertising Age, January 1995, pp. 1, 24. 17. For a more detailed discussion, see Joseph W. Alba, J. Wesley Hutchinson, and John G. Lynch, Jr., “Memory and Decision Making,” in Harold H. Kassarjian and Thomas S. Robertson, eds., Handbook of Consumer Theory and Research (Englewood Cliffs, NJ: Prentice Hall, 1992), pp. 1–49. 26. John Steere, “How Asian-Americans Make Purchasing Decisions,” Marketing News, March 24, 1996, p. 9. 18. There are several other noncompensatory models that suggest consumers follow somewhat different mental processes in arriving at their preferred brand. For a more detailed discussion of attitude models, see J. Paul Peter and Jerry Olson, Consumer Behavior (New York: McGraw-Hill, 2008), chap. 6. 19. Jennifer L. Aaker, “Dimensions of Measuring Brand Personality,” Journal of Marketing Research 34 (August 1997), pp. 347–56. 20. Jennifer L. Aaker, Veronica Benet-Martinez, and Jordi Garolera, “Consumption Symbols as Carriers of Culture: A Study of Japanese and Spanish Brand Personality Constructs,” Journal of Personality and Social Psychology 81 (March 2001), pp. 492–508. 27. Chip Walker, “Word of Mouth,” American Demographics, July 1995, p. 38. 28. Courtney Rubin, “Shoppers Combine Search, Social Media to Fuel Decisions,” www.inc.com. February 25, 2011. 29. “The Microwave Generation,” American Demographics, September 1995, p. 24. See also Deborah Roedder John, “Consumer Socialization of Children: A Retrospective Look at Twenty-Five Years of Research,” Journal of Consumer Research 26 (December 1999), pp. 183–213. 30. “Over 60 and Overlooked,” The Economist, August 10, 2002, pp. 51–52; and Michelle Conlin, “Unmarried America,” BusinessWeek, October 20, 2003, pp. 106–16. C HAPTER F IVE Understanding Organizational Markets and Buying Behavior DHL Supply Chain: Building Long-Term Relationships with Organizational Buyers1 I N 2005, THE EXEL COMPANY—a global leader in supply chain management services headquartered in the United Kingdom—was acquired in a “friendly” merger by Deutsche Post World Net, the German logistics behemoth that is also the parent of DHL express freight. Exel was incorporated as a separate business unit within Deutsche Post’s Logistics Division labeled DHL Supply Chain. The business unit’s primary focus is on providing warehousing and ground-based transport services to contractual customers in more than 170 countries from the company’s 2,500 distribution centers around the world. In recent years, however, the DHL Supply Chain competitive strategy has concentrated on differentiating the operation by offering customers a broader range of integrated and efficient logistics services than its competitors. To that end, it has invested to build capabilities in packaging, integrated information management, e-commerce support, and recycling services. The firm’s salespeople attempt to convince large potential customers in target industry segments—such as the retailing, automotive, life sciences, electronics, and technical equipment industries—that some or all of their necessary supply chain management activities could be performed more effectively or efficiently if outsourced to DHL. Account teams work closely with customers to design custom-tailored programs of integrated services, monitor the performance of those 122 programs, and suggest areas for improvement and expansion. Building Long-Term Relationships with Customers Key aspects of the Supply Chain Division’s competitive and marketing strategies, and of the development of its relationships with customers over time, are illustrated by the firm’s long-running association with the Dutch printing systems manufacturer Océ. The relationship began in the 1970s when Exel transported a consignment of printing systems to a customer in the Netherlands. In the intervening years the relationship has expanded dramatically. Today, the services DHL Supply Chain performs for Océ include freight management, inventory control, technical and customer service support, and recycling. DHL transports new printing systems from Océ’s manufacturing plant to a distribution center in Veghel in the Netherlands, where systems are configured, tested, and then shipped to Océ’s customers as they are sold. When a new printing system is delivered, a DHL technical driver gives on-site instruction on how to use the machine and perform simple maintenance tasks. Also, the firm’s mobile technicians are available to perform equipment testing and repair on customer premises. Finally, DHL developed a “reverse logistics” service for Océ after a customer asked the firm to take back its old printing system when a new one was delivered. The firm’s technicians examine all returned systems and, with approval from Océ, undertake an appropriate course of action, from cleaning, to refurbishing, to recycling of the machine’s component materials. Long-Term Relationships Enhance Long-Term Performance DHL Supply Chain’s success at building lucrative long-term logistics relationships with organizational customers has contributed greatly to its revenue and market share in recent years. The unit generated revenues of over €13 billion in 2010, making it by far the market share leader with over 8.4 percent of the €135 billion global market for supply chain services (the next leading competitor had only a 3 percent share). But perhaps more important for the unit’s future, the experience and competencies it has developed working with customers over the years is helping it win new clients. For instance, DHL Supply Chain recently announced the signing of a three-year contract worth over €130 million per year with Jaguar and Land Rover. Under the contract, DHL Exel will be managing Jaguar and Land Rover suppliers to ensure they are shipping the right materials and components to the right plants at the right time, as well as overseeing in-plant logistics. Marketing Challenges Addressed in Chapter 5 The fact that the DHL Supply Chain Division markets its logistics services to organizational customers rather than individual consumers makes it like the great majority of business firms. Worldwide, organizational markets account for more than twice the dollar value of purchases as consumer markets. About half of all manufactured goods in most countries are sold to organizational buyers. In addition, organizations such as Cargill, Nestlé, and BP buy nearly all minerals, farm and forest products, and other raw materials for further processing. Finally, organizations buy many services from accounting firms, banks, financial advisers, advertising agencies, law firms, consultants, railroads, airlines, security firms, and other suppliers. As we’ll see later, organizational customers are different in some ways from consumers, and those differences have important implications for designing effective marketing programs. But at the most basic level, marketers need to answer the Strategic Issue same set of questions about organizational markets as about conMarketers need to answer the same set of sumer markets in order to develop a solid foundation for their marketquestions about organizational markets ing plans. Who are the target customers and what are their needs and as about consumer markets in order wants? How do those customers decide what to buy and what suppliers to develop a solid foundation for their marketing plans. to buy from? Do their decision processes vary depending on their past experiences, the nature of the product being purchased, and other situational factors? If so, what are the marketing implications of those variations? This chapter provides a framework to help you address these questions. 123 124 Section Two Market Opportunity Analysis We begin our examination of “who is the customer?” by comparing organizational markets to consumer markets and pointing out differences between the two types of customers; differences that often dictate varying marketing approaches. One of those differences is simply the number of participants in the purchase decision. While consumers are influenced by family and friends, they often decide what to buy—and make the actual purchase—on their own. That is typically not the case in organizational purchasing, especially when the product or service involved is relatively complex and expensive. For instance, a number of top managers from purchasing, manufacturing, finance, and other functions were involved in negotiating Jaguar and Land Rover’s new contract with DHL Supply Chain, and managers from several levels within Océ are involved in reviewing and renegotiating the firm’s service agreement each quarter. Therefore, we will discuss the different kinds of participants in organizational purchase decisions, the roles they play, and the different kinds of marketing messages and activities appropriate for each group. Next, we examine the process that organizational customers go through in deciding what to buy and from whom. As with individual consumers, this process varies depending on the past experience the organization has in buying the particular product or service and with a given supplier. As illustrated by the association between DHL and Océ, a primary goal should be to develop long-term relationships—and ideally cooperative alliances—with customers to ensure repeat purchases and capture full lifetime value. We discuss these issues and their implications for marketing programs, as well as the impact the internet and other information technologies are having on firms’ strategies for strengthening customer relationships. Finally, organizational purchasing processes also vary depending on the kinds of goods or services being purchased. Océ’s purchase of integrated logistics services costing millions of euros was more complex, required more information, and focused on different criteria than the company’s more routine purchase of office supplies or copper wire. Therefore, we conclude this chapter with an examination of how organizational purchasing processes differ across various categories of goods and services and the implications of those differences for designing effective marketing programs. Who Is the Customer? A Comparison of Organizational versus Consumer Markets Organizations—including manufacturing firms, service producers, wholesalers, retailers, nonprofit organizations such as churches and museums, and governments—all buy things. They buy many of the same goods and services as households, such as computers, office supplies, cars, airline tickets, and telephone service. Thus, what distinguishes organizational markets from consumer markets is often not the kinds of products being purchased. Instead, the crucial differences from a marketing viewpoint are (1) the motivations of the buyer: what the organization will do with the product and the benefits it seeks to obtain; (2) the demographics of the market; and (3) the nature of the purchasing process and the relationship between buyer and seller. Some of these differences are summarized in Exhibit 5.1 and discussed below. Purchase Motives—Derived Demand Individual consumers and households buy goods and services for their own personal use and consumption. Organizational buyers purchase things for one of three reasons: (1) to facilitate the production of another product or service, as when Toyota buys sheet steel, engine components, or computerized Chapter Five Understanding Organizational Markets and Buying Behavior 125 Exhibit 5.1 Differences between Organizational and Consumer Markets Demand characteristics The demand for industrial goods and services is 1. Derived from the demand for consumer goods and services. 2. Relatively inelastic—price changes in the short run are not likely to affect demand drastically. 3. More erratic because small increases or decreases in consumer demand can, over time, strongly affect the demand for manufacturing plants and equipment. 4. More cyclical. Market demographics Organizational buyers, when compared with buyers of consumer goods, are 1. Fewer in number. 2. Larger. 3. Geographically concentrated. Buyer behavior and buyer–seller relationships Organizational markets are characterized by the following when compared with the markets for consumer goods: 1. Use of professional buying specialists following prescribed procedures. 2. Closer buyer–seller relationships. 3. Presence of multiple buying influences. 4 More apt to buy on specifications. welding machines; (2) for use by the organization’s employees in carrying out its operations (office supplies, computer software, advertising agency services); or (3) for resale to other customers, as when a retailer such as Target buys a truckload of towels to be distributed to its many stores and sold to individual consumers. Given these reasons for purchasing, organizational demand for goods and services is in many cases derived from underlying consumer demand. Océ’s demand for DHL’s logistics services, for instance, depends on the number of printing systems purchased by its customers. Fluctuating economic conditions in an industry can change a firm’s production schedule, plant and equipment utilization, and materials and parts inventories. These changes affect the firm’s demand for materials, components, equipment, logistics services, and more. In other words, derived demand tends to be relatively erratic and cyclical, making accurate sales forecasting and planning more difficult. Market Demographics Another major difference between consumer and organizational markets is the number, size, and geographic dispersion of customers. Organizational markets tend to have fewer potential customers, but on average they buy much larger volumes than consumers do. In many industries, the largest organizations also tend to cluster in one or a few geographic areas, as with the concentration of major banks and financial service firms in New York, London, Frankfurt, Zurich, and Tokyo. Purchasing Processes and Relationships Because of the complexity of many of the goods and services and of the large volumes typically involved, organizational purchase decisions often involve evaluation processes focused on detailed, formally specified 126 Section Two Market Opportunity Analysis criteria. These processes are typically carried out by specialized purchasing managers with a great deal of input and influence from other members of the organization. What Do the Unique Characteristics of Organizational Markets Imply for Marketing Programs? The fact that the demand for many organizational goods and services is derived from underlying consumer demand not only makes it harder to forecast sales, but it also limits the marketer’s ability to influence demand among organizational buyers. Toyota’s demand for steel is unlikely to be increased in the short term by price cuts, persuasive advertising messages, or quantity discounts and other kinds of promotions. Until consumer demand for the firm’s cars and trucks expands, increasing steel purchases would simply produce bigger materials inventories, tie up more working capital, and lower profitability. Therefore, the forward-looking company selling to organizational markets needs to keep one eye on possible changes in organizations’ buying behavior for its product and another eye on trends in the underlying consumer markets. Some firms even engage in marketing actions aimed at stimulating demand in those consumer markets in hopes of increasing demand from their organizational customers. For instance, Monsanto aggressively promoted its warranty for Wear-Dated carpets made from its high-quality synthetic fibers in hopes of stimulating consumers’ selective demand for such carpets. The bottom line is that even organizational marketers need a solid understanding of consumer behavior. The complexity of many of the goods and services organizations buy, the extensive decision process involved, and the demographics of organizational markets also have marketing implications. These factors facilitate the use of direct selling, with its emphasis on personal communications through company salespeople and vertically integrated distribution channels. Organizational marketers also tend to be heavy users of “high-involvement” media, such as trade journals, product brochures, and websites. Another upshot of the derived nature of demand in organizational markets, as well as of the complex products and large dollar values involved, is that interdependence between buyers and sellers tends to be greater. The economic success of the marketer depends greatly on the economic success of the organizational Strategic Issue customer. The marketer is part of the customer’s supply chain and is High level of mutual interdependence encourages the development and therefore relied on for services such as coordinated delivery schedules, maintenance of long-term relationships maintenance, spare parts availability, and efficient order handling. This and alliances between the parties. high level of mutual interdependence encourages the development and maintenance of long-term relationships and alliances between the parties.2 It also demands that supplier firms be customer-oriented and have all their functional activities—including production, R&D, finance, logistics, and customer service—focused on providing superior customer value. As one authority argues, “By its very nature, [organizational] marketing requires that all parts of the business be customer-oriented and that all marketing decisions be based on a complete and accurate understanding of customer needs.”3 The Organizational Customer Is Usually a Group of Individuals Organizations are social constructions. Organizations do not buy things. Rather, individual members, usually more than one, make purchase decisions on the organization’s behalf. Similarly, organizations do not form relationships with other organizations. Relationships Chapter Five Understanding Organizational Markets and Buying Behavior 127 are built and maintained among their individual members. Consequently, to understand how organizational purchasing decisions are made, the marketer must first understand the roles performed by different individuals within the organization and their personal interests and concerns. Participants in the Organizational Purchasing Process Organizational purchasing often involves people from various departments. These participants in the buying process can be grouped as users, influencers, gatekeepers, buyers, and deciders.4 Users: The people in the organization who must use or work with the product or service often have some influence on the purchase decision. For example, drill-press operators might request that the purchasing agent buy a particular brand of drills because they stay sharp longer and reduce downtime in the plant. Influencers: Influencers provide information for evaluating alternative products and suppliers. They are usually technical experts from various departments within the organization. Influencers help determine which specifications and criteria to use in making the purchase decision. Gatekeepers: Gatekeepers control the flow of information to other people in the purchasing process. They primarily include the organization’s purchasing agents and the suppliers’ salespeople. Gatekeepers influence a purchase by controlling the information that reaches other decision makers. An organization does not decide to buy a new product, for example, unless information about its existence and advantages over alternatives is brought to the decision makers’ attention. Buyers: The buyer is usually referred to as a purchasing agent or purchasing manager. In most organizations, buyers have the authority to contact suppliers and negotiate the purchase transaction. In some cases they exercise wide discretion in carrying out their jobs. In other cases, they are tightly constrained by specifications and contract requirements determined by technical experts and top administrators. And more recently, as we shall see, technology has enabled some firms to automate parts of the buyer’s role in the form of computerized reorder and logistics management systems and web auctions. Deciders: The decider is the person with the authority to make a final purchase decision. Sometimes buyers have this authority, but often lower-level purchasing managers carry out the wishes of more powerful decision makers. The Organizational Buying Center For routine purchases with a small dollar value, a single buyer or purchasing manager may make the purchase decision. For most high-value organizational purchases, several people from different departments participate in the decision process. The individuals in this group, called a buying center, share knowledge and information relevant to the purchase of a particular product or service. A buyer or purchasing manager is almost always a member of the buying center. The inclusion of people from other functional areas, however, depends on what is being purchased. When the purchase is a major new installation, the high dollar value of the purchase usually dictates that the firm’s chief executive and its top financial officer actively participate in the final decision. For purchases of key fabricating parts for the manufacture of the final product, R&D, engineering, production, and quality-control people are likely to be added. For accessory equipment, such as new office equipment, an experienced user of the equipment (say, a secretary or office manager) might participate in the decision. Different members of the buying center may participate—and exert different amounts of influence—at different stages in the decision process. For example, people from engineering and R&D often exert the greatest influence on the development of specifications and criteria that a new component must meet, while the purchasing manager often has more influence when it comes time to choose among alternative suppliers. The makeup of the buying center also varies with the amount of past experience the firm has in buying 128 Section Two Market Opportunity Analysis a particular product or service. The buying center tends to be smaller—and the relative influence of the purchasing manager greater—when reordering items the firm has purchased in the past than when buying a new product. In general, though, the typical buying center has at least five or six members and often has many more, including people from outside the firm, such as technical advisers and distribution channel members.5 These variations in the relative influence of different members of the buying center across types of purchase decisions and stages in the buying process are illustrated in Exhibit 5.2. The exhibit summarizes the results of a survey of 231 manufacturing firms where managers were asked to indicate the relative influence of various functional departments at different stages in the procurement of component parts. The influence of each department not only varied across stages in the buying process but also depended on whether the purchase was a new buy or a reorder. Marketing Implications Because employees of a customer’s firm may be active at different stages of the purchase process and have different interests and concerns, an important part of planning a marketing program aimed at organizational customers involves determining which individuals to target, how and when each should be contacted, and what kinds of information and appeals each is likely to find most useful and persuasive. Fortunately, in many cases the roles played by various members of the buying center are sufficiently consistent across similar types of firms in an industry that a marketing manager can tailor different promotional messages and sales policies for specific members. For example, in smaller firms in the construction industry presidents and vice presidents exert significantly more influence at all stages in the decision process than do purchasing agents or construction engineers, while the situation is reversed in large firms, reflecting increasing job specialization and decentralization of Exhibit 5.2 The Relative Influence of Various Functional Departments at Different Stages in Two Types of Organizational Purchasing Decisions Straight rebuy Relative influence Relative influence New buy 50% 40 30 20 10 70% 60 50 40 30 20 10 0 0 Identify need Set specs. Evaluate Select choices supplier Purchase stages Identify need Set specs. Evaluate Select choices supplier Purchase stages Engineering Purchasing R&D Production Sources: Reprinted from Industrial Marketing Management, E. Nauman, D. J. Lincoln, and R. D. McWilliams, “The Purchase of Components: Functional Areas of Influence,” pp. 113–22. © 1984, with permission of Elsevier. See also Jeffrey E. Lewin and Naveen Donthu, “The Influence of Purchase Situation on Buying Center Structure and Involvement: A Select Meta-Analysis of Organizational Buying Behavior Research,” Journal of Business Research 58 (October 2005), pp. 1381–90; and Allison Emright, “It Takes a Committee to Buy into B-To-B,” Marketing News, February 15, 2006, pp. 12–13. Chapter Five Understanding Organizational Markets and Buying Behavior Exhibit 5.3 D 129 Communicating Value to Different Members of a Buying Center with Tailored Advertisements ifferent members of a firm’s buying center value different things when choosing suppliers and products. At Honeywell’s MICRO SWITCH Division, the marketing staff responsible for fiber-optic products develops customized advertisements for the different members of customers’ buying centers— design engineers, production engineers, engineering managers, and purchasing agents. Design and production engineers see value in leading-edge technologies and products that are easy to design, install, and use. Engineering management is concerned with supplier capabilities, including a proven track record and good service. Purchasing agents see value in low cost and reliable delivery. Recognizing that different business and technical functions value different things, Bob Procsal, marketing manager for fiber-optic products, carefully chooses different messages and media to communicate to each buying center member. For instance, ads stressing the products’ advanced technical features and high performance levels run in technical magazines aimed at design and production engineers, while messages emphasizing Honeywell’s years of experience and position as a worldwide leader in advanced switching technology are targeted at engineering managers. Does the added effort and expense of customized advertisements pay? Bob Procsal thinks it does. He reports that inquiries about the company’s line of fiber-optic products increased 50 percent after this practice was implemented. Source: Adapted from Eric N. Berkowitz, Roger A. Kerin, Steven W. Hartley, and William Rudelius, Marketing, 5th ed. (Burr Ridge, IL: Richard D. Irwin, 1997), pp. 190–91. purchasing in bigger companies.6 A manager marketing to this industry might develop account management policies directing the salesforce to seek appointments with top executives when calling on smaller firms, but to initiate contacts through the purchasing department in larger organizations. Another example involving the development of different advertising appeals and the use of different media to reach buying center members is summarized in Exhibit 5.3. Similarly, customers’ buying centers are likely to involve a wider variety of participants when they are considering the purchase of a technically complex, expensive product, such as a computer network, than when the purchase involves a simpler product or service. Consequently, firms such as IBM selling technically complex capital equipment often deploy multifunctional sales teams or utilize “multilevel” selling, with different salespeople calling on different members of the buying center to give each the kinds of information that person will find most relevant.7 How Organizational Members Make Purchase Decisions Organizational purchase decisions often involve extensive information search and evaluation processes similar to those consumers use when buying high-involvement items. As with individual consumers, however, the way specific organizational purchase decisions are made can vary with the firm’s level of past experience and other aspects of the buying situation. Types of Buying Situations Organizations encounter three kinds of buying tasks or situations: the straight rebuy, the modified rebuy, and new-task buying.8 130 Section Two Market Opportunity Analysis A straight rebuy involves purchasing a common product or service the organization has bought many times before. Such purchases are often handled routinely by the purchasing department with little participation by other departments. Such purchases are almost automatic, with the firm continuing to purchase proven products from reliable, established vendors. In straight rebuy situations, all phases of the buying process tend to be short and routine. Even so, when large quantities are involved, the need for quality assurance, parity pricing, and on-time delivery to minimize inventory requires a competent salesforce to help the supplier maintain a continually satisfying relationship with the buyer over time. The rapid spread of computerized reordering systems, logistical alliances, and the like, have made the development and maintenance of long-term relationships between suppliers and their customers increasingly important in the purchase of familiar goods and services.9 We shall examine the nature of such relationships, and how recent technological developments have facilitated their development, in a later section of this chapter. A modified rebuy occurs when the organization’s needs remain unchanged, but buying center members are not satisfied with the product or the supplier they have been using. They may desire a higher-quality product, a better price, or better service. Here buyers need information about alternative products and suppliers to compare with their current product and vendor. And as we’ll see, web-based technology—such as business-tobusiness auctions organized by firms like FreeMarkets, Inc. (www.FreeMarkets.com) or by industry sites like e-Steel.com (www.e-Steel.com) or PlasticsNet.com (www.PlasticsNet .com)—is making it easier for organizational buyers to make such comparisons, at least on the price dimension. Therefore, modified rebuys present good opportunities for new suppliers to win the organization’s business if they can deliver better value than the firm’s current vendor. New-task buying occurs when an organization faces a new and unique need or problem—one in which buying center members have little or no experience and, thus, must expend a great deal of effort to define purchasing specifications and to collect information about alternative products and vendors. Each stage of the decision process is likely to be extensive, involving many technical experts and administrators. The supplier’s reputation for meeting delivery deadlines, providing adequate service, and meeting specifications is often a critical factor in selling a product or service to an organization for the first time. Because the buying center members have limited knowledge of the product or service involved, they may choose a well-known and respected supplier to reduce the risk of making a poor decision. The Purchase Decision-Making Process As Exhibit 5.4 suggests, the stages in the organizational purchase decision-making process—at least for modified rebuy and new-task purchases—correspond quite closely with consumers’ high-involvement purchases. However, the exhibit also suggests that some activities at each stage and their execution differ. More people are involved in organizational purchase decisions, the capability of potential suppliers is more critical, and the postpurchase evaluation process is more formalized. We examine other unique features of each stage of the organizational purchase decision process next.10 Recognition of a Problem or Need The organizational purchasing process starts when someone in the firm recognizes a need that can be satisfied by buying some good or service. As we have seen, though, while consumers may buy things impulsively to satisfy psychological or social needs, most of an organization’s needs are derived from the demand for the goods or services they produce or resell to their own customers. In other Chapter Five Understanding Organizational Markets and Buying Behavior 131 Exhibit 5.4 The Organizational Decision-Making Process for New-Task Purchases Recognition of a problem or need • Derived demand • Requirements planning • Determining product specifications Search for information about products and suppliers • Value analysis • Make-or-buy decisions • Information about potential suppliers Evaluation and selection of suppliers • Vendor analysis Purchase decision • Purchasing contract • Just-in-time purchasing arrangements Postpurchase evaluation and feedback words, most organizational purchases are motivated by the needs of the firm’s production processes and its day-to-day operations. In some cases, need recognition may be almost automatic, as when a computerized inventory system reports that an item has fallen below the reorder level or when a piece of equipment wears out. In other cases, a need arises when someone identifies a better way of carrying out day-to-day operations. Océ expanded the range of logistics services it buys from DHL over the years, for instance, as it discovered activities that the logistics expert can perform more effectively or efficiently. Finally, changes in the organization’s operations can create new needs; for instance, top management may decide to produce a new product line that requires new components or raw materials. Or there may be changes in the firm’s objectives, resources, market conditions, government regulations, or competition. Needs, then, may be recognized by many people within the organization, including users, technical personnel, top management, and purchasing agents. Requirements Planning Instead of simply monitoring inventories and reordering when they run low, some firms attempt to forecast future requirements so as to plan their purchases in advance. Requirements planning governs the purchase of raw materials and fabricating components as well as supplies and major installations. One result of such planning is often the signing of long-term purchase contracts, particularly for products projected to be in short supply or to increase in price. Requirements planning can also lead to lower costs and better relations between a purchaser and its suppliers. 132 Section Two Market Opportunity Analysis Determining Product Specifications The need for particular goods and services is usually derived from a firm’s production or operation requirements and, therefore, must meet specific technical requirements. Technical experts from the firm’s R&D, engineering, and production departments are often involved early in the purchase decision. When the firm needs a unique component or piece of equipment, it might even seek help from potential suppliers in setting the appropriate specifications. For example, automobile manufacturers consult their parts suppliers before finalizing specs for a new model. Increasingly, suppliers are active participants in the design and development of new components or systems. Search for Information about Products and Suppliers Once specifications for the desired product/service are developed, purchasing (and possibly other departments) performs a value analysis. This systematic appraisal of an item’s design, quality, and performance requirements helps to minimize procurement costs. It includes an analysis of the extent to which the product might be redesigned, standardized, or processed using lessexpensive production methods. A cost analysis that attempts to determine what the product costs a supplier to produce is also part of a value analysis. Such information helps the purchasing agent better evaluate alternative bids or negotiate favorable prices with suppliers. Make-or-Buy Decisions Sometimes a firm has the option of producing some components and services internally (advertising, marketing research) or buying them from outside suppliers. Economic considerations typically dominate such decisions, although in the long run other factors may be important. For example, the Spanish retailer Zara makes many of the high-fashion items sold in its 5,000 stores around the world at its own plant in Galicia rather than outsourcing production to lower-cost Asian suppliers. Maintaining tight control over design, production, and distribution enables the firm to bring new fashions to its store shelves in less than four weeks, and to quickly make modifications in response to sales figures and customer feedback. Similarly, some high-tech firms make their own components in order to develop and protect proprietary technology and expertise.11 Information about Potential Suppliers Because many firms evaluate a supplier’s performance on a regular basis, there is often considerable information about that supplier’s quality of performance on file. Where new suppliers are involved, the purchasing department typically engages in an in-depth investigation before qualifying that firm as a potential supplier. An investigation would include such information as the firm’s finances, reputation for reliability, and the ability to meet quality standards; information that can be obtained from personal sources (such as salespersons, trade shows, other firms, and consultants) and nonpersonal sources including catalogs, advertising, trade literature, and websites. Evaluation and Selection of Suppliers Like individual consumers, organizational buyers evaluate alternative suppliers and their offerings by using a set of choice criteria reflecting the desired benefits. The criteria used and the relative importance of each attribute vary according to the goods and services being purchased and the buyer’s needs. Always important are the supplier’s ability to meet quality standards and delivery schedules. Price is critical for standard items such as steel desks and chairs, but for more technically complex items, such as computers, a broader range of criteria enters the evaluation process. Vendor Analysis Some purchasing departments construct quantitative ratings of potential suppliers to aid in the selection process. These ratings look very much like the multiattribute, compensatory attitude model we discussed for individual consumers. The Chapter Five Understanding Organizational Markets and Buying Behavior 133 procedure involves selecting a set of salient attributes and assigning to each a weight reflecting its relative importance. Suppliers are then rated by summing their weighted scores across all attributes. Such ratings serve several useful purposes, including facilitating the comparison of alternative suppliers, providing a basis for discussions with suppliers about their performance, and controlling the number of qualified suppliers. The end result of a vendor analysis is typically the development of a list of approved suppliers. General Electric, for example, works only with vendors that are top-rated in an analysis of quality, technology, price, and other factors. The company finds regular vendor analysis a more efficient way to ensure the quality of the components it buys than waiting to inspect parts when they are received.12 This step in the buying process, along with the previous steps, seems to imply that the individuals making up the buying center respond only to economic arguments. But industrial buyers are social entities in addition to being interested in the economics of the situation. For example, producers of marine diesel engines for large boats understand the need to make such engines aesthetically appealing since the owners of such craft take pride in opening an engine hatch to reveal a sleek, chromed engine. In general, the more similar the suppliers and their offerings, the more likely it is that social factors will affect the buying decision. What If the Customer Makes Unethical Demands of Its Suppliers? As we saw in Chapter 2, a supplier’s ethics can have a direct effect on its success in the marketplace because organizational buyers are more likely to purchase from firms they consider ethical.13 Ethical behavior plays a crucial role in establishing the trust and cooperation necessary for the development and maintenance of long-term relationships with customers. But what if members of the buying organization engage in or demand unethical practices? One questionable practice that some buyers engage in is reciprocity, which occurs when an organization favors a supplier that is also a customer or potential customer for the organization’s own products or services. Although this situation is relatively common, it can cause serious problems, including undermining the morale of purchasing and sales personnel who are constrained in the way they do their jobs. Also, reciprocal buying is illegal when it substantially injures free competition among alternative suppliers. Another unethical practice that causes headaches for many suppliers—particularly in global markets where there are great differences in cultural values and legal restrictions— is the demand for bribes as a precondition for winning a purchase. Ethical Perspective 5.1 examines this issue. It is not always easy to know when a bribe is a bribe. For example, one common practice in high-tech industries has been for small start-ups planning an initial public offering (IPO) of common stock to give shares to executives in firms that are potential customers. While giving away such “friends and family” shares prior to an IPO is not illegal, one likely motive for the practice is the hope that the favored executives will help steer big purchase contracts to the companies in which they hold stock, thereby increasing the value of their holdings.14 The Purchase The purchase agreement between a supplier and an organizational customer can take several forms, ranging from individual spot contracts on the open market, to long-term purchasing contracts covering a year or more, to ongoing informal relationships based on cooperation and trust rather than legal agreements. In the past, long-term purchasing contracts were popular because they enabled an organization to concentrate its purchases with one or a few suppliers, reduce transaction costs, and gain scale economies 134 Section Two Ethical Perspective 5.1 Bribery in Organizational Purchasing Bribery can take many forms ranging from small-value Christmas gifts to large sums of money. In the United States, gifts of high value are typically condemned. Most organizations do not want the decisions of their purchasing personnel unduly influenced by large gifts from a prospective supplier. Bribery is not officially condoned anywhere in the world, but, in the past, most countries’ antibribery laws were not as restrictive or as rigorously enforced as those in the United States. U.S. laws—particularly the Foreign Corrupt Practices Act (FCPA), which punishes firms that bribe government or company officials in foreign trade—have real teeth, including hefty fines and prison sentences. Consequently, most U.S. firms avoid paying major bribes to foreign customers and have sought other ways to influence people and win contracts. Some take foreign officials on junkets to Disney World. Others use local agents or distributors who—known to them or not—do the dirty work. And many multinationals do make small “facilitation” payments to hasten building inspections, telephone installations, customs clearances, and the like. Despite such actions, the strict U.S. antibribery laws may have put American firms at a competitive disadvantage in many countries around the world. Market Opportunity Analysis One government report indicates that bribes were allegedly offered by foreign competitors on 294 international contracts worth $145 billion between 1994 and 1999, and that is probably just the tip of the iceberg. However, commercial bribery—especially the bribing of government officials—is getting riskier. More than 30 countries have passed antibribery laws in recent years, and U.S. officials have stepped up enforcement of the Foreign Corrupt Practices Act (FCPA). The number of open FCPA investigations is at an all-time high, and penalties are up. Fines imposed on firms are also getting bigger, both in the United States and in Europe. For instance, in 2009 U.S. courts fined construction firms KBR and Halliburton $579 million over bribes paid to obtain contracts in Nigeria, and they hit Siemens, a German conglomerate, with an $800 million fine. The German authorities subsequently fined Siemens a similar amount. Sources: Robert Greenberger, “Foreigners Use Bribes to Beat U.S. Rivals, New Report Concludes,” The Wall Street Journal, October 12, 1995, p. B1; Addressing the Challenges of International Bribery and Fair Competition (Washington, DC.: U.S. Department of Commerce, July 1999); Eamon Javers, “Steering Clear of Foreign Snafus,” BusinessWeek, November 12, 2007, p. 76; “Ungreasing the Wheels,” The Economist November 21, 2009, pp. 68–69; and Dionne Searcy, “U.K. Law on Bribes has Firms in a Sweat,” The Wall Street Journal online (www.wsj.com) December 28, 2010. through quantity discounts and the like. For example, an annual requirements contract obligated a supplier to fill all of a buyer’s needs for a specific product at a consistent, usually discounted, price over a year. One problem with long-term legal contracts, though, is that they must precisely specify all the details of a purchase agreement, including technical specifications, prices, credit terms, and so on. But in today’s rapidly changing economic and technical environments, it can be difficult for the parties to foresee what their needs and market conditions will be like months or years into the future. It can be difficult to adjust the terms of a formal contract in response to unforeseen technical improvements, cost changes, or market conditions. This inflexibility of long-term contracts is a major reason their popularity has declined in favor of increased reliance on spot market contracts, or auctions, on one hand and less formal long-term relationships between customers and suppliers on the other.15 The increased reliance on both of these approaches has been facilitated by a common factor: the growth of telecommunications technology and the internet. One Impact of Technology: The Growth of Auctions or E-exchanges Over the past few years, a number of internet firms have emerged to help organizations cut their purchasing costs. The earliest entrants, such as Commerce One and Ariba, focused on improving the efficiency of organizations’ search for information and evaluation of alternative products and suppliers. They developed electronic catalogs that reduced clients’ transaction costs by automating the collection of product information, orders, and payments. Chapter Five Understanding Organizational Markets and Buying Behavior 135 For firms with cash-flow problems, there are barter markets, such as Itex (www.itex .com), where participants offer to trade goods or services in a variety of categories. They operate similarly to other online marketplaces like eBay, but with no cash involved. More recently, sellers’ auction websites have emerged in a number of industries. These provide lively global spot markets for standard processed materials such as steel, chemicals, and plastics. For example, ChemConnect (www.chemconnect.com) is an exchange for buyers and sellers of bulk chemicals such as benzene. The site’s userfriendly design attracted a large number of potential buyers and sellers. As a result ChemConnect is now the largest online spot market for chemical trading, with over a million barrels traded daily.16 The websites that may have the greatest future impact on organizational purchasing behavior, however, are those that facilitate buyers’ auctions. Such auctions invite qualified competing suppliers to submit bids to win a contract where the buyer has specified all of the purchase criteria in great detail, except Strategic Issue the price. By enabling all suppliers to see what the competition is bidWebsites that may have the greatest future impact on organizational purchasing ding in real time, these auctions have the potential to greatly increase behavior, however, are those that facilitate price competition and lower buyers’ acquisition costs in some cases by buyers’ auctions. as much as 30 or 40 percent.17 However, because buyers’ auctions are feasible only when the buyer is able to specify all its requirements except price—including all technical and performance attributes of the good or service, delivery schedules, inventory arrangements, payment schedules, and the like—they work best for purchases where the buyer has experience to draw upon, and where those requirements are unlikely to change rapidly. One service offered by auction sites such as FreeMarkets (www.FreeMarkets.com) is to help clients examine their needs and clearly spell out every aspect of their request for quotes (RFQs) so potential suppliers will know exactly what they’re bidding for. Thus, buyers’ auctions are like “modified rebuy” situations where the buyer knows the physical requirements of the purchase but wants to see whether an alternative supplier might offer a better price. Because auctions throw every purchase up for grabs among alternative suppliers, they work against the development of a cooperative long-term relationship with a given supplier. And they are unlikely to replace such relationships where the product or service being purchased is very technically complex or innovative, is highly customized to the buyer’s unique requirements, or requires specialized equipment or other investments to produce. Auctions are also unlikely to replace long-term cooperation between a buyer and a trusted supplier where there are substantial savings to be gained from logistical alliances, as discussed in the next section. Consequently, while the proportion of global businessto-business online sales volume accounted for by auctions or e-exchanges is predicted to increase steadily for the foreseeable future, other forms of purchasing arrangements, including long-term alliances and partnerships, will continue to dominate.18 Logistical Alliances Technology also has changed organizational purchasing over the past decade by facilitating logistical alliances involving the sharing of sales and inventory data and computerized reordering. Initially, such systems involved electronic data interchange through dedicated telephone or satellite links and were mainly limited to large firms. More recently, software for developing such systems on the web and protecting the security of proprietary data has improved substantially, thereby lowering costs and increasing their availability to smaller firms. Consumer package goods manufacturers such as Procter & Gamble have formed supply chain management alliances with mass merchandisers such as Walmart and Target. Sales information from the retailer’s checkout scanners is shared directly with the supplier’s 136 Section Two Market Opportunity Analysis computers, which figure out when to replenish the stock of each item and schedule deliveries to appropriate distribution centers or even individual stores. Such paperless exchanges reduce sales and purchasing expenses, cut mistakes and billbacks, minimize inventories, decrease out-of-stocks, and improve cash flow. Recent technological enhancements—such as item-level radio frequency identification (RFID) tags—help such alliances deliver even more benefits to both organizational buyers and their retail customers, as illustrated by the experience of Mitsukoshi department stores described in Exhibit 5.5. Performance Evaluation and Feedback When a purchase is made and the goods delivered, the buyer’s evaluation of both product and supplier begins. The buyer inspects the goods on receipt to determine whether they meet the required specifications. Later, the department using the product judges whether it performs to expectations. Similarly, the buyer evaluates the supplier’s performance on promptness of delivery and postsale service. In many organizations this process is done formally through reports submitted by the user department and other persons involved in the purchase. This information is used to evaluate proposals and select suppliers the next time a similar purchase is made. The Marketing Implications of Different Organizational Purchasing Situations The extensive purchasing process we have been talking about applies primarily to newtask purchases, where an organization is buying a relatively complex product or service for the first time. Buyers in such circumstances tend to collect a lot of information about Exhibit 5.5 M Japanese Department Store Uses Radio Frequency Identification Tags to Improve Inventory Control, Purchasing, and Customer Service itsukoshi, one of Japan’s leading luxury department stores, began using radio frequency identification (RFID) tags to track individual inventory items in its ladies shoe departments in 2005. Each pair of shoes on display and every box in the stockroom (or “backyard” as the Japanese refer to it) carries a tiny radio transmitter tag with a unique ID number whose signal can be received anywhere in the department. Sales associates are equipped with PDAs capable of reading the RFID signals, and a customer kiosk housing an RFID reader is installed on the selling floor. Customers can scan through—or the salesperson can display—a full range of styles and colors, and determine whether a particular shoe is available in the right size, without the sales associate making endless trips to the stockroom. As a result, salespeople are able to service more shoppers and suggest more options. The average Mitsukoshi customer tries on 70 percent more shoes in roughly the same amount of shopping time as before the new system was installed. Ongoing analysis of the detailed RFID data concerning every pair of shoes sold in each store provides clues to managers about what is selling quickly and where there may be size or color gaps in the assortment. Mitsukoshi’s suppliers also receive automatic notification when a store’s inventory of a specific stockkeeping unit (SKU) falls below a reorder threshold, thus speeding up replenishment and reducing stockouts. In the first year, the new item-level RFID system enabled Mitsukoshi to achieve a 10 percent increase in year-over-year sales volume. About one half of that increase is attributed to improved cooperation with suppliers leading to faster replenishment and fewer stockouts, and the other half to improved customer service. The program has been so successful that it is being expanded to other fashion items, such as designer jeans. Sources: Susan Reda, “Stepping Up the RFID Effort,” on the stores .org website, www.stores.org/archives/2006/3/cover.asp, March 2006. For a more critical view of RFID Technology, see Leigh Phillips, “Future internet Privacy Worries Europe,” www.businessweek .com/globalbiz, October 9, 2009. Chapter Five Understanding Organizational Markets and Buying Behavior 137 alternative products and suppliers and to engage in extensive comparisons before making a final purchase decision. Such situations are relatively favorable to potential new suppliers who have never sold to the organization. Such newcomers can win the organization’s business if they can provide superior product benefits, superior customer service, or better prices—in other words, better customer value—and if they can convince the customer of their superiority through an effective sales pitch, a user-friendly website, and/or other promotional efforts. (Good value means nothing if nobody knows about it.) Potential new suppliers may even be able to engage in product development efforts aimed at winning the new customer. This is why entrepreneurial start-ups tend to prosper in emerging categories where product designs are still in flux and there are few entrenched competitors with close ties to potential customers; they are more likely to get a full hearing and have a better chance to differentiate themselves from other suppliers. One major reason for establishing long-term cooperative relationships with major customers is to become an active partner in designing—and setting the specifications for—the next generation of the customer’s products. In the process, the supplier may have a major influence on the purchase criteria for major materials and components of the new product, thereby gaining the inside track on winning the purchase contract for those new-task purchases. At the other extreme is the straight rebuy, where the customer is reordering an item it has purchased many times before. These purchases tend to be more routine and computerized. From the seller’s viewpoint, being the established, or “in,” supplier in such purchase situations provides a major competitive advantage because the customer spends little or no effort evaluating alternatives. Therefore, established suppliers should develop procedures to maintain and enhance their favored position with current customers. As we’ll discuss in Chapter 13, for instance, many firms have developed “key account” policies and appoint cross-functional teams to service major customers to help ensure their satisfaction and retention. New technologies have made it easier for established suppliers to strengthen their ties to customers through supply chain management systems and logistical alliances.19 For “out” suppliers, who do not have well-established relationships with an organizational customer, however, the marketing challenge is more difficult. Such competitors must try to move the buyer away from the relatively routine reordering procedures of the straight rebuy toward the more extensive evaluation processes of a modified rebuy purchase decision. They must attempt to interest the buyer in modifying the purchase criteria by promising superior product performance, better service on one or more dimensions, or an equivalent package at a better price.20 Historically, “out” suppliers—particularly small, unknown start-ups with few marketing resources—had a hard time surmounting this challenge. As with congressional elections, incumbents were firmly entrenched. But the emergence of web-based auctions may help level the playing field for such suppliers, at least for those efficient enough to compete largely on price. Developing Long-Term Buyer–Supplier Relationships From a supplier’s perspective, developing logistical alliances and computerized reorder systems can help tie major customers to the firm and increase the proportion of purchases they make from the supplier. But as DHL’s evolving relationship with Strategic Issue Océ illustrates, long-term relationships between suppliers and their Long-term relationships between suppliers organizational customers often involve much more than merely linking and their organizational customers often their computer systems and sharing inventory data. DHL frequently involve much more than merely linking their computer systems and sharing gets involved in improvement projects aimed at developing custominventory data. ized services to meet Océ’s specific needs. 138 Section Two Market Opportunity Analysis Trust between Supplier and Customer Develops Person-to-Person Such complex relationships not only involve a great deal of cooperation between the parties, but they also require mutual trust. Before making a substantial investment in training its employees to perform preinstallation testing of Océ’s printing systems, DHL had to trust Océ to continue purchasing its services long enough to recoup that investment. Similarly, Océ had to trust DHL to measure up to its own high standards when servicing its customers. In other words, both parties must trust one another to avoid opportunistic behaviors that would advance their own short-term self-interest at their partner’s expense.21 Organizations develop trust through the actions of individual members of the firm. Therefore, company salespeople, account teams, logistics managers, and customer service personnel often play crucial roles in winning customer trust and loyalty. Unfortunately, this can make buyer–supplier relationships vulnerable to personnel turnover. Suppliers can minimize such problems by (1) developing effective corporate policies and performance standards with respect to customer service, (2) instituting training programs and succession planning for customer contact personnel, and (3) fostering and rewarding a strong customer orientation within the corporate culture.22 Conditions Favoring Trust and Commitment While mutual trust is important for the development and maintenance of long-term commitments between suppliers and their organizational customers, it is not always easy to develop. First, trust tends to build slowly. Thus, the parties must have some history of satisfying experiences with one another to provide a foundation for trust. It also helps if each party brings an established reputation for fair dealing within its industry.23 From the customer’s perspective, a firm is more likely to trust and develop a long-term commitment to a supplier when that supplier makes dedicated, customer-specific investments, as DHL has done in developing customized services for individual customers. Such investments send a powerful signal about the vendor’s credibility and commitment to the relationship since the assets are not easily deployable elsewhere. There are many other actions a firm can take to initiate, build, and maintain long-term relationships with organizational customers. Such actions become even more important as a product-market matures, sales growth slows, and competition becomes more intense. Consequently, we will examine customer relationship management programs in more detail in Chapter 16 when we discuss marketing strategies for mature markets. In markets characterized by complex and uncertain technical environments, such as where competing technologies are emerging simultaneously, as in the networking software industry, customers are less likely to develop a long-term orientation toward a single supplier. Because firms in such circumstances cannot tell which supplier’s technology will eventually become the industry standard, they are more likely to keep their options open by spreading their purchases across multiple suppliers if it is economically feasible to do so.24 Purchasing Processes in Government Markets Federal, state, and local governments and their various agencies are major buyers of many goods and services. However, a government’s purchasing processes tend to be different in some respects from those of a business organization. For one thing, government organizations tend to require more documentation and paperwork from their suppliers because their spending decisions are subject to public review. Thus, although most governments provide would-be suppliers with detailed guides describing their procedures and requirements, some suppliers complain about excessive bureaucracy, costly paperwork, and red tape.25 Chapter Five Understanding Organizational Markets and Buying Behavior 139 Another difference is that government organizations typically require suppliers to submit bids, and contracts are usually awarded to the lowest bidder who meets the minimum standards specified in the contract. In some cases, though, a government unit will make allowances for a supplier’s superior product quality or customer service. They also sometimes purchase on a negotiated or “cost-plus” contract basis, particularly when the product being purchased will require a lengthy development period (a hydroelectric dam) or major and uncertain R&D investments (a new weapons system), or when there are few alternative suppliers to compete for the contract. These differences in governmental purchasing processes make many standard marketing strategies and tools less relevant and effective than in other organizational markets. For example, since a government purchase contract usually describes the desired product specifications in great detail, and since contracts are usually awarded to the lowest bidder, a strategy of product differentiation via superior features or performance would not likely be successful, particularly if it resulted in higher costs. For the same reason, comparative advertising appeals or personal sales demonstrations have little impact. Nevertheless, many organizations—such as Rockwell, Goodyear, and 3M—have created separate government marketing departments or sales teams. Their task is to anticipate government needs and projects, participate in or influence the development of product specifications, gather competitive intelligence, carefully prepare bids, and expedite postsale activities and services.26 The lessons learned in selling to governments may become much more relevant in private-sector markets as web-based buyers’ auctions for standardized materials and components proliferate. Selling Different Kinds of Goods and Services to Organizations Requires Different Marketing Programs Organizational buying processes tend to vary dramatically depending on what is being bought. Different types of goods and services require sellers to employ varying marketing strategies and actions to be successful in organizational markets. Marketers commonly classify industrial goods according to the uses made of the product by organizational purchasers. With this in mind, six categories of industrial goods and services can be identified: raw materials, component materials and parts, installations, accessory equipment, operating supplies, and business services. Exhibit 5.6 describes these categories and their major characteristics and marketing implications. Raw Materials Raw materials are goods receiving little or no processing before they are sold, except what is necessary for handling and shipping. Purchased primarily by processors and manufacturers, they are inputs for making other products. The two types of raw materials are natural products (fish, lumber, iron ore, and crude petroleum) and farm products (fruits, vegetables, grains, beef, cotton, and wool). Processors and manufacturers purchase nearly all natural products and about 80 percent of all farm products. Retailers or consumers buy the remaining 20 percent directly without any processing. Implications for Marketing Decision Makers The supply of most natural products is limited; in recent decades, there have been some shortages. Often only a few large firms produce particular natural products, and in some countries those producers have 140 Section Two Market Opportunity Analysis Exhibit 5.6 Categories, Characteristics, and Marketing Implications of Goods and Services Bought by Organizations Category Description Characteristics and marketing implications Raw material Relatively unprocessed goods that become a portion of a final product (farm products, lumber, etc.) Limited supply, few producers; distribution is a key function, price is a critical competitive variable Component parts and materials Processed goods that become a portion of a final product (engines, microchips, etc.) High-volume purchases, long-term contracts; fierce competition among suppliers, requires good service and nurturing of relationships with buyers; Web auctions also important for standard components Installations Major capital goods used to produce final product, but not part of the final product (plant installations, production machinery, etc.) Long-lasting; involved in production of many units of the final product over several years; involve large dollar outlays; capital budgeting committee involved in purchase decision; sold directly from manufacturer; personal selling and system design services are crucial Accessory equipment Finished goods that facilitate production of a final product (trucks, hand tools, etc.) Enduring but less so than installations; more standardized, more frequently purchased, and less costly than capital equipment; less complex buying; intermediaries may be involved Operating supplies Finished goods that facilitate repair, maintenance, and ongoing operations (office supplies, repair parts, etc.) Analogous to consumer convenience goods, frequently purchased and consumed in a short time; standardized; broad market; heavy use of channel intermediaries; web-based wholesalers and catalog sites becoming important Business services Provide special expertise to facilitate ongoing operations (law firms, advertising agencies, etc.) Long-term relationships with customers; supplier’s qualifications, experience, and reputation critical to success; purchase decision often made by top executives been nationalized. These supply conditions give producers the power to limit supplies and administer prices, as with the Organization of Petroleum Exporting Countries (OPEC). Such supply conditions encourage processors and manufacturers to seek ways to ensure adequate supplies for the future by negotiating long-term purchase contracts (often at premium prices) or by purchasing the raw materials sources. For example, many large steel manufacturers own iron ore mining and processing operations. When the supply—and therefore the price—of a critical raw material is volatile and unpredictable, long-term purchase agreements may not be viable. Consequently, a buyer may have to adjust its own marketing strategy to cushion the impact of rapidly changing commodity costs. A good example of such an adjustment is provided by the Swiss food giant Nestlé, as discussed in Exhibit 5.7. Natural materials are generally bulky and low in unit value; therefore, producers try to minimize their handling and transportation costs. Distribution channels for natural materials tend to have few middlemen; most materials are marketed directly to processors and manufacturers. The marketing problems associated with natural products are quite different from those of agricultural products, which are produced by many relatively small farms located far from consumer markets. Also, many of these products are produced seasonally. Thus, the distribution channels for most agricultural materials involve middlemen who buy products from Chapter Five Understanding Organizational Markets and Buying Behavior Exhibit 5.7 A 141 Volatile Commodity Costs Force Nestlé to Make Strategic Adjustments s the world’s largest food and beverage company, Nestlé spends more than $30 billion a year on raw materials; mostly agricultural products. The company buys 10 percent of the world’s coffee crop, 12 million metric tons of milk, and more than 300,000 tons of cocoa. Because of increased global demand for food and a variety of factors limiting world supply—such as drought, violent storms, and political turmoil—the price of almost all the major commodities the company purchases more than doubled in the four years from 2006 to 2010. The firm expects raw material costs to increase $3 billion in 2011, the biggest increase ever. Nestlé tried to moderate commodity prices by working with farmers and producer cooperatives around the world to improve production practices and increase crop yields. But a recent report from the International Monetary Fund suggests it may take years before agricultural output increases enough to make a significant dent in worldwide food prices. Consequently, Nestlé crafted a competitive strategy that assumes commodity prices will remain volatile— but generally follow an upward trend—for the foreseeable future. The first part of that strategy is to offset increases in commodity costs which the firm cannot control with reduction in operating costs in areas where the firm does have some control. For example, the firm redesigned the bottles for its Poland Spring water and reduced the amount of plastic used by 35 percent. Second, Nestlé aims for a steady stream of gradual price increases for most of its products, regardless of whether their ingredients costs rise or fall in the short term. This reduces price volatility at the retail level and helps avoid shocking consumers with occasional large price increases. Finally, the firm’s strategy emphasizes the development of unique, high-quality products that can command a premium price. Ingredient costs account for a smaller percentage of the revenue generated by such products. For example, by packaging its highestquality coffee in single-serve capsules for its Nespresso coffee machines, Nestlé can command about 10 times the price per cup that competitors get for unground beans. And the company has built Nespresso into a $3 billion business that is growing over 20 percent a year. Source: Tom Mulier, “Nestlé’s Recipe for Juggling Volatile Commodity Costs,” Bloomberg Businessweek, March 21, 2011, pp. 29–30. a large number of farmers, collect them in a central location (such as a grain elevator), and store them for shipment throughout the year to processors and exporters. Since there is little difference among the products grown by different farmers, branding is relatively unimportant. There is usually little promotional activity, except for cooperative advertising campaigns funded by trade groups to stimulate primary demand for a product. An example is a promotional campaign to persuade health-conscious adults to drink more milk. Component Materials and Parts As with raw materials, component materials and parts are purchased by manufacturers as inputs for making other products. Component materials differ, though, in that they have been processed to some degree before they are sold (for instance, flour bought by a baker). Component parts are manufactured items assembled as part of another product without further changes in form (electric motors for washing machines, batteries for new cars). Implications for Marketing Decision Makers Manufacturers buy most component materials and parts in large quantities; therefore, they are usually sold direct, without the use of middlemen. However, wholesale distributors sell to smaller manufacturers in some lines of trade. To avoid disrupting production runs, sellers must ensure a steady, reliable supply of materials and parts, especially when a just-in-time (JIT) management system is being used 142 Section Two Market Opportunity Analysis by the buyer. This system’s objective is to eliminate inventories at the customer’s manufacturing site, which requires the timely delivery of 100 percent quality (zero-defect) products. This relieves the customer of any incoming inspection. A vendor’s failure on quality or delivery can close a customer’s operation so the resulting penalties are severe. A JIT system is costly to set up and cannot be effectively implemented without a continuing and close working relationship between buyer and seller. This may explain why a growing proportion of the purchases of component materials and parts, particularly in situations where the components are standardized and the buyer is able to specify all requirements in detail, are being made through electronic buyer auctions such as FreeMarkets, Inc.27 (www.FreeMarkets.com). Competitive bidding by suppliers can provide some of the cost saving benefits of JIT systems without the time and effort necessary to build close cooperation. Installations Installations are the buildings and major capital equipment that manufacturers and service producers use to carry out their operations. They are expensive and long-lived; examples are factory buildings constructed for a manufacturer, office buildings built for government agencies, computers used by the Internal Revenue Service, presses used by an automobile manufacturer, and airplanes purchased by Ryanair. Implications for Marketing Decision Makers The marketing of installations presents a real challenge because there are few potential customers at any one time, and the average sale is very large. Many installations are custom-made to fit a particular customer’s needs; therefore, sellers must provide some engineering and design services before making a sale. Often a long period of negotiation precedes the final transaction. Firms selling installations must usually provide many postsale services, such as installing the equipment, training the customer’s personnel in its use, providing maintenance and repair services, and sometimes financing. Because of the small number of buyers, the large dollar volume of each sale, and the custom engineering involved, distribution is usually direct from producer to customer. Sometimes wholesale distributors provide replacement parts and repair services for equipment already in operation. For similar reasons, promotional emphasis is usually on personal selling versus advertising. High-caliber, well-trained salespeople are critically important in the marketing of installations. Accessory Equipment As with installations, accessory equipment includes industrial machines and tools that manufacturers, services producers, and governments use to carry out their operations. The difference is that although installations determine the scale of operations of the firms that buy and use them, accessory equipment has no such impact since it consists of tools and machines with relatively short lives and small price tags. They consist of such goods as personal computers, desks, file cabinets, and hand tools. Implications for Marketing Decision Makers Because this product category includes a wide range of specific items, it is hard to generalize about the most common or appropriate marketing strategies for accessory equipment. In some cases, as with Hyster forklifts and Xerox office equipment, the producers sell accessory equipment directly. Their presale and postsale service requirements are substantial, but the dollar Chapter Five Understanding Organizational Markets and Buying Behavior 143 value of the average sale is high enough to justify direct distribution. When there are many different types of potential customers scattered around the country, the average order size is small, and the product does not require much technical service, producers use wholesale distributors (for instance, Makita power tools). Web-based catalog sites, such as Commerce One (www.CommerceOne.com), are also becoming increasingly important in this category. Personal selling, either by the producer’s or a distributor’s salesforce, remains the most important promotional method for accessory equipment, but because most products in this category are standardized and not technically complex, advertising, brand name promotions, and company websites are also important. Operating Supplies Operating supplies do not become a part of the buyer’s product or service, nor are they used directly in producing it. Instead, these supplies facilitate the buying organization’s day-to-day operations. They are usually low-priced items purchased frequently with a minimum of decision-making effort. Examples include heating fuel, floor wax, typing paper, order forms, paper clips, and pencils. Implications for Marketing Decision Makers These supplies are purchased in small quantities by many different organizations, so wholesale middlemen, including those with extensive websites such as Office Depot, are typically used to distribute them. Price is usually the critical decision variable, and there tends to be little brand loyalty. Business Services Many business services producers, or facilitating agencies, have special areas of expertise used and paid for by other organizations. These include security and guard services, janitorial services, equipment repair services, public warehouses, transportation agencies, consulting and marketing research services, advertising agencies, and legal and accounting services. Implications for Marketing Decision Makers Services are intangible and are purchased before they can be evaluated by the buyer. Thus, the supplier’s qualifications, past performance, and reputation become critical determinants of the success of the marketing effort. Price is less important in selling business services because a lawyer or consultant with an outstanding reputation can often charge much more for a given service than one who is less well known. Also, price often serves as an indicator of quality, especially when there are no other quality cues.28 Because services are often tailored to the specific needs of a given customer, personal selling and negotiation are important elements in most services producers’ marketing programs. This selling is often done by high-level executives in the service producer’s organization. The negotiation process can be lengthy; for instance, an ad agency team spends months developing proposals and making presentations to a prospective client before finding out whether it has landed the new account. This selling task is often worth the effort, though, for once a relationship is established between a service supplier and a customer, it tends to be maintained over a long time, as in the case of DHL and Océ. Many companies employ the same law firm, advertising agency, or logistics services firm for years or even decades. 144 Section Two Market Opportunity Analysis Take-aways 1. While organizational customers are different in some ways from consumers, marketers need to answer a similar set of questions to develop a solid foundation for their marketing plans. Who are our target customers? What are their needs, wants, and preferences? How do those customers decide what to buy and what suppliers to buy from? 2. Organizations buy things for one of three reasons: (1) to facilitate the production of another product or service, (2) for use by the organization’s employees in carrying out its operations, or (3) for resale to other customers. 3. Organizations are social constructions. Therefore, “organizations” do not buy things. Rather, individual employees—usually more than one from different departments and organizational levels—make purchase decisions on the organization’s behalf. Understanding the personal motivations of these individuals, and their influence on different stages of the purchasing process, is essential for marketing success. 4. The internet is simultaneously encouraging two opposing trends in organizational purchasing: (1) the growing use of short-term spot market contracts via web-based auctions and (2) the strengthening of long-term buyer–supplier relationships via the sharing of sales and inventory data and the development of supply chain alliances. 5. The mutual interdependence of organizational buyers and their suppliers makes long-term cooperative relationships crucial for customer retention and marketing success. For firms that sell a significant portion of their output to a few large customers, the stakes are very high. Building trust and commitment at multiple levels in both firms—on an individual-to-individual basis—can be a key factor in establishing and maintaining long-term customer relationships that are profitable to both parties. Endnotes 1. This opening case example is based on material found in “A Moving Story,” The Economist, December 7, 2002, pp. 65–66; Deutsche Post’s 2010 Annual Report, and other material found on the Deutsche Post World Net website, www.dpwn.de. 2. For example, see F. Robert Dwyer, Paul H. Schurr, and Sejo Oh, “Developing Buyer–Seller Relationships,” Journal of Marketing 51 (April 1987), pp. 11–27; Shankar Ganesan, “Determinants of Long-Term Orientation in Buyer–Seller Relationships,” Journal of Marketing 58 (April 1994), pp. 1–19; and Das Narayandas and Kasturi Rangan, “Building and Sustaining Buyer–Seller Relationships in Mature Industrial Markets,” Journal of Marketing 68 (July 2004), pp. 63–77. 3. Frederick E. Webster, Jr., Industrial Marketing Strategy (New York: John Wiley & Sons, 1991), p. 14. Also see Bob Donath, “To Perform Marketing, Think Purchasing,” Marketing News, July 17, 2000, p. 12. 4. Thomas V. Bonoma, “Major Sales: Who Really Does the Buying?” Harvard Business Review, May–June 1982, pp. 111–19. Also see Susan Lynn, “Identifying Buying Influences for a Professional Service: Implications for Marketing Efforts,” Industrial Marketing Management, May 1987, pp. 119–30. 5. For a comprehensive review of buying-center research, see Morry Ghingold and David T. Wilson, “Buying Center Structure: An Extended Framework for Research,” in A Strategic Approach to Business Marketing, Robert Spekman and David T. Wilson, eds. (Chicago: American Marketing Association, 1985), pp. 18–93. See also Robert D. McWilliams, Earl Naumann, and Stan Scott, “Determining Buying Center Size,” Industrial Marketing Management 21 (February 1992), pp. 43–50; Richard G. Jennings and Richard E. Plank, “When the Purchasing Agent Is a Committee: Implications for Industrial Marketing,” Industrial Marketing Management 24 (November 1995), pp. 411–19; Jeffery E. Lewin and Naveen Donthu, “The Influence of Purchase Situation on Buying Center Structure and Involvement: A Select Meta-Analysis of Organizational Buying Behavior Research,” Journal of Business Research 58 (October 2005), pp. 1381–90; and Allison Enright, “It Takes a Committee to Buy into B-to-B,” Marketing News, February 15, 2006, pp. 12–13. 6. Joseph A. Bellizzi, “Organizational Size and Buying Influences,” Industrial Marketing Management 10 (1981), pp. 17–21. 7. For a more detailed discussion of these and other account management policies aimed at reaching the various members of a customer’s buying center, see Mark W. Johnson and Greg W. Marshall, Churchill/Ford/Walker’s Sales Force Management, 7th ed. (New York: McGraw-Hill/Irwin, 2003), chaps. 3 and 4. 8. Patrick J. Robinson, Charles W. Faris, and Yoram Wind, Industrial Buying and Creative Marketing (Boston: Allyn and Bacon, 1967). See also Erin Anderson, Wujin Chu, and Barton Weitz, “Industrial Buying: An Empirical Exploration of the Buyclass Framework,” Journal of Marketing 51 (July 1987), pp. 71–86. 9. Wolfgang Ulaga and Andreas Eggert, “Value-Based Differentiation in Business Relationships: Gaining and Sustaining Key Supplier Status,” Journal of Marketing 70 (January 2006), pp. 119–36. 10. For a more detailed discussion of the organizational purchase decisionmaking process, see Wesley J. Johnson and Jeffrey E. Lewin, “Organizational Buying Behavior: Toward an Integrative Framework,” Journal of Business Research 35 (1996), pp. 1–15. 11. For examples, see Pete Engardio, “The Future of Outsourcing,” BusinessWeek, January 30, 2006, pp. 50–58; and “Global Stretch—When Will Zara Hit Its Limits?” The Economist, March 12, 2011, p. 76. 12. Robin Y. Bergstrom, “Hanging a Vision on Quality,” Production, July 1993, pp. 56–61. See also Wolfgang Ulaga and Andreas Eggert, “ValueBased Differentiation in Business Relationships.” 13. I. Frederick Trawick, John E. Swan, Gail W. McGee, and David R. Rink, “Influence of Buyer Ethics and Salesperson Behavior on Intention to Choose a Supplier,” Journal of the Academy of Marketing Science 19 (Winter 1991), pp. 17–23. 14. Linda Himelstein and Ben Elgin, “Tech’s Kickback Culture,” BusinessWeek, February 10, 2003, pp. 74–77. Chapter Five Understanding Organizational Markets and Buying Behavior 15. Jan B. Heide, “Interorganizational Governance in Marketing Channels,” Journal of Marketing 58 (January 1994), pp. 71–85; and Ganesan, “Determinants of Long-Term Orientation in Buyer–Seller Relationships.” 16. Julia Angwin, “Top Online Chemical Exchange Is Unlikely Success Story,” The Wall Street Journal, January 8, 2004, p. B1. 17. Shawn Tully, “Going, Going, Gone! The B2B Tool That Really Is Changing the World,” Fortune, March 20, 2000, pp. 132–45. 18. Olga Kharif, “B2B, Take 2,” BusinessWeek, November 25, 2003, pp. 24–25; and George S. Day, Adam J. Fein, and Gregg Ruppersberger, “Shakeouts in Digital Markets: Lessons from B2B Exchanges,” California Management Review 45 (Winter 2003), pp. 131–51. 19. Ulaga and Eggert, “Value-Based Differentiation in Business Relationships.” 20. Jan B. Heide and Allan M. Weiss, “Vendor Consideration and Switching Behavior for Buyers in High-Technology Markets,” Journal of Marketing 59 (July 1995), pp. 30–43. 21. Robert M. Morgan and Shelby D. Hunt, “The Commitment-Trust Theory of Relationship Marketing,” Journal of Marketing 58 (July 1994), pp. 20–38; and Kenneth H. Wathne and Jan B. Heide, “Opportunism in Interfirm Relationships: Forms, Outcomes, and Solutions,” Journal of Marketing 64 (October 2000), pp. 36–51. 145 22. Jan B. Heide and Kenneth H. Wathne, “Friends, Businesspeople, and Relationship Roles: A Conceptual Framework and Research Agenda,” Journal of Marketing 70 (July 2006), pp. 90–103; and Fred Selnes and James Sallis, “Promoting Relationship Learning,” Journal of Marketing 67 (July 2003), pp. 80–95. 23. Ganesan, “Determinants of Long-Term Orientation in Buyer–Seller Relationships.” See also Robert W. Palmatier, Rajiv P. Dant, Dhruv Grewal, and Kenneth R. Evans, “Factors Influencing the Effectiveness of Relationship Marketing: A Meta-Analysis,” Journal of Marketing 70 (October 2006), pp. 136–53. 24. Matthew Swibel and Janet Novack, “The Scariest Customer,” Forbes, November 10, 2003, pp. 96–97; see also Jan B. Heide and George John, “Alliances in Industrial Purchasing: The Determinants of Joint Action in Buyer–Supplier Relationships,” Journal of Marketing Research, February 27, 1990, pp. 24–36. 25. Valarie Zeithaml, Mary Jo Bitner, and Dwayne Gremler, Services Marketing, 5th ed. (New York: McGraw-Hill, 2009), chap. 5. 26. Don Hill, “Who Says Uncle Sam’s a Tough Sell?” Sales and Marketing Management, July 1988, pp. 56–60. 27. Tully, “Going, Going, Gone!” 28. Zeithaml, Bitner, and Gremler, Services Marketing. C HAPTER S IX Measuring Market Opportunities: Forecasting and Market Knowledge Intel’s Secret Weapon1 G ENEVIEVE BELL HAS A RADICAL IDEA. Bell, the only female among Intel’s roster of top technical talent dubbed Intel Fellows, and Director of Intel’s User Experience Group, thinks the world would be a better place if we can better understand how people would like to use technology, rather than tossing technology that people don’t really want into the market at an alarming pace. Bell was given her own lab at Intel in 2010, an event that may change Intel, or even the future of technology itself. “Imagine,” says Bell, “If we were willing to take on board the ways in which PCs don’t work and applied that to other technologies such as our refrigerators or televisions. If your fridge said, “I’m terribly sorry, you cannot have that cold milk until I’ve rebooted myself and downloaded new drivers!” or your TV said, “You cannot watch the end of the cricket match because I am defragging my hard drive,” we would all go insane.” Bell’s Charter at Intel In Bell’s view, her charter at Intel is straightforward, “To provide insights and inspire innovation.” Her team of social scientists, interaction designers and human factors engineers is charged with setting research 146 directions, leading new product strategy and definition, and driving consumer-centric product innovation and thinking across the company. All this is everyday work for this wiry-haired woman who as a very small girl used to kill things—frogs and the like—growing up in an aboriginal community in Australia’s outback. Why is there a role like Bell’s at Intel today? “I joined Intel in 1998,” she recalls, “There was a collective sense in Intel’s senior management that they didn’t know what was going to happen when PCs became mass market. They knew they had market research, they knew they had the skills to size markets and how to survey people, and a little bit of usability work was going on even then, but I think the sense of what was missing was this notion about what was motivating people, what did they care about and was there an opportunity if you understood the things to drive new uses of technology.” “For many years thereafter, a part of every presentation I gave, every class I taught, every meeting I attended was explaining what an anthropologist was, what ethnography was, what was user centered design and why it was going to be a useful tool at Intel.” In her 13 years at Intel, Bell has fundamentally changed how the company envisions, plans, and develops its product platforms. How Do Anthropology and Ethnography Work? Bell and her team spend their time hanging out wherever they can find users of technology— people on holiday, people in their workplace, people at home with their families in every corner of the planet. “At Intel, we try to start with people first— we ask questions about who they are and what they care about, we also ask questions about technology: What do you love about it, how does it frustrate you, what do you hate about it, what can’t you live without?” One of the key tools in the modern anthropologist’s toolkit is the digital camera. Says Bell, “We can now put digital cameras in the hands of our research participants. There is nothing like the film a five-yearold takes of its own home—you realize that electrical outlets are everywhere and furniture is really badly designed.” Seeing the world as it really is and though other people’s eyes is what anthropologists do that traditional market researchers often miss. What is Bell Learning about Generation X? One of the questions Bell and her team are sometimes asked is whether today’s Generation X—who seem to be digitally connected all the time—are somehow different from their parents’ generation. “I don’t think it’s as easy as we sometimes think,” says Bell. “We fall into the trap of assuming that what you are and what you do at 16 is what you will do for the rest of your life. I don’t know why we believe that because we were all 16 once, and we mostly don’t behave now as we did then.” In a study of early adopters of social networking technology, Bell spoke to a young woman who had just had a baby and was no longer blogging as much. “Have you ever tried to breast-feed a baby and use a laptop?” the woman asked. “It’s just not going to happen. It is much easier to go back to watching television. It doesn’t demand so much when I have this other thing I’m trying to do!” Can Bell’s Work Make a Difference? Bell, who brings to her craft a doctorate in anthropology from Stanford University, has become one of the world’s leading thinkers on the mash-up of humanity and technology. She has worked tirelessly to get Intel chip designers to not simply build ever-faster chips and market them everywhere. The internet, in many parts of the world, means text on a cell phone, so Intel’s speedy but pricey Celeron chips are not very relevant in some markets. Intel’s cheaper and less power-hungry Atom chips are a better way to go. “Genevieve and her team make us engineers think differently,” says Stephen Pawlowski, who leads Intel’s chip architecture research team. “We intend to use Bell’s expertise heavily as we focus on emerging growth markets.” Perhaps if Bell has her way, one day we’ll all be using PCs that actually start when we ask them to start, and stop when we are done. Or if she fails in her quest, Apple will continue its inroads into the PC, smartphone, and other consumer electronics markets with its legendary skills at doing what Bell hopes Intel can do. And the rest of us will continue to be subservient to the products we buy, rather than masters of them. As Bell puts it, “Anthropology continues to be a really important way to bring voices into the technology realm that really need to be there. Ruth Benedict, an early anthropologist, had a great line— “The role of the anthropologist is to make the world safe for people.” Let’s hope people like Benedict and Bell prevail! 147 148 Section Two Market Opportunity Analysis Marketing Challenges Addressed in Chapter 6 Entrepreneurs and managers in established firms like Intel need to develop knowledge about their market and industry and synthesize that knowledge into tangible plans that their organizations can act on. These plans can take many forms. For entrepreneurs a business plan may be needed to raise the necessary capital to start the venture. For new product managers in established firms, marketing plans must be developed to win support and resources to permit the product’s launch. In organizations of all kinds, annual budgets are prepared to guide decision making for the coming year. These decisions determine staffing, investments in productive capacity, levels of operating expense, and so on. In almost every case, these planning and budgeting activities begin with a sales forecast. Once a sales figure is agreed to, the various activities and investments needed to support the planned sales level are budgeted. In Chapter 6, we deal with some key issues that enable managers and entrepreneurs to bring life to their dreams. First, we address the challenges in estimating market potential and forecasting sales, for both new and existing products or Strategic Issue businesses. We provide a menu of evidence-based forecasting methWe provide a menu of evidence-based ods, each of which is useful in some situations, but not others, and forecasting methods, each of which is we discuss their limitations. We also examine the process by which useful in some situations, but not others. innovative new products diffuse into the market over time, a source of insight into the particularly difficult task of forecasting sales of innovative new products. Finally, we briefly address the informational needs of the forecasting task—as well as the tasks addressed in the earlier chapters of this book that enable managers and entrepreneurs to understand their market and competitive contexts—to provide guidance on to how to gather, collect, and report data relevant to marketing decision making (i.e., marketing research). The portion of the chapter that deals with marketing research has two objectives. First, we want to enable every reader to be an informed and critical user of marketing since most marketing decision makers rely, in part, on such research to Strategic Issue guide key corporate-level and business-level decisions, as was disWe want to enable every reader to be cussed in Chapter 2. Second, we want to provide readers with at least an informed and critical user of marketing research. a rudimentary level of competence in designing and carrying out marketing research studies of various kinds, so that they can, even on minimal budgets, obtain useful market and competitive insights to inform their decision making. Depending on hunches—instead of carefully though-out research inquiries, even modest ones done quickly—can be risky. Every Forecast Is Wrong! We know of no manager who has ever seen a forecast that came in exactly on the money. Most forecasts turn out too high, some too low. Forecasting is an inherently difficult task because no one has a perfect crystal ball. The future is inherently uncertain, especially in today’s rapidly changing markets. Consumer wants and needs shift, buffeted by the winds of ever-changing macro trends. Competitors come and go. New technologies from Intel and others sweep away old ones. Some forecasts are based on extensive and expensive research, others on small-scale inquiries, and still others on uninformed hunches. As we have seen, however, forecasting plays a central role in all kinds of planning and budgeting in all kinds of businesses and other organizations. Given the stakes and the risks entailed Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 149 in being very wrong with a forecast, some effort to prepare an evidence-based forecast, instead of a wild guess, is almost always called for, even if time and money are scarce. So forecast we must. But how? A Forecaster’s Tool Kit: A Tool for Every Forecasting Setting Before choosing a method to prepare a forecast, one first must know what is to be estimated or forecasted. First, there’s the size of the potential market, that is, the likely demand from all actual and potential buyers of a product or product class. An estimate of market potential often serves as a starting point for preparing a sales forecast, which we explore in more detail later in this chapter. Such estimates are particularly crucial for aspiring entrepreneurs, where levels of risk and uncertainty are especially high. Such was the case for two business school graduates, who set out to build a pay telephone business, African Communications Group (ACG), in Tanzania in the early 1990s, before the wave of cell telephone development washed across sub-Saharan Africa. Monique Maddy and Come Laguë knew that, to obtain the financing they would need and to obtain the necessary licenses, they would have to prepare a credible business plan. They also knew that among the most critical elements of any business plan was the sales forecast. Not only would the sales numbers serve as a starting point from which most of the other numbers in the plan would be developed, but they would serve as a key litmus test for prospective investors. If the sales forecast was well supported and credible, Maddy and Laguë believed the rest of the pieces would fall into place. The secondary data they gathered convinced them that the market and industry were sufficiently attractive. But coming up with hard numbers for market potential and sales revenue was another story altogether. For starters, they knew that prospective investors would want to know how large the potential market for telephone services would be in the coming years, measured perhaps in several ways: in numbers of telephone users, in numbers and/or minutes of calls, and in dollars or Tanzanian shillings. This market was composed of those consumers who were likely to have both the willingness and ability to buy and would use a phone card or one of ACG’s other services at one of ACG’s pay phones. There was also the size of the currently penetrated market, those who were actually using pay phones in Tanzania at the time of the forecast. Investors would also want to know these figures—the size of the potential and penetrated markets for the market segments Maddy and Laguë intend to serve, their target market. They would also need a sales forecast, in which they predicted sales revenues for ACG for five years or so. How might Maddy and Laguë do these things? Established organizations employ two broad approaches for preparing a sales forecast: top-down and bottom-up. Under the top-down approach, a central person or persons take the responsibility for forecasting and prepare an overall forecast, perhaps Strategic Issue using aggregate economic data, current sales trends, or other methods Established organizations employ two broad we describe shortly. Under the bottom-up approach, common in decenapproaches for preparing a sales forecast: tralized firms, each part of the firm prepares its own sales forecast, and top-down and bottom-up. the parts are aggregated to create the forecast for the firm as a whole. For an example of how managers at Gap Inc. retailing divisions combine both methods to forecast next-year sales, see Exhibit 6.1. The bottom-up logic also applied to Maddy and Laguë’s task. They could break their anticipated demand into pieces and sum the components to create the summary forecast. These pieces could be market segments, such as small retailers, mobile businesspeople, 150 Section Two Exhibit 6.1 A Market Opportunity Analysis Forecasting Next Year’s Sales at Gap t international retailer Gap Inc., forecasting sales for the next year for each of its key brands—Gap, Banana Republic, and Old Navy—is an important process that drives a host of decisions, including how much merchandise to plan to buy for the coming year. Both top-down and bottom-up approaches are used. At Old Navy, for example, each merchandiser generates a forecast of what level of sales his or her category—women’s knit tops, men’s jeans, and so on—can achieve for the next year. Group merchandise managers then provide their input and sum these numbers to create a total forecast from a merchandising perspective. A second bottom-up forecast is generated by the store operations organization, summing stores and groups of stores. Simultaneously, a top-down figure is prepared at headquarters in California, using macroeconomic data, corporate growth objectives, and other factors. The three forecasts are then compared, differences debated, and a final figure on which to base merchandise procurement and expense budgets is determined. Though the effort to prepare such a forecast is considerable, the broad involvement in the process helps to ensure both knowledgeable input to the forecast as well as subsequent commitment to “make the numbers.” Most important, Old Navy finds that the different processes together with the ensuing discussion lead to substantially better forecasts. Source: Marshal L. Fisher, Ananth Raman, and Anna Sheen McClelland, “Rocket Science Retalling Is Almost Here: Are You Ready?” Harvard Business Review, July–August 2000. For more on Gap, see www.gap.com. consumers, and so on, or product lines, such as revenue from phone cards or individual pay phones, voice-mail fees, pager fees, and the like. Using the bottom-up approach presented numerous advantages. First, this approach would force them to think clearly about the drivers of demand for each market segment or product line and thus better understand the real potential of their business and its parts. Second, they would be forced to make explicit assumptions about the drivers of demand in each category, assumptions they could debate—and support with evidence gathered from their research—with prospective investors and which they could later verify as the business unfolds. Third, such an approach facilitated “what if” planning. Various combinations of market segments and/or product lines could be combined to build a business plan that looked viable. What forecasting methods, or tools, could Maddy and Laguë choose from? There are six major evidence-based methods for estimating market potential and forecasting sales: statistical methods, observation, surveys, analogy, judgment, and market tests. A seventh method, not evidenced-based—the SWAG method (Silly Wild-@*# Guess)—is not condoned here, though there is little else to support some forecasts! Statistical and Other Quantitative Methods Statistical methods use past history and various statistical techniques, such as multiple regression or time series analysis, to forecast the future based on an extrapolation of the past.2 This method is typically not useful for ACG or other entrepreneurs or new product managers charged with forecasting sales for a new product or new business, since there is no history in their venture on which to base a statistical forecast. In established firms, for established products, statistical methods are extremely useful. When Michelin, the tire manufacturer, wants to forecast demand for the replacement automobile tire market in Asia for the next year, it can build a statistical model using such factors as the number and age of vehicles currently on the road in Asia, predictions of GDP for the region, the last few years’ demand, and other relevant factors to forecast market Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 151 potential as well as Michelin’s own replacement tire sales for the coming year. Such a procedure is likely to result in a more accurate forecast than other methods, especially because Michelin has years of experience with which to calibrate its statistical model. As with all forecasting methods, statistical methods have important limitations. Most important of these is that statistical methods generally assume that the future will look very much like the past. Sometimes this is not the case. US WEST (now Strategic Issue CenturyLink), the regional Bell telephone company serving the Rocky Statistical methods generally assume that Mountain and Northwest regions of the United States, ran into trouble the future will look very much like the when its statistical models used to predict needs for telephone capacity past. Sometimes this is not the case. failed to allow for rapidly increasing use of the internet, faxes, and second lines for teenagers in American homes. Suddenly, the average number of lines per home skyrocketed, and there was not enough physical plant—cable in the ground, switches, and so on—to accommodate the growing demand. Consumers had to wait, sometimes for months, to get additional lines, and they were not happy about it! Similarly, if product or market characteristics change, statistical models used without adequate judgment may not keep pace. When tire manufacturers produce automobile tires that last 80,000 miles instead of 30,000 to 50,000 miles, the annual demand for replacement tires is reduced. If automobile manufacturers were to change the number of wheels on the typical car from four, the old statistical models would also be in trouble. For example, many large-capacity pickup trucks sold in the United States feature six wheels. Other quantitative methods, especially useful for new products, have also been developed. These include methods to mathematically model the diffusion of innovation process for consumer durables3 (discussed later in this chapter) and conjoint analysis,4 a method to forecast the impact on consumer demand of different combinations of attributes that might be included in a new product. Observation Another method for preparing an evidence-based forecast is to directly observe or gather existing data about what real consumers do in the product-market of interest. Maddy and Laguë conducted a study of pay phone use in Tanzania to find out how many minutes per day the typical pay phone was used. Their study showed that an average of 150 three-minute calls were made per day at the 60 working pay phones then provided by other companies in Dar es Salaam. Revenue for most pay phones fell into the US $100 to $150 range.5 Like statistical methods, observation-based forecasting is attractive because it is based on what people actually do. If behavioral or usage data can be found from existing secondary sources—in company files, at the library, or on the internet—data colStrategic Issue lection is both faster and cheaper than if a new study like the one Maddy Observation-based forecasting is attractive and Laguë conducted must be designed and carried out. For new-to-thebecause it is based on what people world products, however, observation is typically not possible, and secactually do. ondary data are not available, since the product often does not yet exist, except in concept form. Had there been no pay phones in Tanzania or a similar country, observation would not have been possible. Market tests and concept tests, which we discuss later in this section, are two ways to get real purchase data about new-to-the-world products. Surveys or Focus Groups Another common way to forecast sales or estimate market potential is to conduct surveys or focus groups. These methods can be done with various kinds of respondents. Consumers, after being shown a statement of the product concept (a concept test) or a prototype or 152 Section Two Market Opportunity Analysis sample of the product, can be asked how likely they are to buy, creating a survey of buyers’ intentions. Buyers can also be asked about their current buying behavior: what they currently buy, how often, or how much they use. Salespeople can be asked how much they are likely to sell, completing a survey of salesforce opinion. Experts of various kinds—members of the distribution channel, suppliers, consultants, trade association executives, and so on—can also be surveyed. As part of their research in Dar es Salaam, Maddy and Laguë surveyed pay phone customers to find out more about them. A whopping 65 percent were using a pay phone because they lacked access to another working phone—good news for the ACG concept! Sixty-three percent were business customers, 20 percent were students or teachers, and 17 percent were other nonbusiness customers. Business customers spent an average of US$10 per week for 14 pay phone calls, and nonbusiness customers spent US$6 per week for 12 calls.6 By combining these data with demographic data on the Tanzanian population, Maddy and Laguë now had what they needed to prepare an evidence-based, bottom-up forecast of market potential, market segment by market segment. Surveys and focus groups possess important limitations, however. For one, what people say is not always what people do. Consumer surveys of buyer intention are always heavily discounted to allow for this fact. For one common approach to doing so, see Exhibit 6.2. Second, the persons who are surveyed may not be knowledgeable, but Strategic Issue if asked for their opinion, they will probably provide it! Third, what people imagine about a product concept in a survey may not be what is Surveys and focus groups possess important limitations, however. For one, what people actually delivered once the product is launched. If consumers are asked say is not always what people do. if they will buy an “old world pasta sauce with homemade flavor,” they Exhibit 6.2 A Survey of Buyers’ Intentions: What People Say Is Not What They Do When Nestlé’s refrigerated foods division in the United States was considering whether to acquire Lambert’s Pasta and Cheese, a fresh pasta company, it wanted to forecast the likely first-year sales volume if the acquisition were completed. To do so, Nestlé used a concept test in which consumers were asked, among other things, how likely they were to try the fresh pasta product. The results were as shown in the first two columns in the following table. Purchase Intent % Response Rule of Thumb Reduction for Forecasting Purposes Percentage of Market Deemed Likely to Actually Buy Definitely would buy 27% Multiply by .8 27% ⫻ .8 ⫽ 21.6% Probably would buy 43% Multiply by .3 43% ⫻ .3 ⫽ 12.9% Might or might not buy 22% Count as zero 8% Count as zero Probably or definitely would not buy Totals 100% 21.6% ⫹ 12.9% ⫽ 34.5% Even though 70% of consumers surveyed indicated they were likely to buy, Nestlé’s experience indicated that these “top two box” percentages should be cut sharply: “definitely” responses were reduced by 20%, while “probably” responses were reduced by 70%; and “maybe” responses were considered as “no.” These adjustments, shown in columns three and four, reduced the 70% figure by more than half, to 34.5%. Most consumer product manufacturers who employ concept tests use similar rules of thumb when interpreting purchase intent data for forecasting purposes because they have learned that what people say they will buy exceeds what they will actually buy. Similar logic is useful in a variety of forecasting situations. Source: Marie Bell and V. Kasturi Rangan, “A Survey of Buyers’ Intentions: What People Say Is Not What They Do” from Nestlé Refrigerated Foods: Contadina Pasta and Pizza, case no. 9-595-035. Boston: Harvard Business School, 1995. Copyright © 1995 by the President and Fellows of Harvard College. Reprinted by permission. For more on Nestlé, see www.nestle.com. Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 153 will surely provide a response. Whether they will actually like the taste and texture of the sauce that the lab develops is another story! In general, statistical and observational methods, where adequate data or settings are available in which to apply them, are superior to survey methods of forecasting because such methods are based, at least in part, on what people have actually done or bought (e.g., the number of old cars actually on the road or the length of pay phone calls in Tanzania), while survey methods (Are you likely to buy replacement tires this year? How often are you likely to use a pay phone?) are based on what people say, a less reliable indicator of their future behavior. Analogy An approach often used for new product forecasting where neither statistical methods nor observations are possible is to forecast the sales or market potential for a new product or product class by analogy. Under this method, the product is compared with similar historical data that are available. When Danone, the leading marketer of yogurt in Europe, plans to introduce a new flavor, its managers look at the sales history of earlier introductions to forecast the sales for the newest flavor. This method is also used for new-to-the-world high-technology products, for which product prototypes are often either not available or extremely expensive to produce. Rather than conduct surveys to ask consumers about their likelihood to buy a product they can hardly imagine (What would someone have said in 1978 about his or her likelihood to buy a personal computer?), forecasters consider related product introductions with which the new product may be compared. Indeed, Apple, in developing its now wildly successful music business, had a number of available analogs with which to shed light on the likely demand for paid downloading of music from iTunes and for the demand for a user-friendly portable device—the iPod—on which to play them. First, Napster, the free peer-to-peer music-sharing site, was all the rage with consumers (though not with the music publishing industry, which eventually convinced the courts that Napster was illegal). Second, the Sony Walkman had sold more than 300 million units, proving there was vibrant demand for a portable music player. The use of analogs like these, as well as antilogs—previous examples one explicitly decides not to copy—is a crucial approach for many entrepreneurs as they mold their initial ideas into more refined versions that will actually work.7 As always, there are limitations. First, the new product and its pricing are never exactly like that to which the analogy is drawn. Downloaded music from Napster was free, but Apple planned to ask consumers to pay for their tunes. What price should Apple charge, and would customers with free downloads available be willing to pay anything at all? Second, market and competitive conditions may vary from when the analogous product was launched. Such conditions must be taken into account. Judgment While we hesitate to call this a forecasting method of its own, since capable and informed judgment is required for all methods, sometimes forecasts are made solely on the basis of experienced judgment, or intuition. Some decision-makers are intuitive in their decision processes and cannot always articulate the basis for their judgments. Said a footwear buyer at Nine West Group, an international manufacturer and retailer of shoes and fashion accessories, “Trend forecasting is a visceral thing that cannot be trained. I rely on my sense of color and texture, but at times I cannot explain why I feel a certain way…. I just know.”8 Those with sufficient forecasting experience in a market they 154 Section Two Market Opportunity Analysis know well may be quite accurate in their intuitive forecasts. Unfortunately, it is often difficult for them to defend their forecasts against those prepared by evidence-based methods when the two differ. Nonetheless, the importance of experienced judgment in forecasting, whether it is used solely and intuitively or in concert with evidence-based methods, cannot be discounted. Market Tests Market tests of various kinds are the last of our six commonly used forecasting methods. Used largely for new consumer products, market tests such as experimental test markets may be done under controlled experimental conditions in research laboratories or in live test markets with real advertising and promotion and distribution in stores. Use of live test markets has declined over the past few decades for two reasons. First, they are expensive to conduct because significant quantities of the new product must be produced and marketing activities of various kinds must Strategic Issue be paid for. More importantly, in today’s data-intensive environUse of test markets has declined over the ment, especially for consumer products sold through supermarkets past few decades for two reasons. and mass merchants, competitors can buy the data collected through scanners at the checkout and learn the results of the test market without bearing the expense. More diabolically, competitors can engage in marketing tactics to mislead the company conducting the test by increasing sampling programs, offering deep discounts or buy-one-get-one-free promotions, or otherwise distorting normal purchasing patterns in the category. Experimental test markets, on the other hand, are still commonly used. The coming of the internet has made possible a new kind of market test: an offer directly to consumers on the web. Offers to chat rooms, interest groups, or e-mail lists of current customers are among the common approaches. Use of such techniques has increased due to companies’ ability to carry out such tests quickly and at low cost. We explore these and other internet marketing strategies in greater detail in Chapter 14. Psychological Biases in Forecasting To a varying degree, the effectiveness of all of the forecasting methods we’ve just reviewed is often undermined by excessive optimism on the forecaster’s part, especially in new product or new venture settings. Forecasters often fall prey to what Dan Lovallo and Daniel Kahneman call the planning fallacy, a tendency to make decisions based on delusional optimism rather than on a rational weighting of possible gains and losses and the probabilities thereof.9 A solution they espouse, based on the systematic use of multiple analogs, is discussed in Exhibit 6.3. Mathematics Entailed in Forecasting Regardless of the method used, the ultimate purpose of the forecasting exercise is to end up with numbers that reflect what the forecaster believes is the most likely outcome, or sometimes a range of outcomes under different assumptions, in terms of future market potential or for the sales of a product or product line. The combination of judgment and other methods often leads to the use of either of two mathematical approaches to determine the ultimate numbers: the chain ratio calculation or the use of indices. See Exhibit 6.4 and Exhibit 6.5 for examples applying these mathematical calculations Chapter Six 155 Measuring Market Opportunities: Forecasting and Market Knowledge Exhibit 6.3 Managing the View through Your Rose-Colored Glasses E ven in new product and new venture settings, virtually nothing is completely new. Many similar products or ventures have undoubtedly preceded yours. Even in the theatre, there are only 36 literary plots: Leonard Bernstein’s West Side Story is Shakespeare’s Romeo and Juliet, set in New York’s Harlem in the 1950s. Dan Lovallo and Daniel Kahneman argue that the overoptimistic, rosy view can be mitigated by systematically assembling a class of similar projects, laying out the distribution of actual outcomes of those projects from best to worst, and then positioning the current project in that distribution. The resulting forecast will be far more accurate. This “outside view,” as they call it, is much more likely to yield realistic estimates because it bypasses the cognitive and organizational biases that tend to hype the more typical “inside view” that’s based on the project itself. Sources: John Mullins and Randy Komisar, Getting to Plan B: Breaking Through to a Better Business Model, Boston: Harvard Business Press, 2009; and Dan Lovallo and Daniel Kahneman, “Delusions of Success,” Harvard Business Review, July 2003. to arrive at sales forecasts. Both mathematical approaches begin with an estimate of market potential (the number of households in the target market in Exhibit 6.4; the national market potential for a product category in Exhibit 6.5). The market potential is then multiplied by various fractional factors that, taken together, predict the portion of the overall market potential that one firm or product can expect to obtain. In Exhibit 6.4, which shows the more detailed of the two approaches, the factors reflect the appeal of the product to consumers, as measured by marketing research data and the company’s planned marketing program. Exhibit 6.4 Chain Ratio Forecast: Trial of Fresh Pasta Once Nestlé’s research on fresh pasta had been completed (see Exhibit 6.2), it used the chain ratio method to calculate the total number of households who would try their fresh pasta. The chain ratio calculation went like this Research Results for: Data from Research Chain Ratio Calculation Result Number of households in target market 77.4 million Concept purchase intent: adjusted figure from Exhibit 6.2 34.5% will try the product 77.4 million ⫻ 34.5% 26.7 million households will try if aware Awareness adjustment: based on planned advertising level 48% will be aware of the product 26.7 million ⫻ 48% Distribution adjustment: based on likely extent of distribution in supermarkets, given the introductory trade promotion plan The product will obtain distribution reaching 70% of U.S. households 12.8 million ⫻ 70% 12.8 million households will try if they find product at their store 9.0 million will try the product Similar chain ratio logic is useful in a variety of forecasting settings. Source: Marie Bell and V. Kasturi Rangan, “Chain Reaction Forecast: Trial of Fresh Pasta, from Nestlé Refrigerated Foods: Contadina Pasta, and Pizza, case no. 9-595-035 (Boston: Harvard Business School Publishing, 1995). Copyright © 1995 by the President and Fellows of Harvard College. Reprinted by permission. For more on Nestlé, see www.nestle.com. 156 Section Two Exhibit 6.5 I Market Opportunity Analysis Estimating Market Potential Using Indices n many countries there are published indices of buying behavior, including the “Annual Survey of Buying Power” published by Sales and Marketing Management in the United States. The Buying Power Index (BPI) is a weighted sum of a geographical area’s percentage of national buying power for the area, based on census income data (weight = .5), plus the percentage of national retail sales for the area (weight = .3), plus the percentage of national population located in the area (weight = .2). If this calculation comes to 3.50 for a given state or region, one might expect 3.5% of sales in a given category (toys, power tools, or whatever) to come from that geographical area. Category development indices (CDIs) are similar indices that report the ratio of consumption in a certain category (for instance, restaurant sales) to population in a defined geographical area. Trade associations or trade magazines relevant to the category typically publish such indices. Ratios greater than 1.0 for a particular geographic area (perhaps metropolitan Chicago) indicate that the area does more business than average (compared to the country as a whole) in that category. Brand development indices (BDIs) compare sales for a given brand (for example, Pizza Hut restaurants) to population. Companies that use BDI indices typically calculate them for their own use. The ratio of the BDI to the CDI for a given area is an indicator of how well a brand is doing, compared to its category overall, in that area. These various indices are useful for estimating market potential in defined geographic areas. They are, however, crude numbers, in that they do not consider differences in consumer behavior from region to region. The CDI or BDI for snowmobiles in Minnesota (with its freezing winters) is far higher than in balmy Texas, for example. Attempting to rectify this imbalance by increasing the snowmobile advertising budget in Texas would be difficult! Rate of Diffusion of Innovations: Another Perspective on Forecasting Before entrepreneurs or established marketers invest in the development and introduction of an innovation, they want to know how rapidly the innovation is likely to be adopted by the target market. The faster the adoption rate, the faster will be the Strategic Issue rate at which the innovative new product’s sales ramp up. Diffusion Diffusion theory is useful to managers in of innovation theory seeks to explain the adoption of an innovative predicting the likely adoption rate for new product or service over time among a group of potential buyers. Lack and innovative goods or services. of awareness and limited distribution typically limit early adoption. As positive word about the product spreads, the product is adopted by additional consumers. Diffusion theory is useful to managers in predicting the likely adoption rate for new and innovative goods or services. The Adoption Process and Rate of Adoption The adoption process involves the attitudinal changes experienced by individuals from the time they first hear about a new product, service, or idea until they adopt it. Not all individuals respond alike; some tend to adopt early, some late, and some never. If plotted on a cumulative basis, the percentage of people adopting a new product over time resembles a S curve. Although the curve tends to have the same shape regardless of the product involved, the length of time required differs among products—often substantially. The time dimension is a function of the rate at which people in the target group (those ultimately adopting) move through the five stages in the adoption process. Generally, the speed of the adoption process depends heavily on the following factors: (1) the risk (cost of product failure or dissatisfaction), (2) the relative advantage over other Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge Strategic Issue 157 products, (3) the relative simplicity of the new product, (4) its compati bility with previously adopted ideas, and behavior, (5) the extent to which its trial can be accomplished on a small-scale basis, and (6) the ease with which the central idea of the new product can be communicated.10 Some new products move quickly through the adoption process (a new breakfast cereal), while others take years. Risk minimization via guarantees and reliable and prompt service can be helpful as can the ability to demonstrate the product’s uniqueness in meeting the customer’s needs. Source credibility is also important. The rate at which an innovative new product category passes through the adoption process is also a function of the actions taken by the product’s marketers. Thus, the diffusion process may be faster when there is strong competition among competitors, when they have favorable reputations, and when they allocate substantial sums to R&D (to improve performance) and marketing (to build awareness). Early cellular telephones scored high on most of the key adoption factors. Some new products move quickly through the adoption process (a new breakfast cereal), while others take years. Adopter Categories Early adopters differ from later adopters. If we use time of adoption as a basis for classifying individuals, five major groups can be distinguished: innovators, early adopters, early majority, late majority, and laggards. See Exhibit 6.6 for an illustration and Exhibit 6.7 for the approximate size and characteristics of each group.11 Because each category comprises individuals who have similar characteristics and because individuals differ substantially across categories, these adopter groups can be considered market segments. Thus, one would use a different set of strategies to market a new product to the early adopter group than to market it to the late majority group. For a discussion of the challenges in transitioning marketing efforts from group to group, see Exhibit 6.8. Implications of Diffusion of Innovation Theory for Forecasting Sales of New Products and New Firms Strategic Issue Optimistic entrepreneurs or new product managers sometimes naively forecast that their innovations will capture 10 or 20 percent of the market in its first year. Optimistic entrepreneurs or new product managers sometimes wax euphoric about the prospects for the innovations they plan to bring to market. They naively forecast that their innovations will capture 10 or 20 percent of the market in its first year. How likely is it that a truly innovative new product, even a compellingly attractive one, will win all of the innovators plus most of the early adopters in its first year Exhibit 6.6 Diffusion of Innovation Curve Early Majority Early Adopters Late Majority 13.5% 2.5% Innovators 34% 34% 16% Laggards 158 Section Two Market Opportunity Analysis Exhibit 6.7 Size and Characteristics of Individual Adopter Group ● Innovators represent the first 2.5 percent of all individuals who ultimately adopt a new product. They are more venturesome than later adopters, more likely to be receptive to new ideas, and tend to have high incomes, which reduces the risk of a loss arising from an early adoption. ● Early adopters represent the next 13 to 14 percent who adopt. They tend to be more a part of the local scene, are often opinion leaders, serve as vital links to members of the early majority group (because of their social proximity), and participate more in community organizations than do later adopters. ● The early majority includes 34 percent of those who adopt. These individuals display less leadership than early adopters, tend to be active in community affairs (thereby gaining respect from their peers), do not like to take unnecessary risks, and want to be sure that a new product will prove successful before they adopt it. ● The late majority represents another 34 percent. Frequently, these individuals adopt a new product because they are forced to do so for either economic or social reasons. They participate in community activities less than the previous groups and only rarely assume a leadership role. ● Laggards comprise the last 16 percent of adopters. Of all the adopters, they are the most “local.” They tend to participate less in community matters than members of the other groups and stubbornly resist change. In some cases, their adoption of a product is so late it has already been replaced by another new product. Exhibit 6.8 I Crossing the Chasm: A Difficult Transition in the Diffusion Process n Geoffrey Moore’s classic book on the marketing of high-technology products, Moore explores the challenges of crossing the “chasm,” as he calls it, in the diffusion process between the early adopters and the early majority. For many high-tech products, innovators and early adopters have quite different needs from early majority customers. They are often willing to adopt a revolutionary new product that is not yet very user-friendly or whose product features have not yet been fully developed. Their own technical skill enables them to adapt such a product to their needs and resolve some of the uncertainties inherent in the product’s perhaps still-unclear potential. Their self-perception as an innovator gives them comfort in trying new products before others do. Early majority buyers, on the other hand, typically require easier-touse products, whose benefits are clearly defined, and for which there is proof that the product will perform. Taking a product from the first group of buyers to the second is a difficult challenge, one that is compounded by the fact that buyers in the innovator and early adopter groups are not likely to associate or talk with buyers in the early majority group. Source: Geoffrey A. Moore, Crossing the Chasm (New York: HarperCollins, 1991). on the market? History suggests that such penetration levels are rare at the outset. More typically, first-year penetration levels include some but not all of the innovators, well under 2.5 percent of those who, it is hoped, will ultimately adopt! A good way to estimate how quickly an innovation is likely to move through the diffusion process is to construct a chart that rates the adoption on the six key factors influencing adoption speed, as shown in Exhibit 6.9. An innovation that is risky for the prospective user to try or buy, has little competitive advantage, is complex or incompatible with current user behavior, and for which it is difficult or expensive to try or to understand its benefits is likely to face tough sledding, regardless of the attractiveness of the industry. Personal robots, introduced in the early 1980s with great fanfare, were such an innovation. Thus, introducing a new product that delivers no real benefits or lacks competitive advantage into any industry, regardless of its high-tech profile, is likely to be an unpleasant experience! Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 159 Exhibit 6.9 Comparison of Rate of Adoption of Cellular Phones and Early Personal Computers for Home Use Adoption Factor Cell Phones Home Computers Risk +/− Moderate risk: Cell phones were given away to attract early adopters who agreed to one year’s usage. − An expensive investment wasted, if it turned out not to be useful. Relative advantage + Enabled people to make and receive phone calls from anywhere—in the car or at the beach! − It was not clear, in the early days of personal computing, what the advantages of a PC were in the home. Relative simplicity + Early cell phones were easy to use. − Early PCs were inordinately complex to use. Compatibility with current behavior + Just like making or receiving a phone call at home or office. − Lots of learning required to use. Ease of small-scale trial +/− Easy to demonstrate, but contracts required. +/− One could visit a store for hands-on trial but couldn’t understand the “bits, bytes, and RAM.” Ease of communication of benefits Key: − “Make or receive calls anywhere” is easy to understand. − Benefits were not clear, thus not communicable. +Favorable for rapid adoption ⫺Unfavorable for rapid adoption Cautions and Caveats in Forecasting Keys to Good Forecasting A key goal of good forecasting is to identify the full range of possibilities about the future, not some illusory set of certainties that are, in fact, not certain at all.12 There are two important keys to improve the credibility and accuracy of a set of Strategic Issue forecasts of sales and market potential. The first of these is to make There are two important keys to improve explicit the assumptions on which the forecast is based. This way, the credibility and accuracy of forecasts of sales and market potential. if there is debate or doubt about the forecast, the assumptions can be debated, and data to support the assumptions can be obtained. The resulting conversation is far more useful than stating mere opinions about whether the forecast is too high or too low. For ACG, the combination of observational and survey forecasting methods enabled Maddy and Laguë to articulate the assumptions on which their revenue forecasts were based and to support those assumptions with data. Their evidence-based forecast was instrumental in their obtaining US$3.5 million in start-up capital to get their venture off the ground.13 The second key to effective forecasting is to use multiple methods. When forecasts obtained by different methods converge near a common figure, greater confidence can be placed in that figure. The procedure used at Gap Inc. to forecast next year’s sales (see Exhibit 6.1) is an example of such an approach. Where forecasts obtained by multiple methods diverge, the assumptions inherent in each can be examined to determine which set of assumptions can best be trusted. Ultimately, however, any forecast is almost certainly wrong. Contingency plans should be developed to cope with the reality that ultimately unfolds. 160 Section Two Market Opportunity Analysis Common Sources of Error in Forecasting Several sources of potential error in forecasts should be recognized. First, forecasters are subject to anchoring bias, where forecasts are perhaps inappropriately “anchored” in recent historical figures, even though market conditions have markedly changed, for better or worse.14 Second, capacity constraints are sometimes misinterpreted as forecasts. Someone planning to open a car wash that can process one car every seven minutes would probably be amiss in assuming sufficient demand to actually run at that rate all the time. A restaurant chain that is able to turn its tables 2.5 times each night, on average, must still do local market research to ascertain how much volume a new restaurant will really generate. Putting similar 80-table restaurants in two trade areas with different population makeup and density, with different levels of competition, will result in different sales levels. Another source of error in forecasting is incentive pay. Bonus plans can cause managers to artificially inflate or deflate forecasts, whether intentionally or otherwise. “Sandbagging”—setting the forecast or target at an easily achievable figure in order to earn bonuses when that figure is beaten—is common. Finally, unstated but implicit assumptions can overstate a well-intentioned forecast. While 34.5 percent of those surveyed (after adjustments, as shown in Exhibit 6.2) may indicate their willingness to buy a new grocery product, such as fresh pasta, for such a forecast to pan out requires that consumers actually are made aware of the new product when it is introduced and that the product can actually be found on supermarket shelves. Assumptions of awareness and distribution coverage at levels less than 100 percent, depending on the nature of the planned marketing program for the product, should be applied to such a forecast, using the chain ratio method (see Exhibit 6.4). In today’s fast-changing world that is becoming harder and harder to predict, these common sources of error in forecasting are only the beginning of the challenge that forecasters must address. In their new book, Future Ready; How to Master Business Forecasting, Steve Morlidge and Steve Player argue that, in many companies, today’s forecasting culture—based on a command-and-control mind set, an annual budget-driver schedule, and a predict and comply approach—has simply gone wrong (See Exhibit 6.10).15 Why Data? Why Marketing Research? In the first portion of this chapter, we provided several approaches to forecasting, each of which requires that data be collected. Similarly, the first five chapters of this book provided frameworks for gaining a better understanding of market and competitive conditions and of what buyers in a given market want and need—what we call market knowledge.16 Obtaining market knowledge also requires data, and so far we’ve provided little discussion of exactly how one might best find the necessary data. Without relevant and timely data, market knowledge is generally incomplete and often ill-informed, based perhaps on hunches or intuition that may or may not be correct. For an example of how Starbucks uses qualitative marketing research to systematically tap into its customers’ ideas and suggestions, see Exhibit 6.11. Without adequate market knowledge, marketing decisions are likely to be misguided. Products for which there is little demand may be introduced, only to subsequently fail. New markets may be entered, despite market or industry conditions that make success unlikely. Attractive product-markets may be overlooked. Products may be marketed to the wrong target market, when consumers in another market segment would like the product better. Pricing may be too high, reducing sales, or too low, leaving money on the table. Advertising and promotion monies may be poorly spent. Second-best distribution Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 161 Exhibit 6.10 Mastering Forecasting Let’s face it. It is nigh on impossible to predict the future. The world is too complex and too dynamic to do so with any confidence. So what is a forecaster to do? Morlidge and Player offer six pragmatic suggestions about what to do and how to do it, as shown in the table below. Issue What to Stop Doing What to Start Doing Purpose Stop using the budget process and accounting structure to drive your forecasts Start recognizing the distinction between targets (what you hope will happen) and forecasts (what you think will happen) and the gap between them Time Stop producing forecasts on the accounting department’s timetable Start producing rolling forecasts, and update them based on the rate of change of the variables that drive your decisions Models Stop relying on a single approach Start using different types of models and approaches in combination Measurement Stop measuring the quality of your forecasts informally Start routinely measuring forecast error to find biases, rather than focusing on accuracy Risk Stop forecasting single-point outcomes Start assessing alternative potential outcomes Process Stop treating forecasting as an optional exercise Start building forecasting into the fabric of your managerial processes Source: Steve Morlidge and Steve Player, Future Ready: How to Master Business Forecasting (Chichester, West Sussex, UK: John Wiley and Sons, Ltd, 2010). For more on Steve Morlidge, see http://www.satoripartners.co.uk/About_Me.html. Exhibit 6.11 I Starbucks Listens, “Splash Sticks” Are the Result n January 2008, Starbucks founder Howard Schultz returned to his former CEO role, in an effort to reinvigorate the company following a string of disappointing performance figures. One of the first things Schultz did was to launch an online listening post, MyStarbucksIdea.com, in order, as Schultz put it, to instill what he calls “a seeing culture” into the company. It quickly became clear that Starbucks customers weren’t reticent. More than 10,000 of them wanted something to plug the hole in the lid on their take-out coffee that would prevent spilling. The result? Starbucks’ reusable “splash stick” does just that. The Starbucks system and others like it, such as Dell’s IdeaStorm.com, are powered by new “Ideas” software from Salesforce.com. “It’s like a live focus group that never closes,” says Marc Benioff, Salesforce’s chairman and CEO. The Starbucks website is backed by 48 specially trained “idea partners” who host the online discussions that ensue. They also act as advocates for customers’ ideas so they get a fair hearing inside the company. Chris Bruzzo, Starbucks’ chief technology officer, says the purpose of MyStarbucksIdea.com was to “open up a dialogue with customers and build up this muscle inside our company.” MyStarbucksIdea.com is but one manifestation of how online tools are reshaping the practice of marketing research and leading to a better understanding of what customers want. Source: Jeff Jarvis, “The Buzz from Starbucks Customers,” BusinessWeek European Edition, April 28, 2008. For more on Starbucks, see www.starbucks.com. channels may be chosen. These outcomes are all too common. Most often, they result from ill-formed or underinformed marketing decisions. Thoughtfully designed, competently executed marketing research can mitigate the chances of such unpleasant outcomes. 162 Section Two Market Opportunity Analysis Thus, in the remainder of this chapter, we address the challenge of obtaining market knowledge, including the development of systems to track pertinent market information inside and outside the firm, as well as the design and implementation of more targeted studies intended to collect information about a particular marketing problem. We begin by discussing the principal kinds of market knowledge systems used in companies large and small, and we show how such systems can improve the timeliness and quality of marketing decisions. Customer Relationship Management: Charting a Path toward Competitive Advantage Marketing is rapidly becoming a game where information, rather than raw marketing muscle, wins the race for competitive advantage. There are four commonly used market knowledge systems on which companies rely to keep pace with Strategic Issue daily developments: internal records regarding marketing performance Marketing is rapidly becoming a game (in terms of sales and the effectiveness and efficiency of marketing where information, rather than raw marketing muscle, wins the race for programs), marketing databases, competitive intelligence systems, and competitive advantage. systems to organize client contact. Taken together, these systems lie at the heart of the systematic practice of customer relationship management (CRM). Effective use of CRM is likely to result in happier, higher-volume, more loyal customers. Few of these systems that made modern CRM possible existed in their current form until developments in data processing and telecommunications made them cost-effective. Internal Records Systems Every Monday morning, each retail director at the headquarters of Nine West Retail Stores, a leading operator of shoe specialty stores, receives the “Godzilla Report,” a tabulation of detailed sales and inventory information about the fastest-selling items in Nine West stores from the prior week.17 By style and color, each director learns which items in his or her stores are selling fast and need to be reordered. A similar report provides information about all other styles currently in Nine West’s stores, so that slow sellers can be marked down or transferred to stores where those styles are in higher demand. Additional reports aggregate sales information by style and color; by merchandise category (e.g., dress or casual); by store, area, or region; and for various time periods. The information provided by these reports constitutes the backbone of Nine West’s decision-making about which shoes to offer in which of its stores. Imagine how much more difficult the retail director’s job would be without today’s point-of-sale systems to collect and report such data! Imagine the potential advantage Nine West has over shoe retailers who lack such information. Every marketer, not just retailers, needs information about “what’s hot, what’s not.” Unfortunately, accounting systems generally do not collect such data. Typically, such systems just track dollars of revenue, with no information about which goods or services were sold. Thus, marketers need internal records systems to track what is Strategic Issue selling, how fast, in which locations, to which customers, and so on. Every marketer, not just retailers, needs information about “what’s hot, what’s Providing input on the design of such systems so that the right data not.” Unfortunately, accounting systems are provided to the right people at the right time is a critical marketing generally do not collect such data. responsibility in any company. But what constitutes critical marketing information varies from company to company and industry to industry. Nine West retail directors need to know which styles and colors are selling, in which stores, at what rate. Wal-Mart believes its key suppliers need to know its store-by-store item and category sales data, so it provides password-protected online access to such data to some suppliers. Telemarketers need to know which callers are producing sales, at what Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 163 times of day, and for which products. Marketers of kitchen gadgets through infomercials on late-night television need to know which ads on which stations in which cities are performing, in order to place media spending where it will be most productive. Companies selling their wares to industrial markets through outside salesforces need to know not only which products are selling to which customers, but also which salespeople are selling how much, at what margins and expense rates, and to whom. The salesforce, too, needs information about status of current orders, customer purchasing history, and so on. For those charged with developing or updating internal record systems in their companies, we provide, in Exhibit 6.12, a series of questions to help marketing decision makers specify what internally generated sales data are needed, when, for whom, in what sequence, and at what level of aggregation. Marketing Databases Make CRM Possible In the technology boom of the late 1990s, several companies launched extensive and expensive projects to help them better manage customer relationships through enhanced use of customer data. Although many large-scale CRM projects have failed to show an adequate return on investment, CRM has proved to be very successful in managing marketing campaigns and in serving customers more effectively and more efficiently. For a discussion of how one charity has benefited from such tools, see Exhibit 6.13. The purpose of CRM is to develop a unified and cohesive view of the customer from every touch point within the company, whether by telephone, over the web, by mail, or in person, and, in so doing, to increase profitability and shareholder value. CRM, when implemented successfully, is a cross-functional process that requires coordination and broad-based strategic thinking. The goal of most CRM efforts is to profitably win a Exhibit 6.12 Designing an Internal Records System for Marketing Decision Makers Implications for a Chain Footwear Retailer Implications for an Infomercial Marketer of Kitchen Gadgets What information is key to providing our customers with what they want? Need to know which shoes sell, in which stores and markets, at what rate Need to know which gadgets sell, in what markets, at what rate What regular marketing decisions are critical to our profitability? Decide which shoes and shoe categories to buy more of, which to buy less of or get rid of, in which stores and markets to sell them Decide on which specific TV stations, programs, and times of day to place infomercials for which gadgets What data are critical to managing profitability? Inventory turnover and gross margin Contribution margin (gross margin less media cost) per gadget sold Who needs to know? Buyers and managers of merchandise categories Media buyers, product managers When do they need to know for competitive advantage? For hottest sellers, need to know before competitors, to beat them to reorder market. For dogs, need to know weekly, to mark them down. Need to know daily, for prior night’s ads, to reallocate media dollars In what sequence and at what level of aggregation should data be reported? Sequence of report: hot sellers first, in order of inventory turnover Aggregation: by style and color for buyers, by category for merchandise managers Sequence of report: hot stations and programs first, in order of contribution margin per gadget sold Aggregation: By stations/programs for media buyers, by gadget for product managers Questions to Ask 164 Section Two Exhibit 6.13 Market Opportunity Analysis Customer Relationship Management (CRM) Projects— A Campaign Management Success Story C ampaign management software allows marketers to design and execute marketing programs that allow them greater control and accountability and that produce better results than in the past. The veterinary charity PDSA in the United Kingdom uses software to manage its database of 3.5 million supporters, its 11 million transactions, and 22 million lines of previous mailing history. Because it is a charity, PDSA realizes that not every supporter wishes to be permanently included in its database, and the system allows for this to be factored in. PDSA uses the database to effectively target customers for its mail shot campaigns and pulls in between €10 million and €12 million in contributions per year. The European bank ING has used a Dutch software company to implement a CRM system that allows it to identify its customers who never respond to mailshots, thereby reducing their mailings by 30 percent, or 46 million. Other vendors help companies pinpoint customers who are most likely to defect to competitors, thereby reducing customer churn. Sources: “Ringing the Changes,” Precision Marketing, September 20, 2002; and Michael Dempsey, “FT Report—FT-IT—Getting Back to Basics in Battle to Win Customers,” Financial Times, November 6, 2002. For more on PDSA, see www.pdsa.org.uk. growing share of key customers’ business while finding lower-cost but effective ways of serving less valuable customers. A key element in such efforts is the use of marketing databases, often in conjunction with call centers where many customer contacts occur. Databases created for CRM purposes typically capture information about most or all of the following for each customer.18 ● ● ● ● Transactions: Complete transaction detail, including dates, items purchased, and prices paid. Instances of customer contact: Whether sales calls, call center inquiries, service requests, or whatever, a CRM system should capture the detail of each and every customer contact with the company. Customer demographics: Relevant descriptive data to facilitate market segmentation and target marketing are crucial. Customer responses: A CRM system should capture linkages between marketing activities and customer action. Did the customer respond to an e-mail? A direct mail shot? A face-toface sales call? Many companies have become quite sophisticated about using marketing databases. Catalog marketers such as Lands’ End and L. L. Bean, based in the United States, know who are their best customers and what categories they tend to buy. Online marketers such as Amazon use “cookies,” electronic signatures placed at a customer’s personal computer, so they not only keep track of what each customer has bought, but also recognize the customer when he or she logs on to their site. Airlines track members of their frequent flyer programs and target some with special promotions. Supermarket chain Tesco in the United Kingdom uses its loyalty cards to track and analyze customer buying patterns and to offer customers coupons and incentives tailored to their buying behavior. Tesco uses its analysis in deciding product placement on shelves, managing coupon campaigns, and tailoring product portfolios to individual stores.19 Designing marketing databases that take effective advantage of Strategic Issue customer data that companies are in a position to collect requires that Designing marketing databases that take several major issues be considered: the cost of collecting the data, the effective advantage of customer data that companies are in a position to collect economic benefits of using the data, the ability of the company to keep requires that several major issues be the data current in today’s mobile society, and the rapid advances in considered. technology that permit the data to be used to maximum advantage. Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 165 Collecting information, then storing and maintaining it, always costs money. If a company wants to know more about the demographics and lifestyles of its best customers, in addition to their purchasing histories, it must obtain demographic and lifestyle data about them. Doing so is more difficult than it sounds; many people are unwilling to spend much time filling out forms that ask nosy questions about education, income, whether they play tennis, and what kind of car they drive. The cost of collecting such information must be weighed against its value. What will be done with the information once it is in hand? Marketers planning to build their own databases need also to consider several increasingly important ethical issues, as discussed in Ethical Perspective 6.1. Ethical Perspective 6.1 Ethical Issues in Database Marketing, internet Marketing, and Marketing Research New technologies relating to the gathering and use of information about consumers and their behavior, interests, and intentions raise a host of legal and ethical questions. These new technologies have the potential to harm individuals when such information “is used without their knowledge and/or consent, leading them to be excluded from or included in activities in such a way that they are harmed economically, psychologically, or physically.” Examples include the improper disclosure of a person’s credit rating, denying medical insurance to an individual based on confidential information, and a person’s being placed on target lists for direct mail and telemarketing. The depth of privacy concerns varies from country to country, a critical issue for internet marketers, given their global reach. Ethical issues in marketing research stem, in large part, from the interaction between the researcher and respondents, clients, and the general public. For instance, respondents should not be pressured to participate, should have the right to remain anonymous, and should not be deceived by fake sponsorship. Client issues involve the confidentiality of the research findings and the obligation to strive to provide unbiased and honest results regardless of client expectations. The public is very much involved when they are exposed to a sales solicitation disguised as a marketing research study or issuing from data obtained from “volunteer surveys” using write-ins or call-ins. In discussing the reliability of, and ethical issues involved with, marketing research studies, a Wall Street Journal article noted that many studies “are little more than vehicles for pitching a product or opinion.” An examination of hundreds of recent studies indicated that the business of research has become pervaded by bias and distortion. More studies are being sponsored by companies or groups with a financial interest in the results. This too often leads to a bias in the way questions are asked. Because of shortages in time and money, sample sizes are being reduced to the point that, when groups are further broken into subgroups, the margin of error becomes unacceptable—assuming a probability sample was used. In addition to sample size, the way the sampling universe is defined can bias the results. Thus, in a Chrysler study showing that people preferred Chrysler’s cars to Toyota’s, a sample of only 100 respondents was used in each of two tests, and none owned a foreign car. Thus, the respondents may well have been biased in favor of U.S. cars. In addition to the preceding problems, subjective sampling procedures are often used, data analysis may be flawed, or only the best conclusions are reported. Frequently researchers are hired whose views on the subject area being researched are known to be similar to those of the client. In an attempt to regulate the marketing research industry, several codes of conduct and ethics have been developed. For the United States these include published codes by the American Marketing Association, the American Association for Public Opinion Research, the Marketing Research Association, and the Council of American Survey Research Organizations. In the United Kingdom, the Market Research Society has developed an ethical Code of Conduct that all members are required to adhere to. Similar organizations have developed localized guidelines in other countries. For one such listing of organizations in other countries, see the British Market Research Association website at www.bmra.org.uk. Sources: Paul N. Bloom, Robert Adler, and George R. Milne, “Identifying the Legal and Ethical Risks and Costs of Using New Information Technologies to Support Marketing Programs,” in The Marketing Information Revolution, Robert C. Blattberg, Rashi Glazer, and John D. C. Little, eds. (Boston: Harvard Business School Press, 1994), p. 294; Cynthia Crossen, “Studies Galore Support Products and Positions, But Are They Reliable?” The Wall Street Journal, November 14, 1991, pp. A1 and A8; and Thomas E. Weber, “Europe and U.S. Reach Truce on Net Privacy, but What Comes Next?” The Wall Street Journal, June 19, 2000, p. B1. 166 Section Two Market Opportunity Analysis Building or accessing marketing databases is but a small part of any effective CRM effort, however. Implementing such an effort requires four key steps:20 ● ● ● ● Gaining broad-based organizational support for creating and adopting a CRM strategy. Forming a cross-functional CRM team with membership from all functions that have customer contact. Conducting a needs analysis that identifies both customer and business needs. Developing a CRM strategy to guide implementation. One of the things that some CRM efforts make possible is segmenting markets according to the lifetime value of customers, rather than by more traditional means. Customer lifetime value (CLV) refers to the margins that a customer generates over a lifetime less the cost of serving the customer. Calculating CLV is not a trivial task; it requires both historical purchasing data and forecasting of future customer purchases which, as we’ve seen, is always somewhat tenuous. Nevertheless, research conducted by Deloitte Consulting found that companies that use CLV metrics are 60 percent more profitable than firms that do not.21 The rapid rise in so-called two-sided markets—in which one set of customers who pay little or nothing (Google search users, for example) are essential to attract a completely different and more lucrative set of customers (advertisers who buy ads that arise in response to Google searches)—has led to an even more vexing challenge than the calculation of customer lifetime value in a conventional sense. This challenge is to figure out the value of both kinds of customers: those who search (and are not asked to pay), in Google’s case, and those who pay, the advertisers. Marketing academicians and marketers themselves are beginning to address this and similar kinds of problems, using sophisticated models that help marketers decide on which set of customers to spend marketing dollars, when, and in what pattern over time.22 Welleducated marketing graduates with an affinity for web analytics are well placed to make meaningful contributions to their employers or to start new kinds of businesses themselves to address complex issues like these. Why CRM Efforts Fail Unfortunately, there have been many instances of CRM installations that were unsuccessful, sometimes dramatically so. All of us have experienced infuriating occasions where wading through endless levels of telephone prompts and poorly trained or soulless customer service representatives has damaged or destroyed, rather than enhanced, the customer relationship the company sought to build. Research by Bain & Co. suggests that there are four major pitfalls to watch out for:23 ● ● ● ● Implementing CRM without first developing a strategy. Putting CRM in place without changing organizational structure and/or processes. Assuming that more CRM is better. Failure to prioritize which customer relationships are most worth investing in. Client Contact Systems One good starting point for developing CRM capabilities in companies having limited resources is to put in place salesforce automation software. Such software helps companies disseminate real-time product information to salespeople to enable them to be more productive and more able to satisfy customer needs. Such software also allows companies to effectively capture customer intelligence from salespeople, keep track of it for use on later Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 167 sales calls, and even transfer it to other salespeople in the event of a salesperson leaving the company. Several low-cost software applications that run on PCs are available. ACT and Goldmine are two of the best-known programs in this arena, and Salesforce.com (see www.salesforce.com for a free trial) offers a web-based product. These programs keep track of clients’ names, addresses, phone and fax numbers, and so on—along with all kinds of personal tidbits, such as their spouse’s and children’s names and the kind of wine the client likes to drink—and they also provide an organized way to make notes about each contact with the customer. CRM is a topic about which whole chapters—even entire books—have been written, so we’ve just scratched the surface with our treatment here. There are a couple of good websites for those interested in learning more about CRM. One is www.crmdaily.com, which provides daily updates on the latest happenings in the CRM field. Another is www.1to1 .com, the website of the Peppers and Rogers group, a leading consultancy in this arena. Competitive Intelligence Systems24 In today’s fast-paced business climate, keeping up with competitors and the changing macroenvironment is no easy task. Competitive intelligence (CI) is a systematic and ethical approach for gathering and analyzing information about competitors’ activities and related business trends. It is based on the idea that more than 80 percent of all information is public knowledge. The most important sources of CI information include companies’ annual and other financial reports, speeches by company executives, government documents, online databases, trade organizations, as well as the popular and business press. The challenge is to find the relevant knowledge, analyze it, and share it with the decisionmakers in the organization, so they can use it. The critical questions that managers setting up a CI system should ask are: ● ● ● ● How rapidly does the competitive climate in our industry change? How important is it that we keep abreast of such changes? What are the objectives for CI in our company? Who are the best internal clients for CI? To whom should the CI effort report? What budget should be allocated to CI? Will it be staffed full- or part-time? In companies that operate in industries with dynamic competitive contexts, the use of full-time CI staff is growing. Marketing Research: A Foundation for Marketing Decision Making We now turn briefly to the marketing research task: the design, collection, analysis, and reporting of research intended to gather data pertinent to a particular marketing challenge or situation. The word particular is very important. MarStrategic Issue keting research is intended to address carefully defined marketing Research carried out without carefully problems or opportunities. Research carried out without carefully thought-out objectives usually means time thought-out objectives usually means time and money down the and money down the tubes! tubes! Some marketing problems commonly addressed through marketing research include tracking customer satisfaction from unit to unit or year to year (tracking studies); testing consumer responses to elements of marketing programs, such as prices or proposed advertising campaigns; and assessing the likelihood that consumers will buy proposed new products. 168 Section Two Market Opportunity Analysis Exhibit 6.14 Steps in the Marketing Research Process: What Can Go Wrong? Steps What Frequently Goes Wrong? 1. Identify managerial problem and establish research objectives. Management identifies no clear objective, no decision to be made based on the proposed research. 2. Determine data sources (primary or secondary) and types of data and research approaches (qualitative or quantitative) required. Primary data are collected when cheaper and faster secondary data will do. Quantitative data are collected without first collecting qualitative data. 3. Design research: type of study, data collection approach, sample, etc. These are technical issues best managed by skilled practitioners. Doing these steps poorly can generate misleading or incorrect results. 4. Collect data. Collector bias: hearing what you want to hear. 5. Analyze data. Tabulation errors or incorrect use or interpretation of statistical procedures may mislead the user. 6. Report results to the decision maker. Some users do not really want objective information—they want to prove what they already believe to be true. We begin by presenting a model of the marketing research process that sets forth the many decisions that must be made to conduct effective and actionable marketing research. The steps in the marketing research process are shown in Exhibit 6.14. As this exhibit shows, the marketing research process is fraught with numerous opportunities for error. That’s why it’s so important that all who play influential roles in setting strategy for their firms or who use marketing research results for decision making be well-informed and critical users of the information that results from market research studies. To this end, we now address each of the steps in the marketing research process, from a decision-making point of view. Step 1: Identify the Managerial Problem and Establish Research Objectives As for any other form of human endeavor, if you don’t have clear objectives, any road will get you there! The same is true for conducting marketing research. A good place to start is to ask what the managerial problem or question is that a proposed program of research might address. Maddy and Laguë’s initial inquiries about starting a telecommunications business in Tanzania had numerous managerial questions to be answered. How attractive is the telephone market in Tanzania? What segments are most attractive? How large is the market, and how fast is it likely to grow? Is the industry attractive? Who are the key competitors and what competitive advantages might they have and not have if we enter? What telecommunications wants and needs are not well satisfied currently, for which groups of consumers? How likely are consumers to use the system we propose to put in place? How much might they be willing to pay? What incentives would retailers or others need to sell our phone cards or to place our pay phones on their premises? Taking each of these managerial questions, one at a time, and applying appropriate analytical frameworks to each of them—such as macro trend analysis and Porter’s five forces (Chapter 3), and so on— provides clear guidance for the kind of information the researcher needs. The result is a set of research objectives (e.g., determine market size and growth rate, assess supplier power in this industry, and so on) that will drive the research. Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 169 Step 2: Determine the Data Sources and Types of Data Required This step is critical in determining the cost-effectiveness and timeliness of the research effort. The researcher must answer two key questions at this stage: Should I gather data from primary or secondary sources? Whichever type of data sources are called for, do I need qualitative or quantitative research to satisfy my research objectives, or both? Primary or Secondary Sources? Primary data are data collected from individual research subjects using observation, a survey, interviews, or whatever. The data are then gathered and interpreted for the particular research objective at hand. Secondary data already exist—on the internet, in government documents, in the business press, in company files, or wherever. Someone has already done the primary data collection and placed the data where others can access it, whether easily or with difficulty, whether free or at some cost. Which is better—primary or secondary data? If (and it’s an important if) a research objective can be met using secondary data, that’s usually the best course to follow. Why? First, it’s usually quicker to find the data somewhere than to collect Strategic Issue information from scratch. Imagine having to collect demographic data Which is better—primary or secondary data? about Tanzania without the Tanzanian census! Second, it’s usually less costly to simply find existing secondary data than to collect the information as primary data all over again. Third, secondary data are typically based on what people actually do, or how they actually behave. Surveys, a common form of primary data, are based on what people say. The two are not the same, as we saw earlier in the forecasting portion of this chapter. For Maddy and Laguë, secondary data, if available, should answer several of their research questions, such as those on market and industry attractiveness, if Tanzania’s government has made gathering and reporting such data a priority. Often, the availability and quality of a country’s secondary data, from government as well as other sources, correlates closely with its degree of economic development. Refer to Exhibit 3.14 in Chapter 3 for a list of some commonly used websites for market and industry analysis. Similar sources are available for most developed countries. To explore consumers’ willingness to use the innovative system of pay phones and calling cards that Maddy and Laguë proposed to develop, primary data were necessary. It is unlikely that a study to evaluate the attractiveness of such a system to consumers had already been conducted. Qualitative or Quantitative Data and Research Approaches? Where secondary data are to be collected, the researcher needs to decide whether qualitative data, such as that concerning sociocultural trends in Tanzania, or quantitative data, such as the number of households in a particular income group in Dar es Salaam, are required. Most secondary research studies require both qualitative and quantitative data. If primary data are necessary, a decision must be made about whether to collect that data using qualitative or quantitative research approaches. Qualitative research usually involves small samples of subjects and produces information that is not Strategic Issue easily quantifiable. Qualitative data may yield deeper insights into conNever generalize from qualitative research. sumer behavior than are available from quantitative research. For this reason, qualitative research is often conducted first and used to guide subsequent quantitative research. An important drawback of qualitative research, however, is that its generally small samples may not fairly represent the larger population. Most experienced marketing researchers would say, “Never generalize from qualitative research. Always follow up with a quantitative study to test the hunches developed in the qualitative study.” Such 170 Section Two Market Opportunity Analysis statements presume, however, that adequate research resources are available to conduct additional studies. Often, and particularly in entrepreneurial settings, such is not the case, and decision makers are forced to rely, albeit tenuously, on small-scale qualitative studies. Quantitative research collects data that are amenable to statistical analysis, usually from large enough samples so that inferences may be drawn with some confidence to the population from which the subjects in the sample are drawn. The principal benefit of quantitative research lies in its measurement of a population’s attitudes toward or likely response to products or marketing programs. Because of their larger sample sizes and quantitative metrics, greater confidence can be placed in quantitative studies, when conducted properly, using appropriate sampling procedures and statistical techniques. We address these issues in more detail in subsequent sections of this chapter. Qualitative Research Techniques There are seemingly as many qualitative research techniques as there are stars in the sky.25 The most common ones, however, are focus groups and interviews of various kinds.26 A focus group typically consists of 8 to 12 consumers from the marketer’s target market brought together at Strategic Issue a research facility to discuss a particular marketing problem, such as Focus groups have significant limitations. attitudes toward a proposed new product and various possible features. A skilled moderator conducts the focus group, records the conversation on audio- and/or videotape, and writes a report of the findings. Typically, two or more groups are conducted for a single research project. Focus groups have significant limitations: They are subject to data distortion caused by a dominant person in the group, their results are difficult to interpret, and they are neither representative of nor generalizable to a larger population, due to their small sample size and convenience samples. They are one way, however, to begin a research inquiry or to gather at least some information when research budgets are tight.27 In-depth interviews are another, perhaps better, approach. A set of qualitative research methods whose use is growing fast among marketing professionals is the use of ethnographic and anthropological approaches, like those Genevieve Bell and her team employ at Intel, as we saw at the outset of this chapter. Such approaches have been used by many other high-tech companies to better understand consumers’ real needs. Among the results of such efforts was Nokia’s insight about the need for very simple and inexpensive but dust-proof cell phones in India. More than 200 million of Nokia’s low-price Model 1100 handset were sold between 2003 and 2007, contributing to the rapid growth of cell phone penetration in India and other emerging markets that took hold at about that time.28 Alas, not all companies, whether tech-driven or otherwise, actually seek and are willing to invest in an in-depth understanding of what consumers really need. Quantitative Research Techniques In most quantitative research, questionnaires are used that enable the researcher to measure the subjects’ responses on quantitative scales. These scales enable the researcher to compare product attributes, the responses of demographically different consumers, and other differences in order to better understand what consumers prefer, how satisfied they are with one product compared to others, and so on. Where statistically significant differences are found, managers can be relatively certain at some known level of confidence that the differences uncovered in the research reflect those actually found in the whole population. Examples of several kinds of quantitative scales commonly used in such research are shown in Exhibit 6.15. Novice researchers, or those whose budgets are limited, can sometimes obtain useful market knowledge from small-scale research that begins with some qualitative research, perhaps several interviews, and concludes with a quantitative study using measures such as those shown in Exhibit 6.15. Gaining experience with such research, even in a class Chapter Six 171 Measuring Market Opportunities: Forecasting and Market Knowledge Exhibit 6.15 Some Commonly Used Types of Scales for Quantitative Market Research Type of scale Description Example Semantic Differential Scale A scale connecting two bipolar words How satisfied are you with your provider of cable TV? Not or phrases at all satisfied 1 2 3 4 5 6 7 Extremely satisfied Likert Scale A statement with which the respondent shows the amount of agreement/disagreement I am extremely satisfied with my provider of cable TV. Strongly agree 1 2 3 4 5 6 7 Strongly disagree Quality Rating Scale Rates some attribute on a scale from “excellent” to “poor” My cable TV service, overall, is: Good Very Good Poor Fair Importance Scale, using semantic differential attribute format Rates the importance of some. attribute How important are the following criteria to your satisfaction with your cable TV provider? Not at all important Intention-to-Buy Scale Measures how likely the respondent is to buy at some price Excellent Extremely important Answers the phone quickly 1234567 Prompt repair service 1234567 Cleans up after installation 1234567 Service never goes dark 1234567 How likely are you to sign up for the new InterGalactic Channel for an extra $9.95 per month? Definitely __________ Probably __________ Might or might not __________ Probably not __________ Definitely not __________ project setting, provides future managers with some appreciation for the conduct of marketing research and the limitations to its interpretation. Step 3: Design the Research Designing secondary research is a simple matter of finding sources of informations sufficient to satisfy the research objectives and ensuring that the sources are credible. For primary qualitative research, such as focus groups or interviews, Strategic Issue detailed guides are prepared for conducting the research to specify They key decisions to be made in primary what questions are to be asked. For primary quantitative research, research design are to determine the data collection method and prepare the research design is the most technical and most difficult step in conresearch instrument, determine how to ducting the research. The key decisions to be made in primary research contact the participants in the research, design are to determine the data collection method and prepare the and design sampling plan. research instrument, determine how to contact the participants in the research, and design the sampling plan. Determine the Data Collection Method and Prepare the Research Instrument The most common methods of collecting primary data are observation, survey, and experiment. Observation is just that: observing subjects using pay phones in Tanzania, in Maddy and Laguë’s case. Typically, a form is prepared on which the observer 172 Section Two Market Opportunity Analysis records what is being observed, perhaps minutes of use and gender of the user, among other things. Many companies favor the use of observation to better understand not only consumers, but also salespeople and distribution channel members. Surveys involve writing a questionnaire, which, will include questions and either scaled answers (such as those shown in Exhibit 6.15) or spaces for open-ended answers. Demographic information about the respondent is also usually requested to aid in market segmentation and market targeting decisions, which we address in Chapters 7 and 8. Constructing survey questions and formats for the answers is more difficult than one might expect and is beyond the scope of this book, but several sources cited in this chapter, as well as Exhibit 6.15, can help bring the reader up to speed on these tasks.29 Experiments are studies in which the researcher manipulates one or more variables, such as price or product features, either within the context of a survey or in a laboratory or field setting, in order to measure the effect of the manipulated variable on the consumer’s response. One common use of experiments is to examine the consumer’s likelihood to buy a new product at different price points. Different respondents are given different prices for the product, and the researcher tests differences in consumers’ likelihood to buy as the price changes. This procedure entails less bias than asking consumers what they would be willing to pay for a product, the typical answer to which is “as little as possible!” Determine the Contact Method Once a data collection method is chosen, the researcher must decide how to contact those who will participate in the research. Common choices include face-to-face (perhaps in a shopping mall or a public place), mail, telephone, fax, e-mail, and the internet. Exhibit 6.16 shows some of the trade-offs among these methods. A significant problem with survey research is that those who choose not to participate when asked (“We’re eating dinner now, and please don’t call back!”) may differ from those who do participate. This nonresponse bias may distort the results of the research. Response rate can also be a problem, since many who are asked to participate will not do so. Response rates for mail surveys generally run about 10 to 15 percent. The other types are better or worse, as shown in Exhibit 6.16. Thus, for a mail survey, 6 to 10 times the number of surveys the researcher hopes to receive must be mailed. Increasingly, marketing research of all kinds, especially surveys, is moving from more costly face-to-face or telephone contact methods to online approaches. Proponents argue that there are benefits in doing so. First, it’s fast, easy, and in some cases free, thanks to numerous websites like www.zoomerang.com that offer easy-to-use online survey tools. Second, respondents can choose when to take the survey, so they may provide more thoughtful, more complete answers. And researchers can ask more sensitive questions because the process is less intrusive.30 Exhibit 6.16 Pros and Cons of Different Contact Methods for Survey Research Method Response rate Cost Timelines Nonresponse bias Face-to-Face High High Slow Low Mail Low Low Slow High Telephone Moderate Moderate Fast Moderate Fax Moderate Low Fast High E-mail Low Low Fast High Internet Low Low Fast High Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 173 Significantly, some of the world’s largest users of marketing research, including Procter & Gamble, are turning more and more to online methods. P&G’s global consumer and market knowledge officer Joan Lewis expects surveys to decline sharply in importance by 2020. The rise in social media is the reason why. “The more people see two-way engagement and being able to interact with people all over the world, I think the less they want to be involved in structured research,” she said. “If I have something to say to that company now, there are lots of ways to say it. We are all brought into the research industry with the almost dogmatic belief that representation is everything,” Ms. Lewis said, noting that she doesn’t discount the importance of having samples representative of a population for some research. “But we need to get away from the notion that being representative of something is the only way to learn.”31 But critics have significant concerns, the main one being that it’s difficult to ensure that the huge pools of online respondents are representative of the wider population. The fact that respondents are not selected randomly violates a core tenet of probability-based sampling and interpretation of the results, notes Stanford professor Jon A. Krosnick, who has studied polling for eight years. Gary Langer, Director of Polling at ABC News, says the pools of volunteer participants—lured by gifts or cash—who take some polls are simply poll-taking clubs. ABC refuses to run the results of nonrandom polling.32 Design the Sampling Plan Selecting a sample of participants for observational, survey, or experimental research requires that three questions be answered: 1. Who is the population (or universe) from which the sample of respondents will be drawn? 2. What sample size is required to provide an acceptable level of confidence? 3. By what method, probability sampling (also called random sampling) or nonprobability sampling (such as convenience sampling), will the sample be selected? We’ll discuss each of these issues briefly.33 First, the population from which the sample is to be drawn must be clearly specified. Typically, it consists of the target market, defined in demographic or behavioral terms (e.g., users of pay telephones in Tanzania), although excluding current nonusers might not be a good idea for Maddy and Laguë if they hope to expand the market. Second, the sample must be large enough to provide confidence that statistical data, such as mean responses to survey questions, are truly within some narrow-enough range, sometimes called the margin of error. In general, the larger the sample size, the smaller the margin of error. If Maddy and Laguë observed only three pay phones in their research, they could not be very confident that the average daily minutes of use at those phones was representative of use for 60 pay phones in Tanzania. A larger sample would give them more confidence. Exhibit 6.17 provides rough approximations of the margin of sampling error associated with different sample sizes. Third, the idea behind probability, or random, sampling is that every person in the population has an equal chance of being selected. If nonprobability samples, such as convenience samples, are used, the sample may be biased. If Maddy Strategic Issue and Laguë observe consumers using pay phones in the international An astute user should always ask about the departure lounge at the airport in Dar es Salaam, this sample would sample selection method. If the method is not reflect usage by the general Tanzanian population. Convenience not random, the user should inquire about how the sample was selected. samples are used quite often for marketing research because true random samples are more difficult and costly to reach. The nonresponse problem makes almost all samples potentially biased in the same way. An astute user should always ask about the sample selection method. If the method is not random, the user should inquire about how the sample was selected to look for any source of bias that might distort the research results. 174 Section Two Market Opportunity Analysis Exhibit 6.17 Margin of Error Associated with Different Sample Sizes Assume a poll of eligible voters is taken to determine which candidate is in the lead. Suppose the results are that Jones has 45% of the voters in her corner. Smith has 41%, and 14% are undecided. Can we conclude that Jones leads Smith? It depends, in part, on the sample size of the poll. Sample size Approximate margin of error for 95% confidence level Implications for the Jones and Smith race (in which Jones appears to be leading) 100 10 percentage points Jones has 45% plus or minus 10%, or 35% to 55%. Smith has 41% plus or minus 10%, or 31% to 51%. Smith could be leading by as much as 51% to 35%. 500 4–5 percentage points Jones has 45% plus or minus 4.5%, or 40.5% to 49.5%. Smith has 41% plus or minus 4.5%, or 36.5% to 45.5%. Smith could be leading by as much as 45.5% to 40.5%. 1,000 3 percentage points Jones has 45% plus or minus 3%, or 42% to 48%. Smith has 41% plus or minus 3%, or 38% to 44%. Smith could be leading by as much as 44% to 42%. What will the headlines say? Probably that Jones leads Smith, 45 percent to 41 percent, if the sample size is 1,000, typical In national or statewide political polls. Is this a fair conclusion? Adapted from “What Is a Survey: What Is a Margin of Error?” http://www.whatisasurvey.info/chapters/ chapter10.htm . Copyright 1998 by the American Statistical Association. All rights reserved. Step 4: Collect the Data By now, the hardest parts of the research process are complete, though the most timeconsuming parts have just begun. The data collection contributes more to overall error than any other step in the process. In some cases, especially where entrepreneurs or marketers conduct marketing research themselves instead of contracting with a third party for data collection, collector bias can be a problem. The person collecting the data might, in his or her enthusiasm for the product, bias the respondents so they tell the researcher what they think he or she wants to hear. Errors in face-to-face or telephone surveys include those that derive from nonresponse by some respondents; selection errors by the interviewer (i.e., selecting respondents who are not members of the specified population); the way the interviewer asks the questions; the interviewer’s interpretation and recording of answers; and even interviewer cheating. In surveys conducted by fax, e-mail, or over the internet, an additional problem is that the researcher does not know who actually replied to the survey. The data collection effort can be substantial. To complete 100 surveys in the United Kingdom with randomly selected homes using random digit dialing, several hundred phone numbers will likely be required and 1,000 dialings! Step 5: Analyze the Data When the data have been collected, the completed data forms must be processed to yield the information the project was designed to collect. The forms are checked to see that instructions were followed, that the data are complete, and that the data are logical and consistent within each respondent’s form. Typically, the data are then entered into computer files; percentages and averages are computed; and comparisons are made between Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 175 different classes, categories, and groups of respondents. Often, sophisticated statistical analyses are required. Step 6: Report the Results to the Decision Maker This is where the rubber meets the road. If the research study began with clearly defined objectives, reporting the results simply returns to those objectives and reports what was found. Where research is carried out without clear objectives, reporting can be difficult, as no clear conclusions may be available. Lots of marketing research money is wasted in some companies because of poorly specified research objectives. What Users of Marketing Research Should Ask The research process described in the preceding section makes clear where many of the potential stumbling blocks are in designing and conducting marketing research. The informed and critical user of marketing research should ask the following questions, ideally before implementing the research or if necessary subsequent to its completion, to ensure that the research is unbiased and the results are trustworthy. 1. What are the objectives of the research? Will the data to be collected meet those objectives? 2. Are the data sources appropriate? Is cheaper, faster secondary data used where possible? Is qualitative research planned to ensure that quantitative research, if any, is on target? 3. Are the planned qualitative and/or quantitative research approaches suited to the objectives of the research? Qualitative research is generally better for deep insights into consumer behavior, while quantitative research is better for measurement of a population’s attitudes and likely responses to products or marketing programs. 4. Is the research designed well? Will questionnaire scales permit the measurement necessary to meet the research objectives? Are the questions on a survey or in an interview or focus group unbiased? (“Isn’t this a great new product? Do you like it?”) Do the contact method and sampling plan entail any known bias? Is the sample size large enough to meet the research objectives? 5. Are the planned analyses appropriate? They should be specified before the research is conducted. Rudimentary Competence: Are We There Yet? One objective we set at the outset of this chapter was to provide the reader with at least a rudimentary level of competence in designing and carrying out marketing research studies. Entire courses dealing with marketing research are offered in nearly every business school marketing curriculum and half a chapter does little justice to the detail and technical expertise involved in this important craft. Nonetheless, by reading this chapter and a few of the cited reference sources on particular research techniques, the reader should be able to conduct at least some useful research for a class project or even a low-budget entrepreneurial venture. Such research, despite its limitations, will give the reader an experiential base useful in assessing research done by others, and it will surely yield greater insights into the marketing problem than will hunches alone. Given the importance of marketing research in marketing and strategic decision making today, we encourage every business student from every business discipline to try his or her hand at it. In the remaining chapters in this book, we shall return from time to time to the marketing research topic and show how marketing research informs not only market and competitive 176 Section Two Market Opportunity Analysis analysis and customer understanding, but also the design and implementation of marketing programs. In recent years, a wide variety of software applications have been developed to aid marketers in conducting marketing research and applying it and other data to specific marketing problems. Various trade magazines publish annual directories that list providers of these tools and other services that facilitate marketing research.34 In subsequent chapters, we’ll point out specific applications for which such applications are commonly used. Take-aways 1. Every forecast and estimate of market potential is wrong! Evidence-based forecasts and estimates, prepared using the tools provided in this chapter, are far more credible—and generally more accurate—than hunches or wild guesses. A menu of evidence-based forecasting approaches is provided in this chapter. 2. Forecasts have powerful influence on what companies do, through budgets and other planning procedures. Thus, forecasting merits significant management attention and commitment. 3. Superior market knowledge is not only an important source of competitive advantage, but it also results in happier, higher volume of, and more loyal customers. Thus, the systematic development of market knowledge is a critically important activity in any organization. 4. Much can go wrong in marketing research and often does. Becoming an informed and critical user of marketing research is an essential skill for anyone who seeks to contribute to strategic decision making. Tools for obtaining this skill are presented in this chapter. Endnotes 1. This material is drawn from Stephen Prentice, “Intel’s Genevieve Bell: An Anthropologist at the Cutting Edge of Technology and Society: A Gartner Fellows Interview,” April 23, 2010; Rob Enderle, “Intel’s Secret Weapon”, TG Daily, http://www.tgdaily.com/hardware-opinion/50438-genevieve-bellintel; http://www.gartner.com/displaydoument?id1358720; Mike Magee, “Intel’s Genevieve Bell Drank Water out of Frogs”, TechEye, http://www .techeye.net/chips/; Michael V. Copeland, “Intel’s Cultural Anthropologist,” Fortune European Edition, September 27, 2010, pp. 16–17; Intel, “Mobile Etiquette Mishaps Are Running Rampant”, Hoteliers, March 17, 2011, http:// www.4hoteliers.com/4hots_nshw.php?mwi8403; and the Intel website at http://www.intel.com/pressroom/kist/bios/gbell.htm. 2. Kenneth D. Lawrence, Ronald K. Klimberg, and Sheila M. Lawrence, Fundamentals of Forecasting Using Excel (New York: Industrial Press, 2009). 3. See Frank M. Bass, “A New Product Growth Model for Consumer Durables,” Management Science, January 1969, pp. 215–27; and Trichy V. Krishnan, Frank M. Bass, and V. Kumar, “Impact of a Late Entrant on the Diffusion of a New Product/Service,” Journal of Marketing Research, May 2000, pp. 269–78. 4. For more on conjoint analysis, see Vithala Rao, Applied Conjoint Analysis (New York: Springer Publishing, 2009). 5. Anita M. McGahan, African Communications Group (Condensed) (Boston: Harvard Business School Publishing, 1999). 6. McGahan, African Communications Group (Condensed). 7. For more on analogs and antilogs and their use in developing evidencebased forecasts and business models, see John Mullins and Randy Komisar, Getting to Plan B: Breaking Through to a Better Business Model (Boston: Harvard Business Press, 2009). 8. Colin Welch and Ananth Raman, Merchandising at Nine West Retail Stores (Boston: Harvard Business School Publishing, 1998). 9. Dan Lovallo and Daniel Kahneman, “Delusions of Success,” Harvard Business Review, July 2003. 10. Everett M. Rogers, Diffusion of Innovations (New York: Free Press, 1983). 11. Rogers, Diffusion of Innovations. 12. Paul Saffo, “Six Rules for Effective Forecasting,” Harvard Business Review, July–August 2007. 13. Dale O. Coxe, African Communications Group (Boston: Harvard Business School Publishing, 1996). 14. Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty,” Science 185 (1974), pp. 1124–31. 15. Steve Morlidge and Steve Player, Future Ready: How to Master Business Forecasting (Chichester, West Sussex, UK: John Wiley and Sons, Ltd, 2010). 16. Li and Calantone define market knowledge as “organized and structured information about the market.” See Tiger Li and Roger J. Calantone, “The Impact of Market Knowledge Competence on New Product Advantage: Conceptualization and Empirical Examination,” Journal of Marketing, October 1998, pp. 13–29. 17. Welch and Raman, Merchandising at Nine West Retail Stores. 18. Russell S. Winer, “A Framework for Customer Relationship Management,” California Management Review 43 (Summer 2001), pp. 89–105. 19. “Marketing—Clubbing Together,” Retail Week, November 8, 2002. 20. For more on this topic, see V. Kumar and Werner J. Reinartz, Customer Relationship Management (Hoboken, NJ: John Wiley & Sons, 2006). Chapter Six Measuring Market Opportunities: Forecasting and Market Knowledge 177 21. Sudhir Kale, “CRM Failure and the Seven Deadly Sins,” Marketing Management 13 (April 2004), pp. 42–46. Unknown Unknown’s.” MIT Sloan Management Review, Summer 2007, pp. 17–21. 22. For one such approach, see Sunil Gupta and Carl F. Mela, “What Is a Free Customer Worth?” Harvard Business Review, November 2008, pp. 102–109. 23. Darrell K. Rigby, Frederick F. Reichfeld, and Phil Schafter, “Avoid the Four Perils of CRM,” Harvard Business Review, February 2002, pp. 101–9. 24. Information in this section comes from the Society of Competitive Intelligence Professionals website at www.scip.org. 27. The survey research methods section of the American Statistical Association offers useful guides to conducting focus groups and surveys. Downloadable PDF files may be found at www.whatisasurvey.info. 25. For additional qualitative research techniques. See Abbic Griffin, “Obtaining Customer Needs for Product Development”, in M.D. Rosenau, ed. The PDMA Handbook of New Product Development (New York: John Wiley and Sons, 1996): and Gerald Zaltman, “Rethinking Marketing Research: Putting the People Back to”, Journal of Marketing Research, November 1997, pp. 424–37. 26. The definitive guide to conducting in-depth long interviews is Grant McCracken. The Long Interview (Newbury Park, CA: Sage Publications, 1988). For an adaptation of McCracken’s approach to new product and new venture settings, where discovering the “unknown unknowns” is a primary research objective. See John W. Mullins, “Discovering 28. Darren Murph, “Nokia’s 1100 Handset Over 200 Million Served,” engadget mobile, http://mobile.engadget.com/2007/05/07/nokias-1100handset-over-200-million-served/, May 7, 2007. 29. For more on questionnaire design, see any marketing research text, such as Joseph F. Hair, Jr., Robert P. Bush and David J. Oninau. Marketing Research (Burr Ridge, JL: Irwin/McGraw-Hill, 2008.) 30. Bun Helm, “Online Potts: How Good Are They?” Business Week European Edition, June 16, 2008. pp. 86–87. 31. Jack Neff, “Will Social Media Replace Surveys as a Research Tool?”. Advertising Age March 21, 2011. http://adage.com/article/ news/p-g-surveys-fade-consumers-reach-brands-social-media/149509/. 32. Helm, “Online Polls: How Good Are They?” 33. For more on sampling, see Hair, Bush, and Oninau, Marketing Research. 34. For example, see “Directory of E-marketing Services.” Marketing News. September 29, 2003, pp. 12–20. C HAPTER S EVEN Targeting Attractive Market Segments The Developing World’s Emerging Middle Class1 F OR MANY YEARS, IN THE eyes of Western marketers, there were only two market segments in the developing world—the very rich (of which there were not very many, but they had plenty of money to spend)—and everyone else, all very poor. With the 2004 publication of C. K. Prahalad’s landmark book, The Fortune at the Bottom of the Pyramid, eyes were opened to the aggregate purchasing power of the world’s poorest citizens, often defined as those earning less than $2 per day. Prahalad called attention to what a few companies had already figured out, that if you packed shampoo in single-portion sachets, poor consumers could and would buy it, even though the large economy size bottle sold in the west was completely irrelevant. Today, a new reality is emerging all over the developing world. Rapid economic development has spawned a large and growing middle class, a middle class with discretionary spending power and a plethora of unmet needs that local and foreign marketers are just starting to serve. But targeting the developing world’s new middle class isn’t as simple as following the old division between rich and poor, for this new group is a heterogeneous one, whose composition varies from country to country. The New Middle Class: Who and How Large? There are two common approaches to defining this new middle class, which sits just above the poor in 178 Prahalad’s pyramid: in absolute terms without regard to local conditions or in relative terms, wherein what’s “middle” is defined more locally. Central to the middle class notion is a reasonable amount of income that is discretionary—perhaps one-third, according to Diana Farrell of the National Economic Council in the United States—which goes to goods and services other than food and shelter. Most of the time, this means holding a steady job with salary and some benefits or running a small business whose employees go beyond the immediate family. If one defines middle class as those having incomes greater than Brazil’s average income and less than Italy’s—roughly between $12 and $50 per person per day—the middle class population in emerging markets was about 250 million in 2000 and 400 million in 2005. But such an approach omits very large numbers of people in India and China who are clearly middle class but don’t earn $12 per day. Martin Ravallion of the World Bank uses a range of $2 to $13 at 2005 purchasing-power parity prices, above the accepted poverty line in the developing world but below the American one. By his definition, India’s middle class population rose from 147 million to 264 million from 1990 to 2005 and China’s from 174 million to 806 million. The middle class in emerging markets globally nearly doubled over that period, from 1.4 billion to 2.6 billion. It now accounts for more than half of the developing world’s population, up from one-third in 1990. Shasi Thanoor, an Indian commentator, argues that the middle class is a category that is “more sociological than logical.” It is, of course, an income category, but it’s also a set of attitudes, even a mindset. And new kinds of spending patterns, too. These households spend proportionately less on food and housing, so they have money to spend on private education, health care, motorcycles, modern kitchens, air conditioners, and more. McKinsey believes that India’s middle class will reach 580 million people by 2025. For marketers, this phenomenon holds powerful implications in market segmentation terms. Targeting India’s New Middle Class Consider Dinaz Vervatwala, owner of a growing chain of fitness studios in India’s fast-growing hightech hot spot, Hyderabad. Vervatwala pioneered the aerobics industry in Hyderabad in 1993, opening her first fitness studio to serve upscale women in the posh Banjara Hills neighborhood. Hyderabad has grown rapidly in recent years, and her business has grown with it. The growth of high-tech industries in Hyderabad—from software to business process outsourcing and more—has created a new market of fitness customers having a blend of Indian and Western attitudes and aspirations. As we write, there are four Dinaz’s Fitness Studios in Hyderabad (www.dinazs.com), employing more than 50 people in total, each the product of a range of important marketing decisions. What socioeconomic level should Vervatwala target? What level of service do customers want, and what price will they pay for it? Where should new stores be located? Should she continue to target women, or should she expand her sights to include men (so far, not the case)? Each of these decisions required Vervatwala to think clearly about not just the growing market that was readily apparent, but about the market segments within it that she wanted to target, where to find them and how best to serve them. Targeting: One Ingredient in Marketing Success As Dinaz Vervatwala foresaw, Hyderabad’s rapid growth has created a growing middle class of customers she was eager and willing to serve. But it’s not just fitness studios that are growing in India. By 2007, India had more cell phone users than America. China had twice as many. In banking, ICICI, a large Indian bank, added 4 million new customers in 2008, most of them previously unbanked and living in India’s second and third tier cities, where much of the growth in India’s middle class is taking place. But bricks and mortar weren’t a part of the effort. ICICI’s mobile phone banking innovations and vigorous cost-cutting reduced its transaction costs to levels far below those of its competitors. Market segmentation decisions are not confined to small entrepreneurial companies like Dinaz’s, of course. In March 2011, Vikram Pandit, CEO of CitiBank, announced that CitiBank, attracted by the explosion in trade and capital flows within and into emerging market countries like Brazil, China, and India, planned to become the world’s “largest emerging markets financial services company.” CitiBank already earns more than half its profits from developing countries. Some observers argue that Asia, in particular, has reached a tipping point. The Chinese already buy more cars and more cell phones than Americans and will soon surpass them in computers, too, not to mention numerous other categories where the same thing is happening. Targeting attractive market segments in these rapidly growing markets and developing marketing strategies that are tailored to serve the chosen segments is what good marketers, whether entrepreneurs like Dinaz Vervatwala or bankers like those at ICICI and CitiBank, do. 179 180 Section Two Market Opportunity Analysis Marketing Challenges Addressed in Chapter 7 Targeting the most attractive market segments is an issue that arises for marketers everywhere, not just in emerging economies. Different groups of customers—different market segments—have different wants and needs, both tangible and intangible. Fitness aficionadas may measure their progress by stepping on the scale, but the real benefits that Dinaz Vervatwala offers—overall appearance, energy, and attitude—are more difficult to quantify. In virtually any market, if different segments can be clearly identified, specific goods or services with specific marketing programs can be developed to meet the physical needs of the customer (pounds lost or kept at bay, muscles finely toned, endurance enhanced) as well as the emotional needs that consumers attach to their favorite pursuits (looking good in the clubs or at work). In Chapter 7, we draw on the foundation of market knowledge and customer understanding established in the first six chapters to introduce what are probably the most important and fundamental tools in the marketer’s tool kit: market segmentation and target marketing. Together with differentiation and brand positioning, which we address in Chapter 8, these tools provide the platform on which most effective marketing programs are built. Learning to apply these tools effectively, however, requires addressing several important questions. Why do market segmentation and target marketing make sense? Why not sell the same fitness services—or bank accounts, automobiles, or whatever—to everyone? How can potentially attractive market segments be identified and defined? Finally, how can these segments be prioritized so that the most attractive ones are pursued? Answering these questions should enable an entrepreneur, a venture capital investor in Silicon Valley or Hyderabad, or a marketing manager in a multinational firm to decide which market segments should be targeted and provide insight into which investments should be made. Do Market Segmentation and Target Marketing Make Sense in Today’s Global Economy? Market segmentation is the process by which a market is divided into distinct subsets of customers with similar needs and characteristics that lead them to respond in similar ways to a particular product offering and marketing program. Target marketing requires evaluating the relative attractiveness of various segments in terms of market potential, growth rate, competitive intensity, and other factors and the firm’s mission and capabilities to deliver what each segment wants, in order to choose which segments it will serve. Brand positioning entails designing product offerings and marketing programs that can establish an enduring competitive advantage in the target market by creating a unique brand image, or position, in the customer’s mind. Dinaz Vervatwala founded her fitness studio in part because she saw a market segment—women in Banjara Hills—whose needs were not being fully met. She chose to target this segment because fitness training was growing in popularity and because she had particular knowledge and expertise she could bring to the party. She positioned her fitness studios as the ones that were focused on womenly without any ogling males anywhere nearby. These three decision processes—market segmentation, target marStrategic Issue keting, and positioning—are closely linked and have strong interdependence. All must be well considered and implemented if the firm is Are all these analyses and conscious choices about which segments to serve to be successful in managing a given product-market relationship. No really necessary? matter how large the firm, however, its resources are usually limited Chapter Seven Targeting Attractive Market Segments 181 compared with the number of alternative market segments available for pursuit. Thus, a firm must make choices. Even in the unusual case where a firm can afford to serve all market segments, it must determine the most appropriate allocation and deployment of its marketing effort across segments. In East Africa, for example, to reach rural villages. Coca-Cola relies on more than 13,000 small distributors—many of whom use pushcarts and hand trucks—to reach local mom and pop retailers.2 By tailoring its promotion and distribution methods by market and market segment, Coke’s sales in Africa surpassed $550 million in 2009.3 But are all these analyses and conscious choices about which segments to serve and how best to serve these really necessary? Most Markets Are Heterogeneous Because markets are rarely homogeneous in benefits wanted, purchase rates, and price and promotion elasticities, their response rates to products and marketing programs differ. Variation among market segments in product preferences, size and growth in demand, media habits, and competitive structures further affect the differences and response rates. Thus, markets are complex entities that can be defined (segmented) in a variety of ways. As New York–based trend tracker Tom Vierhile notes, “what consumers really appear to hunger for are products that fit their unique needs, wants, and desires. They want products that talk just to them. . . . and appeal just to them on an emotional level.”4 The critical issue is to find an appropriate segmentation scheme that will facilitate target marketing, positioning, and the formulation of successful marketing strategies and programs. Today’s Market Realities Often Make Segmentation Imperative Market segmentation has become increasingly important in the development of marketing strategies for several reasons. First, population growth in many developed countries has slowed, and more product-markets are maturing. This sparks more intense competition in existing markets as firms seek growth via gains in market share and encourages companies to find new markets they’ve not served previously. Often, as they search for faster-growing markets, their attention turns to the developing world, where the enormous diversity in demographic profiles and market conditions makes careful market segmentation and targeting essential. Nokia, for example, has targeted the fast-growing Indian market, where a majority of the population lives in rural areas. In doing so, it’s had to adapt the design of its cell phones, adding dust-proof keypads and eliminating other features to make its phones affordable to India’s low-income masses. When Nokia’s researchers discovered that many cell phones in India were used by more than one person, Nokia developed handsets with multiple address books.5 By developing products uniquely suited to the Indian market and various segments therein, Nokia has become the market leader.6 Second, such social and economic forces as expanding disposable incomes, higher educational levels, and more awareness of the world have produced customers with more varied and sophisticated needs, tastes, and lifestyles than ever before. This has led to an outpouring of goods and services that compete with one another for the opportunity of satisfying some group of consumers. Third, there is an increasingly important trend toward microsegmentation in which extremely small market segments are targeted. For a discussion of how one company built itself into a multimillion-dollar business while serving a very small niche (see Exhibit 7.1). This trend has been accelerated in some industries by new technology such as computer-aided 182 Section Two Exhibit 7.1 Market Opportunity Analysis Can Under Armour Become Another Nike? K evin Plank did not set out to create a cult around athletic underwear—he simply wanted a comfortable T-shirt to wear under his football pads that would wick moisture away from his skin and protect him from heat exhaustion during practice. After hunting through all the sporting goods shops, Kevin realized that there was not a single product on the market that met his needs. He set out to create one. In March 1996, just before graduation, Kevin had some T-shirts sewn up in Lycra and found that he had solved a common problem for all of his teammates. Under Armour, the company that was soon born in his grandmother’s basement, made its first sale of 200 shirts for $12 apiece to the football team at Georgia Tech. Kevin ended his company’s first year with sales of $17,000. Under Armour was marketed by word-of-mouth from happy, satisfied customers and grew with sales to athletic teams in colleges. The company got its big break due to a product placement in the Oliver Stone football movie Any Given Sunday. Buzz from the movie and a first-time ad in ESPN Magazine during the movie premiere boosted Under Armour sales to $1.35 million in 1999. Under Armour’s sales in 2001 drove triple-digit growth in its category and led industry peers at Sporting Goods Business to recognize the company as “Apparel Supplier of the Year.” Under Armour’s sales soared to U.S. $55 million in 2002, more than $400 million in 2006, and more than $850 million in 2009. The underserved niche market segment that Kevin Plank discovered and his success have not gone unnoticed. Ironically, recent entrants to this segment are Nike and Reebok. Will Under Armour be able to withstand the competitive heat? Kevin Plank’s reaction? “I’ll never let them see me sweat.” Sources: Company website: http://www.underarmour.com; Elaine Shannon, “Tight Skivvies; They’re What Everyone’s Wearing This Season. Here’s Why,” Time, January 13, 2003, p. A1; and Stanley Holmes, “Under Armour May Be Overstretched,” BusinessWeek European Edition, April 30, 2007, p. 65; Matt Townsend, “Under Armour’s Daring Half-Court Shot,” Bloomberg Businessweek, European Edition, November 1–7, 2010, pp. 24–25. design, which has enabled firms to mass-customize many products as diverse as T-shirts and coffee mugs, even designer jeans and cars. Mass customization websites such as CaféPress and Zazzle in the United States and Spreadshirt in Europe now make it possible for consumers to order T-shirts and other custom-designed products in quantities of one or one thousand, with almost instant delivery. No longer must everyone at the company picnic wear exactly the same T-shirt, since companies like these let everyone choose their own style, size, and color, and even the slogan.7 Finally, many marketing organizations have made it easier to implement sharply focused marketing programs by more sharply targeting their own services. For example, many new media have sprung up to appeal to narrow interest groups. In the United Kingdom, these include special interest magazines, such as Wanderlust and Autocar; radio stations with formats targeted to different demographic groups, such as classical music, rock, country, and jazz, not to mention chat shows of various kinds; and cable TV channels, such as Sky Sport and the Discovery Channel. Also, more broad-based magazines, such as Time, The Economist, and Hello, offer advertisers the opportunity to target specific groups of people within their subscription base. An advertiser can target specific regions, cities, or postal codes, or even selected income groups. How Are Market Segments Best Defined? There are three important steps in the market segmentation process: ● Identify a homogeneous segment that differs from other segments. The process should identify one or more relatively homogeneous groups of prospective buyers with regard to their wants and needs and/or their likely responses to differences in the elements of the marketing Chapter Seven Targeting Attractive Market Segments Strategic Issue There are three important steps in the market segmentation process. ● ● 183 mix—the 4 Ps (product, price, promotion, and place). For Dinaz Vervatwala, women were targeted even though most other fitness clubs in India targeted men and women. Specify criteria that define the segment. The segmentation criteria should measure or describe the segments clearly enough so that members can be readily identified and accessed, in order for the marketer to know whether a given prospective customer is or is not in the target market and in order to reach the prospective customer with advertising or other marketing communication messages. Like most retailers, Vervatwala targets well-defined trading areas in placing new studios. Determine segment size and potential. Finally, the segmentation process should determine the size and market potential of each segment for use in prioritizing which segments to pursue, a topic we address in more detail later in this chapter. In most developed countries, detailed demographic data showing what kind of people live where is readily available. Given these objectives, what kinds of segmentation criteria, or descriptors, are most useful? Segmentation decisions are best made in one of three ways: based on who the customers are, based on where they are, or based on how they behave relevant to the market in question. The three approaches apply in both consumer and organizational markets. We examine each of these approaches as follows. Who They Are: Segmenting Demographically While firm demographics (age of firm, size of firm, industry, etc.) are useful in segmenting organizational markets, we usually think of demographics in terms of attributes of individual consumers, as shown in Exhibit 7.2. Some examples of demographic attributes used to segment consumer markets are as follows: ● Age. Since mobile phone penetration has reached almost saturation levels in Europe and the United Kingdom, mobile service providers are focusing attention on the 55–65 and 65-plus segment to improve usage and penetration. Their high disposable incomes and their ability to devote time to new habits are seen as a lucrative market opportunity.8 At the other end of the demographic scale, Red Bull has built a following among youth worldwide (see Exhibit 7.3). Exhibit 7.2 Some of the More Commonly Used Demographic Attributes* Demographic Descriptors Examples of Categories Age Under 2, 2–5, 6–11, 12–17, 18–24, 25–34, 35–49, 50–64, 65 and over Sex Male, female Household life cycle Young, single; newly married, no children; youngest child under 6; youngest child 6 or over; older couples with dependent children; older couples without dependent children; older couples retired; older, single Income Under $15,000, $15,000–24,999; $25,000–74,999, etc. Occupation Professional, manager, clerical, sales, supervisor, blue collar, homemaker, student, unemployed Education Some high school, graduated high school, some college, graduated college Events Birthdays, graduations, anniversaries, national holidays, sporting events Race and ethnic origin Anglo-Saxon, African-American, Italian, Jewish, Scandinavian, Hispanic, Asian *Others include marital status, home ownership, and presence and age of children. 184 Section Two Exhibit 7.3 Market Opportunity Analysis Red Bull’s Targeted Approach Wins across the Globe A ustria-based Red Bull is a company with one product that accounts for nearly all of its revenue; an energy drink containing the amino acid taurine. While working for Unilever, Dietrich Mateschitz traveled often to Asia, where he tried syrups that Asian businessmen drank to revitalize. His experience there led him to spot a market opportunity, and after modifying the drink to appeal to Western palates, he launched Red Bull in 1986. Its signature, a slim, silver-colored, 8.3-ounce can, has been an enormous hit with its target youth segment across the globe. By 2005, its global revenue had passed the $1.8 billion mark. From Stanford University on California’s West Coast to the beaches of Australia and Thailand, Red Bull has managed to maintain its hip, cool image, with virtually no mass-market advertising. It has instead opted for a grass-roots campaign. “In terms of attracting new ● ● ● ● ● ● customers and enhancing consumer loyalty, Red Bull has a more effective branding campaign than Coke or Pepsi,” said Nancy F. Koehn, professor of business administration at Harvard Business School and author of Brand New: How Entrepreneurs Earned Consumers’ Trust from Wedgwood to Dell. Red Bull used Collegiate Brand Managers to promote the drink via free samples handed out at student parties. The company also organized extreme sports events, for example, cliff diving in Hawaii or skateboarding in San Francisco, reinforcing the brand’s extreme, on-the-edge image. Sources: Jill Bruss, “Alternatively Speaking: Alternative Beverages Keep the Industry Abuzz with New Products (Category Focus),” Beverage Industry 1, November 2002; Nancy F. Koehn, Brand New: How Entrepreneurs Earned Consumers’ Trust from Wedgwood to Dell (Boston: Harvard Business School Press, 2001); and Kerry A. Dolan, “The Soda with Buzz,” Forbes, March 28, 2005. Sex. In Australia, Toyota launched an online information service aimed at women, recognizing that women make up 50 percent of Toyota’s sales and directly influence 8 out of 10 vehicle purchases.9 As many marketers are discovering, however, thinking about all men or all women as a single market segment is usually naive. Understanding segments within the male population, for example, can bring out insights previously missed.10 Among women, sharply targeted segmentation schemes can often deliver attractive results. A plethora of juice-based dietary cleansing brands targeting the urban get-thin-quick segment has emerged in recent years. New York’s Organic Avenue and BluePrint Cleanse, Los Angeles-based Cooler Cleanse and iZo Cleanze arc among them. We get “a lot of mommies,” reports BluePrint co-founder Erica Huss Jones. But Dr. Michael D. Gershon of Columbia University’s Department of Anatomy and Cell Biology is less than enthralled. There’s “nothing but danger associated with” cleansing, he says. “It is a practice to be condemned.11 Income. Higher-income households purchase a disproportionate number of cellular phones, expensive cars, and theater tickets. In 2000, Nokia started a wholly owned subsidiary, Vertu, to create an ultra-exclusive mobile telephone and services built around the phone, targeting the same customers who buy luxury watches and custom-made cars.12 Occupation. The sales of certain kinds of products (e.g., work shoes, automobiles, uniforms, and trade magazines) are tied closely to occupational type. The increase in the number of working women has created needs for specialized goods and services including financial services, business wardrobes, convenience foods, automobiles, and special-interest magazines. Education. There is a strong positive correlation between the level of education and the purchase of travel, books, magazines, insurance, theater tickets, and photographic equipment. Race and ethnic origin. More and more companies are targeting these segments via specialized marketing programs. In the United States, car companies have found ways to cater to the needs of the multicultural segment, which is estimated to comprise 32 percent of the U.S. population in 2010. A distinctive trend that had already emerged by 2002 was AsianAmericans’ affinity for upscale cars—they accounted for 15 percent of BMW and 9 percent of Mercedes Benz sales.13 Demographic descriptors are also important in the segmentation of industrial markets, which are segmented in two stages. The first, macrosegmentation, divides the market Chapter Seven Targeting Attractive Market Segments 185 according to the characteristics of the buying organization using such attributes as age of firm, firm size, and industry affiliation (SIC code in the United States). The international counterpart of SIC is the trade-category code. The second stage, microsegmentation, groups customers by the characteristics of the individuals who influence the purchasing decision—for instance, age, sex, and position within the organization. International markets are segmented in a similar hierarchical fashion, starting with countries, followed by groups of individuals or buying organizations. Where They Are: Segmenting Geographically Different locations or regions vary in their sales potential, growth rates, customer needs, cultures, climates, service needs, and competitive structures, as well as purchase rates for a variety of goods. For example, more pickup trucks are sold in the Southwest United States, more vans in the Northeast, and more diesel-fueled cars in Europe. More and more advertisers are taking advantage of geographic media buys. Uni-Marts, Inc., a convenience store operator of over 400 stores, focuses on small towns and rural areas, thereby avoiding big competitors. In the first 25 years of its history, it never recorded a loss.14 Nestlé, in order to reach the 800,000 Brazilians who live in the Amazon River basin, chartered a boat stocked with more than 300 of its brands, including Nescafé instant coffee, Maggi soups and seasonings, and Leche Ideal, Nestlé’s fortified powdered milk. Says Nestlé Brazil CEO Ivan Zurita, “We’re going to pick up the customer where he is.”15 Geographic segmentation is used in both consumer and organizational markets and is particularly important in retailing and many services businesses, where customers are unwilling to travel very far to obtain the goods or services they require. Thus, one way to segment retail markets is by distance or driving time from a particular location. The area included within such a geographically defined region is called a trade area. Geodemographic Segmentation Marketers targeting emerging markets in the developing world must pay particular attention to market segmentation within the geographic regions they target. Virtually every developing country contains a small segment of extremely wealthy Strategic Issue people, a rapidly growing but perhaps relatively small middle class, Low-cost reports based on census data and large numbers of people who are poor by Western standards. The show the demographic profile of the population residing within any given radius first two of these demographic groups are most often found in the citof a particular street corner or shopping ies, while many poor live either in rural areas or in urban slums. Treatcenter location in the United States. ing the people of any developing country as a single market segment is not likely to bring success. In emerging and developed markets alike, many segmentation schemes involve both demographic and geographic factors. Thus, retailers usually want to know something about the people who live within, perhaps, a two-mile or five-mile radius of their proposed new store. Neiman Marcus, the upscale department store, might target one demographic group within a given trade area, and Wal-Mart, a discounter, might target another. Claritas (www.claritas.com) and other sources offer low-cost reports based on census data that show the demographic profile of the population residing within any given radius of a particular street corner or shopping center location in the United States. These reports are useful in assessing the size and market potential of a market segment defined by a particular trade area. Geodemographics also attempts to predict consumer behavior by making demographic, psychographic, and consumer information available at the block and zip code or postal code levels. Claritas’s PRIZM service classifies all U.S. households into 186 Section Two Market Opportunity Analysis 66 demographically and behaviorally distinct clusters, each of which, in turn, is assigned to one of 14 social groups and 11 life stage groups.16 Claritas offers similar datasets for other countries as well. How They Behave: Behavioral Segmentation There is no limit to the number of insightful ways successful marketers have segmented markets in behavioral terms. Kevin Plank of Under Armour initially targeted college and university athletic teams. Mountain bike makers Specialized and Strategic Issue Gary Fisher target bicyclists who wish to ride on single-track trails or Gatorade’s simple segmentation scheme back-country terrain. Europe’s easy Jet airline originally targeted leicreated a whole new category of “sports sure travelers. Gatorade’s original target market consisted of athletes beverages.” who needed to replenish water and salts lost through perspiration. This simple segmentation scheme created a whole new category of “sports beverages,” which grew to include entries from Coke (Powerade) and Pepsi (All Sport), though Gatorade still dominates the category. This onetime niche market has grown into a multibillion-dollar market in the United States alone.17 These examples all demonstrate the power of highly specific behavioral descriptors in defining sharply focused market segments, based not on who the target consumers are or where they live, but based on what they do. In virtually every consumer and organizational market there are segments like these just waiting to be identified and targeted by insightful marketers. Behavioral attributes can take many forms, including those based on consumer needs; on product usage patterns; on more general behavioral patterns, including lifestyle, which often cuts across demographic categories or varies within them; and, in organizational markets, on the structure of firms’ purchasing activities and the types of buying situations they encounter. We examine some of these forms next. Consumer Needs Customer needs are expressed in benefits sought from a particular product or service. Different individual customers have different needs and thus attach different degrees of importance to the benefits offered by different products. In the end, the product that provides the best bundle of benefits—given the customer’s particular needs— is most likely to be purchased. For an example of how targeting a distinct set of consumer needs has taken a late entrant to the top of the car rental industry, see Exhibit 7.4. Since purchasing is a problem-solving process, consumers evaluate product or brand alternative on the basis of desired characteristics and how valuable each characteristic is to the consumer—choice criteria. Marketers can define segments according to these different choice criteria in terms of the presence or absence of certain characteristics and the importance attached to each. Firms typically single out a limited number of benefit segments to target. Thus, for example, different automobile manufacturers have emphasized different benefits over the years, such as Volvo’s safety versus Jaguar’s styling, quickness, and status. In organizational markets, customers consider relevant benefits that include product performance in different use situations. For example, supercomputers are bought because they meet the high-speed computational requirements of a small group of customers such as governments, universities, and research labs. Other considerations in the purchase of industrial products/services include on-time delivery, credit terms, economy, spare parts availability, and training. Product Usage and Purchase Influence In addition to highly specific behavioral attributes such as those just discussed, there are more general product-related attributes as well. They include product usage, loyalty, purchase predisposition, and purchase influence, all of which can be used to segment both consumer and industrial markets. 187 Chapter Seven Targeting Attractive Market Segments Exhibit 7.4 I Enterprise Rent-a-Car: Targeting Pays Off n 1963, Jack Taylor added car rentals to his small automobile leasing business. Taylor’s strategy was to serve a completely different target market than the majors, Hertz and Avis, and provide replacement cars for people involved in accidents or breakdowns and those who were grounded while their cars were being serviced. Serving this market required a completely different sort of service—delivering the car to the customer, for example— than the majors provided. “This stuff is a lot more complicated than handing out keys at the airport,” says Andy Taylor, Jack’s son and now chairman and CEO. The business grew steadily, if unexceptionally, until the 1990s, when the younger Taylor stepped on the gas and cruised past Hertz and Avis to take the number one spot in the U.S. market, with a fleet of 500,000 vehicles and more than $6 billion in revenue for the still privately held company. Europe followed and the initial entry has already begun, into the U.K., Ireland, and Germany. While Enterprise now serves target segments beyond the car-replacement market, its clear focus on a narrowly defined segment that the majors had ignored provided the beachhead and an impregnable foundation on which the company was able to grow. Equally important, the strong customer service culture and decentralized decision-making that were crucial to the initial strategy have become the lynchpin of the company’s wider success. Enterprise measures each of its branches each month in terms of both profitability and customer service (two questions are asked of each customer: Are you satisfied with our service? Would you come back?), and no one gets promoted from branches that have belowaverage customer service scores, no matter how strong their financial performance. Enterprise has found that customers who answer “completely satisfied” on question one are three times more likely to come back. Clear targeting. Exceptional customer service. It’s a combination that’s kept Enterprise rolling for nearly 50 years. Source: Simon London, “Driving Home the Service Ethic,” Financial Times, June 3, 2003. Product usage is important because in many markets a small proportion of potential customers makes a high percentage of all purchases. In organizational markets, the customers are better known, and heavy users (often called key accounts) are easier to identify. For Coca-Cola, differences in products usage rates provide clues to where its growth prospects are most attractive. North Americans bought $2.6 billion worth of Coke in 1989, and just $2.9 billion in 2009. So Coke is looking elsewhere for growth, like Kenya, for example, where annual per capita consumption is just 39 servings, compared to 665 servings in Mexico, whose people guzzle more Coke than anywhere else. Coke providers refrigerated coolers to the mom and pop dukas where Kenyans shop, and even prescribes exactly how they should be stocked: half-liter bottles of Coke at the top, Fanta in the middle, and large bottles at the bottom.18 Market segmentation based on sources of purchase influence for the product category is relevant for both consumer and organizational markets. Many products used by various family members are purchased by the wife, but joint husband–wife decisions are becoming more common. Children’s products, prescription drugs, and gifts are clearly influenced by a variety of family members. In organizational markets, several individuals or units with varying degrees of influence participate in buying decisions. Lifestyle Segmentation by lifestyle, or psychographics, segments markets on the basis of consumers’ activities, interests, and opinions—in other words, what they do or believe, rather than who they are in a demographic sense. From such information it is possible to infer what types of products and services appeal to a particular group, as well as how best to communicate with individuals in the group. Even among demographic groups that might at first glance seem homogeneous, behavioral segmentation based on lifestyle is identifying new target markets for savvy marketers (see Exhibit 7.5). 188 Section Two Exhibit 7.5 B Market Opportunity Analysis Marketing to Baby Boomers: Rethinking the Rules y 2006, more than half the baby boomers in the United States—those born between 1946 and 1964—had turned 50 or older. With combined spending power of more than $1 trillion per annum among the 50- to 60-year-olds alone, this growing market simply cannot be ignored. What marketers are discovering, though, is that these aging customers aren’t all the same. Demographic segmentation just won’t do. Behavior is the key. Consumers aged 50+ buy a quarter of all Vespa motor scooters in the United States. Better still for Vespa, with their emptynester spending power, they tend to buy the top-ofthe-line models. But that doesn’t mean all boomers are fantasizing about their younger days. Indeed, wrinkles and gray hair are in among many boomers, along with healthier diets and lifestyles to help them age gracefully. But are these consumers counting their days until they can retire to the shuffleboard court or bingo parlor? Hardly. As a result, Del Webb, the retirementcommunity division of Pulte Homes Inc., is changing the way it markets its properties, with more emphasis on the varied and active lifestyles that many of tomorrow’s retirees will lead. “We have to keep up with residents,” says David G. Schreiner, vice president for active-adult business development at Del Webb. “The War Generation was far more predictable and consistent, but this generation gives you a bunch of paradoxes.” Source: Louise Lee, “Love Those Boomers,” BusinessWeek, October 24, 2005. Stanford Research Institute (SRI) has created a U.S. segmentation service (called VALS 2), which builds on the concept of self-orientation and resources for the individual. Self-orientation is based on how consumers pursue and acquire products and services that provide satisfaction and shape their identities. In doing so, they are motivated by the orientations of principle, status, and action. Principle-oriented consumers are motivated by abstract and idealized criteria, while status-oriented consumers shop for products that demonstrate the consumer’s success. Action-oriented consumers are guided by the need for social or physical activity, variety, and risk-taking. Resources include all of the psychological, physical, demographic, and material means consumers have to draw on. They include education, income, self-confidence, health, eagerness to buy, intelligence, and energy level—on a continuum from minimal to abundant. Based on these two dimensions, VALS 2 defines eight segments that exhibit distinctive behavior and decision-making—actualizers, fulfillers, achievers, experiencers, believers, strivers, makers, and strugglers. Claritas and similar commercial organizations identify Strategic Issue each of the respondents as to their VALS type, thereby permitting a crossThose interested in the VALS segmentation classification of VALS type with the product usage and personal information scheme can complete a short survey on collected by such companies. Thus, users can determine what each VALS the VALS website and discover the VALS segment bought, what their media habits are, and similar data. The VALS segment to which they belong. system has been further developed in Europe and Asia. Those interested in the VALS segmentation scheme can complete a short survey on the VALS website (log onto www.sric-bi.com/VALS/presurvey/shtml) and discover the VALS segment to which they belong. Organizational Behavioral Attributes Purchasing structure and buying situation segmentation attributes are unique to organizational markets. Purchasing structure is the degree to which the purchasing activity is centralized. In such a structure the buyer is likely to consider all transactions with a given supplier on a company-wide or global basis, to emphasize cost savings, and to minimize risk. In a decentralized situation, the buyer is apt to be more sensitive to the user’s need, to emphasize product quality and fast delivery, and to be less cost-conscious. Some marketers segment their markets accordingly and target customers whose purchasing structure is similar (companies who buy centrally from one location to meet their global needs, for example). Chapter Seven Targeting Attractive Market Segments 189 The buying situation attribute includes three distinct types of situations: straight rebuy, a recurring situation handled on a routine basis; modified rebuy, which occurs when some an element, such as price or delivery schedules, has changed in a client–supplier relationship; and a new buying situation, which may require the gathering of considerable information and an evaluation of alternative suppliers. Business-to-business marketers seeking new customers often find the buying situation to be a useful way to decide which new customers to target. Innovative Segmentation: A Key to Marketing Breakthroughs At the beginning of this section, we identified three steps in the market segmentation process: ● ● ● Identify a homogeneous segment that differs from others. Specify criteria that define the segment. Determine segment size and potential. Skilled marketers, such as the creators of Under Armour athletic wear, Red Bull energy drinks, and Enterprise Rent-a-Car, know that following this process to an insightful and innovative market segmentation scheme is often the key to marketing breakthroughs. Often, combinations of different attributes are used to more precisely target an attractive segment: perhaps some behavioral dimension together with a carefully defined demographic profile within some geographic region. Generally, it is useful to know the demographic profile of the target market to be pursued, even if the driving force behind the segmentation scheme is geographical and/or behavioral in nature, because understanding the demographic profile of a target market enables the marketer to better choose targeted advertising media or other marketing communication vehicles. As several examples in this section have shown, at the foundation of many a marketing breakthrough one often finds an insightful segmentation scheme Strategic Issue that is sharply focused in a behavioral way. Marketers with superior At the foundation of many a marketing breakthrough one often finds an insightful market knowledge are probably more likely to generate the insights segmentation scheme that is sharply necessary to define market segments in these innovative and meanfocused in a behavioral way. ingful ways. Sometimes these insights are counterintuitive, even surprising (see Exhibit 7.6). Choosing Attractive Market Segments: A Five-Step Process Most firms, not even Coca-Cola, no longer aim a single product and marketing program at the mass market. Instead, they break that market into homogeneous segments on the basis of meaningful differences in buyer behavior or in the benefits Strategic Issue sought by different groups of customers. Then they tailor products and Most firms no longer aim a single product marketing programs to the particular desires and idiosyncrasies of each and marketing program at the mass segment. But not all segments represent equally attractive opportunimarket. ties for the firm. To prioritize target segments by their potential, marketers must evaluate their future attractiveness and their firm’s strengths and capabilities relative to the segments’ needs and competitive situations. Within an established firm, rather than allowing each business unit or product manager to develop an approach to evaluate the potential of alternative market segments, it is 190 Section Two Exhibit 7.6 S Market Opportunity Analysis Illiterate Consumers: A Segment Worth Targeting? ome 21–23 percent of United States consumers simply do not have the basic language and numeracy skills that are necessary to effectively navigate today’s typical retail shopping environment. In many developing countries, the proportion of consumers who are functionally illiterate is even higher. But these groups have surprising purchasing power, controlling $380 billion in spending in the United States alone in 2003. Because these consumers do not assimilate information in the same way literate consumers do, however, various kinds of marketing efforts—from price promotions, to retail signage, to the packaging of “new and improved” products, most of which are words- and numbers-based—are wasted on, or even misleading to, this consumer population. Such tactics may even cause these consumers to switch away from the brands being promoted. Some marketers are addressing this opportunity, however, and have found ways to better meet these consumers’ needs. Employee training to help reduce customers’ possible losses of self-esteem (what happens if they don’t have enough money at checkout), the use of pictorial information alongside word information, and other measures can make these consumers both loyal and profitable. Source: Madhubalan Viswanathan, José Antonio Rosa, and James Edwin Harris, “Decision Making and Coping of Functionally Illiterate Consumers and Some Implications for Marketing Management,” Journal of Marketing 69 (January 2005), pp. 15–31. often better to apply a common analytical framework across segments. With this approach, managers can compare the future potential of different segments using the same set of criteria and then prioritize them in order to decide which segments to target and how resources and marketing efforts should be allocated. One useful analytical framework managers or entrepreneurs can use for this purpose is the market-attractiveness/competitive-position matrix. As we saw in Chapter 2, managers use such models at the corporate level to allocate resources across businesses, or at the business-unit level to assign resources across product-markets. We are concerned with the second application here. Exhibit 7.7 outlines the steps involved in developing a market-attractiveness/competitiveposition matrix for analyzing current and potential target markets. Underlying such a matrix is the notion that managers can judge the attractiveness of a market (its profit potential) by examining market, competitive, and environmental factors that may influence profitability. Similarly, they can estimate the strength of the firm’s competitive position by looking at the firm’s capabilities or shortcomings relative to the needs of the market and the competencies of likely competitors. By combining the results of these analyses with other considerations, including risk, the mission of the firm, and ethical issues (see Ethical Perspective 7.1), conclusions about which markets and market segments should be pursued can be reached. The first steps in developing a market-attractiveness/competitive-position matrix, are to identify the most relevant variables for evaluating alternative market segments and the firm’s competitive position regarding them and to weight each variable in importance. Note, too, that Exhibit 7.7 suggests conducting a forecast of future changes in market attractiveness or competitive position in addition to, but separately from, an assessment of the current situation. This reflects the fact that a decision to target a particular segment is a strategic choice that the firm will have to live with for some time. Step 1: Select Market-Attractiveness and Competitive-Position Factors An evaluation of the attractiveness of a particular market or market segment and of the strength of the firm’s current or potential competitive position in it builds naturally on the kind of opportunity analysis developed in Chapter 3. Managers can assess both dimensions 191 Chapter Seven Targeting Attractive Market Segments Exhibit 7.7 Steps in Constructing a Market-Attractiveness/Competitive-Position Matrix for Evaluating Potential Target Markets 1. Choose criteria to measure market attractiveness and competitive position. 2. Weight market attractiveness and competitive position factors to reflect their relative importance. 3. Assess the current position of each potential target market on each factor. 4. Project the future position of each market based on expected environmental, customer, and competitive trends. 5. Evaluate implications of possible future changes for business strategies and resources requirements. Ethical Perspective 7.1 Eat Chocolate, Get Fit? In 2003, Cadbury’s, the British confectionery company, launched a “Sports for Schools” promotion, emulating an earlier and very successful promotion that Tesco, the leading grocer in the United Kingdom, had run called “Computers for Schools.” Cadbury’s offered to buy fitness equipment for schools in exchange for tokens obtained through consumer purchases of Cadbury’s confectionery. Following howls of protest in the media, in which the program was characterized as a perverse incentive for children to eat more of a product widely considered to be associated with child obesity, a growing problem in the United Kingdom and elsewhere, Cadbury’s withdrew the program. As the U.K.’s Food Commission calculated, “Cadbury’s wants children to eat 2 million kilograms of fat (more than 4 million pounds)—to get fit.” According to the Food Commission’s calculations, a netball that sold for £5 in sporting goods stores would require consumer tokens from £38 worth of Cadbury products. These £38 worth of products would, in turn, involve consuming more than 20,000 calories and over 1,000 grams of fat. In targeting children and families with this promotion, Cadbury’s overlooked or misunderstood consumers’ rising concerns over child obesity. Empirical research by Craig Smith and Elizabeth Cooper-Martin indicates that ethical concerns such as those that arose here are particularly likely to arise over targeting strategies where the target market is perceived as vulnerable and where the products concerned are, in any sense, perceived to be harmful. Thus, it’s not necessarily the products themselves that lead to ethical concerns, but targeting and market segmentation decisions to which insufficient ethical consideration is given. As Smith and Cooper-Martin note, “Marketing managers should be alert to public disquiet over the ethics of certain targeting strategies,” especially when consumer vulnerability and product harm enter the equation. Sources: N. Craig Smith, “Out of Leftfield: Societal Issues as Causes of Failure of New Marketing Initiatives,” Business Strategy Review, Summer 2007; and N. Craig Smith and Elizabeth CooperMartin, “Ethics and Target Marketing: The Role of Product Harm and Consumer Vulnerability,” Journal of Marketing 61 (July 1997), pp. 1–20. 192 Section Two Market Opportunity Analysis on the basis of information obtained from analyses of the environment, industry and competitive situation, market potential estimates, and customer needs. To make these assessments, they need to establish criteria, such as those shown in Exhibit 7.8, Strategic Issue against which prospective markets or market segments can be evaluBoth market and competitive perspectives are necessary. ated. Both market and competitive perspectives are necessary. Market-Attractiveness Factors As we saw in Chapter 3, assessing the attractiveness of markets or market segments involves determining the market’s size and growth rate and assessing various trends—demographic, sociocultural, economic, political/ legal, technological, and natural—that influence demand in that market. An even more critical factor in determining whether to enter a new market or market segment, however, is the degree to which unmet customer needs, or needs that are currently not being well served, can be identified. In the absence of unmet or underserved needs, it is likely to be difficult to win customer loyalty, regardless of how large the market or how fast it is growing. “Me-too” products often face difficult going in today’s highly competitive markets. Competitive-Position Factors As we showed in Chapter 3, understanding the attractiveness of the industry in which one competes is also important. Entering a segment in a way that would place the firm in an unattractive industry or increase its exposure therein may not be wise. Of more immediate and salient concern, however, is the degree to which the firm’s proposed product entry into the new market or segment will be sufficiently differentiated from competitors, given the critical success factors and product life-cycle conditions already prevalent in the category. Similarly, decision-makers need to Exhibit 7.8 Factors Underlying Market Attractiveness and Competitive Position Market-Attractiveness Factors Competitive-Position Factors Customer needs and behavior Opportunity for competitive advantage • • Can we differentiate? • Can we perform against critical success factors? • Stage of competing products in product life cycle: Is the timing right? Are there unmet or underserved needs we can satisfy? Market or market segment size and growth rate • Market potential in units, revenue, number of prospective customers • Growth rate in units, revenue, number of prospective customers Firm and competitor capabilities and resources • Management strength and depth • Financial and functional resources: marketing, distribution, manufacturing, R&D, etc. • Brand image Macro trends: Are they favorable, on balance? • Relative market share • Demographic Attractiveness of industry in which we would compete • Sociocultural • Threat of new entrants Economic • Threat of substitutes • Political/legal • Buyer power • Technological • Supplier power Natural • Competitive rivalry • Industry capacity • • • Might the target segment constitute a platform for later expansion into related segments in the market as a whole? 193 Chapter Seven Targeting Attractive Market Segments know whether their firm has or will be able to acquire the resources it will take—human, financial, and otherwise—to effectively compete in the new segment. Simply put, most new goods or services need to be either better from a consumer point of view or cheaper than those they hope to replace. Entering a new market or market segment without a source of sustainable competitive advantage is often a trap. Step 2: Weight Each Factor Next, a numerical weight is assigned to each factor to indicate its relative importance in the overall assessment. Weights that Under Armour’s Kevin Plank might have assigned to the major factors in Exhibit 7.8 are shown in Exhibit 7.9. Some users would rate each bullet point in Exhibit 7.8 independently, assigning a weight to each one. The task of weighting the factors—as well as determining them in the first place— gets more complicated as companies reach out to new and different markets, like the growing middle class in the developing world. Both the scores and the weights placed on different factors may differ in emerging versus developed markets, for example, and the factors and their weights may differ across markets where a category is relatively mature versus nascent. Macro trends are generally more favourable for Coca-Cola in emerging markets with rapidly growing middle classes, for example, than in North America or western Europe, where both population growth and Coke consumption are relatively flat. Step 3: Rate Segments on Each Factor, Plot Results on Matrices This step requires that evidence—typically both qualitative and quantitative data—be collected to objectively assess each of the criteria identified in Step 1. For Under Armour the assessment of the various factors might have looked as shown in Exhibit 7.9. While more detailed evidence than we discuss here should have been, and no doubt was, gathered, Plank might have reached the following conclusions: Exhibit 7.9 Assessing the Athletic Underwear Market Segment at Under Armour’s Inception Weight Rating (0–10 Scale) Total Customer needs and behavior: unmet needs? .5 9 4.5 Segment size and growth rate .2 7 1.4 Macro trends .3 9 2.7 Market-attractiveness factors Total: Market attractiveness 8.6 1.0 Competitive-position factors Opportunity for competitive advantage .4 6 2.4 Capabilities and resources .2 5 1.0 .4 5 2.0 Industry attractiveness Total: Competitive position 1.0 5.4 194 Section Two Market Opportunity Analysis Market-Attractiveness Factors • • • Unmet needs for wicking underwear for athletic teams have been identified and are well understood. Score: 9. The athletic team segment is small, but easily identified and reached and might lead to other segments in the future. Score: 7. Macro trends are largely favorable: Sports are “in,” number of people in athletically active demographic groups is growing, and niche brands for other athletic pursuits (e.g., Patagonia for outdoor people) have been successful. Score: 9. Competitive-Position Factors • • • Opportunity for competitive advantage is modest: Proposed garments will be differentiated, but are easily imitated; Under Armour, as a new firm, has no track record. Score: 6. Resources are extremely limited, though the founder knows the athletic community. Score: 5. Five forces are mixed: Entry barriers are very low (unfavorable), buyer power and supplier power are low (favorable), there is little threat of substitutes (favorable), and rivalry among existing firms is modest. Score: 5. Mere armchair judgments about each criterion are not very credible and run the risk of taking the manager or entrepreneur into a market segment that may turn out not to be viable. It is especially important to undertake a detailed analyStrategic Issue sis of key competitors, especially with regard to their objectives, Compelling evidence that a proposed strategy, resources, and marketing programs. Similarly, compelentry into a new segment will satisfy some previously unmet needs, and do so in ling evidence that a proposed entry into a new segment will sata way that can bring about sustainable isfy some previously unmet needs, and do so in a way that can competitive advantage, is called for. bring about sustainable competitive advantage, is called for. Both qualitative and quantitative marketing research results are typically used for this purpose. Once these assessments have been made, the weighted results can be plotted on a market-attractiveness/competitive-position matrix like the one shown in Exhibit 7.10 . Exhibit 7.10 Market-Attractiveness/Competitive-Position Matrix, for Under Armour at Inception Market Attractiveness High (8–10) Moderate (4–7) Low (0–3) Weak (0–3) Moderate (4–7) Strong (8–10) Company’s Competitive Position = Market attractiveness and competitive position with Under Armour at inception Chapter Seven Targeting Attractive Market Segments 195 Step 4: Project Future Position for Each Segment Forecasting a market’s future is more difficult than assessing its current state. Managers or entrepreneurs should first determine how the market’s attractiveness is likely to change over the next three to five years. The starting point for this assessment is to consider possible shifts in customer needs and behavior, the entry or exit of competitors, and changes in their strategies. Managers must also address several broader issues, such as possible changes in product or process technology, shifts in the economic climate, the impact of social or political trends, and shifts in the bargaining power or vertical integration of customers. For example, Eons.com, the fast-growing social networking site for U. S. baby boomers, is banking on expectations that today’s baby boomers will remain active as they pass the age of 50. Jeff Taylor, Eons’s founder (who was founder and CEO of the job site Monster.com), says people in previous generations may have “dried up like a raisin” as they got older, but not today’s baby boomers. “They’re pumping up life, having fun on the flip side of 50,” he says. Many 50-plus consumers have been using cell phones, the internet, and other high-tech gadgets for two or three decades, so Taylor figures that his target market will be internet-savvy. Some will be looking for love, too. The erotic poems and racy photos posted in the site’s “Fun, Flirting, and Sex After 50” section suggest that Eons’s users haven’t turned into raisins just yet!19 Once they have determined any changes likely to occur in market attractiveness, managers must next determine how the business’s competitive position in the market is likely to change, assuming that it responds effectively to projected environmental changes but the firm does not undertake any initiatives requiring a change in basic strategy. The expected changes in both market attractiveness and competitive position can then be plotted on the matrix in the form of a vector to reflect the direction and magnitude of the expected changes. Anticipating such changes may be especially important in today’s internet age and in today’s increasingly integrated and competitive global economy. Step 5: Choose Segments to Target, Allocate Resources Managers should consider a market segment to be a desirable target only if it is strongly positive on at least one of the two dimensions of market attractiveness and potential competitive position and at least moderately positive on the other. In Exhibit 7.10, this includes Strategic Issue markets positioned in any of the three cells in the upper right-hand corner Managers should consider a market of the matrix. However, a business may decide to enter a market that cursegment to be a desirable target only if it is strongly positive on at least one of the rently falls into one of the middle cells under these conditions: (1) managtwo dimensions of market attractiveness ers believe that the market’s attractiveness or their competitive strength and potential competitive position and at is likely to improve over the next few years; (2) they see such markets as least moderately positive on the other. stepping-stones to entering larger, more attractive markets in the future; or (3) shared costs or synergies are present, thereby benefiting another entry. Under Armour used its growth in the apparel category and its retailer relationships to expand to the range of its apparel and, more recently, to enter the market for athletic footwear. However, both its 2008 entry into the cross-trainers category and its 2009 entry into running flopped. Undeterred, Under Armour launched its Micro G basketball shoe in October 2009, taking on Nike and its firmly entrenched 95 percent share in the basketball category. Will Under Armour be able to successfully migrate from its original niche underwear segment into footwear? Nike does not seem worried. Says Nike spokesman Derek Kent, “We thrive on competition of any kind. We expect to further expand our leadership position.”20 196 Section Two Market Opportunity Analysis Exhibit 7.11 Implications of Alternative Positions within the Market-Attractiveness/Competitive-Position Matrix for Target Market Selection, Strategic Objectives, and Resource Allocation Competitive Position Weak Market Attractiveness High Build selectively: • Specialize around limited strengths • Seek ways to overcome weaknesses • Withdraw if indications of sustainable growth are lacking Limited expansion or harvest: • Look for ways to expand without high risk; otherwise, minimize Moderate investment and focus operations Low Divest: • Sell when possible to maximize cash value • Meantime, cut fixed costs and avoid further investment Moderate Strong DESIRABLE POTENTIAL TARGET Invest to build: • Challenge for leadership • Build selectively on strengths • Reinforce vulnerable areas DESIRABLE POTENTIAL TARGET Protect position: • Invest to grow at maximum digestible rate • Concentrate on maintaining strength Manage for earnings: • Protect existing strengths • Invest to improve position only in areas where risk is low DESIRABLE POTENTIAL TARGET Build selectively: • Emphasize profitability by increasing productivity • Build up ability to counter competition Manage for earnings: • Protect position • Minimize investment Protect and refocus: • Defend strengths • Seek ways to increase current earnings without speeding market’s decline Sources: Adapted from George S. Day, Analysis for Strategic Market Decisions (St. Paul: West, 1986), p. 204; and S. J. Robinson, R. E. Hitchens, and D. P. Wade, “The Directional Policy Matrix: Tool for Strategic Planning,” Long Range Planning 11 (1978), pp. 8–15. The market-attractiveness/competitive-position matrix offers general guidance for strategic objectives and allocation of resources for segments currently targeted and suggests which new segments to enter. Thus, it can also be useful, especially under changing market conditions, for assessing markets or market segments from which to withdraw or to which allocations of resources, financial and otherwise, might be reduced. Exhibit 7.11 summarizes one observer’s generic guidelines for strategic objectives and resource allocations for markets in each of the matrix cells. Different Targeting Strategies Suit Different Opportunities Most successful entrepreneurial ventures target narrowly defined market segments at the outset, as did Dinaz Vervatwala and Kevin Plank, for two reasons. One, doing so puts the nascent firm in position to achieve early success in a market segment that it Strategic Issue understands particularly well. Second, such a strategy conserves precious Most successful entrepreneurial ventures resources, both financial and otherwise. But segmenting the market into target narrowly defined market segments. narrow niches and then choosing one niche to target is not always the best strategy, particularly for established firms having substantial resources. Three common targeting strategies are niche-market, mass-market, and growth-market strategies. 197 Chapter Seven Targeting Attractive Market Segments Niche-Market Strategy This strategy involves serving one or more segments that, while not the largest, consist of a sufficient number of customers seeking somewhat-specialized benefits from a good or service. Nestlé did just this in launching its exclusive—and pricey, at 10 times the price per cup compared to buying unground beans at the supermarket—Nespresso brand of coffee, packed in single-serve capsules for high-end consumers who would like to enjoy an espresso or cappuccino at home. Nespresso has become a $3 billion business, growing at more than 20 percent annually.21 Such a strategy is designed to avoid direct competition with larger firms that are pursuing the bigger segments. Infact, overall coffee consumption is down in some countries, even though sales of specialty coffees in coffee bars such as Starbucks or Coffee Republic have boomed in recent years, though four-dollar lattes have become less fashionable in the currently distressed global economy. For an example of an American bank pursuing a niche market strategy in a services business, see Exhibit 7.12. Mass-Market Strategy A business can pursue a mass-market strategy in two ways. First, it can ignore any segment differences and design a single product-and-marketing program that will appeal to the largest number of consumers. The primary object of this strategy is to capture sufficient volume to gain economies of scale and a cost advantage. This strategy requires substantial resources, including production capacity, and good mass-marketing capabilities. Consequently, it is favored by larger companies or business units or by those whose parent corporation provides substantial support. For example, when Honda first entered Exhibit 7.12 W PNC Bank Targets Generation Y hen it comes to banking, the members of Generation Y—those aged 18–34, by PNC Financial Services’ definition, including many of the readers of this book—have different needs from their parents’ generation. The most important of these differences, banking-wise, is that they tend to be clueless about how to manage their money. Some, in this debit card day and age, don’t even know how to balance a checkbook because they rarely write checks. As Michael Ley, the PNC executive who led a project to target these customers says, “This group understands how to research online, but they said, ‘We need help helping ourselves.’” PNC decided that Gen Y was worth targeting, so they developed a new online product called the “Virtual Wallet.” Virtual Wallet consists of three accounts: “Spend,” “Reserve,” and “Growth,” all linked together with a userfriendly interface. What sets Virtual Wallet apart from other banks’ products is features such as getting account balances by text message. Colleen Rohlf, a 24-year-old teacher from Pittsburgh, doesn’t have to worry any more about exactly how much money is in her account and doesn’t have to worry about going online to find out. “I always know how much money I have,” she says. PNC likes this target market because it tends to hold higher balances than others and because Virtual Wallet customers rarely call customer service or show up in a branch office, keeping handling costs down. By late 2008, PNC had signed up more than 20,000 Virtual Wallet customers, of which 70 percent fell into the Gen Y demographic. With an average of 130 new customers signing on daily, PNC expected to break even in about two years, a year less than a conventional brick-and-mortar branch would take. As Gen Y grows up, PNC plans to add additional user-friendly tools for loans, investments, and other financial services. Source: Burt Helm, “User-Friendly Finance for Generation Y,” BusinessWeek, European Edition, December 8, 2008, p. 66. 198 Section Two Market Opportunity Analysis the American and European motorcycle markets, it targeted the high-volume segment consisting of buyers of low-displacement, low-priced cycles. Honda subsequently used the sales volume and scale economies it achieved in that mass-market segment to help it expand into smaller, more-specialized segments of the market. A second approach to the mass market is to design separate products and marketing programs for the differing segments. This is often called differentiated marketing. For example, Marriott and Europe’s Accor do this with their various hotel chains. Although such a strategy can generate more sales than an undifferentiated strategy, it also increases costs in product design, manufacturing, inventory, and marketing, especially promotion. Growth-Market Strategy Most companies would probably prefer to make life simple and sell more or less identical products wherever they go. In fact, some do. Boeing, whose largest markets for passenger jets are now in India and China, sells more or less the same planes there that they sell elsewhere. Automakers like Ford and Toyota design cars on global platforms. An Apple iPod is an iPod wherever you go. But for most companies, segmenting global markets presents similar, if not more daunting, challenges compared to segmenting their home markets.22 Businesses pursuing a growth-market strategy often target one or more fast-growth segments, even though these segments may not currently be very large. It is a strategy often favored by smaller companies to avoid direct confrontations with larger firms while building volume and share. Most venture capital firms invest only in firms pursuing growthmarket strategies because doing so is the only way they can earn the 30 percent to 60 percent annual rates of return on investment that they seek for portfolio companies. VC-backed Zynga, the multiplayer online gaming company whose games are played by more than 120 million users, hitched its wagon to fast-growing Facebook, whose user base has grown at a torrid pace. Founded in 2007, privately held Zynga’s revenues were thought to have surpassed $450 million in 2010. “Only a few companies are so privileged to get the rocket-ship growth that Zynga has,” crows Reid Hoffman, co-founder of Linkedln and a Zynga director and investor.23 A growth-market strategy usually requires strong R&D and marketing capabilities to identify and develop products appealing to newly emerging user segments, plus the resources to finance rapid growth. The problem, however, is that fast growth, if sustained, attracts large competitors. The acquisition of Playfish by longtime gaming leader Electronic Arts in November 2010 may give Zynga a run for its money.24 The goal of the early entrant is to have developed an enduring competitive position via its products, service, distribution, costs, and its brand by the time competitors enter. In the online world, however, such positions can be fleeting. Global Market Segmentation One traditional approach to global market segmentation in the developed world was to view a country as a single segment comprising all consumers. As we have seen earlier in this chapter, this approach is seriously flawed because it Strategic Issue relies on country variables rather than consumer behavior, assumes One traditional approach to global market segmentation has been to view a country as homogeneity within the country segment, and ignores the possibila single segment comprising all consumers. ity of the existence of homogeneous groups of consumers across This approach is seriously flawed. country segments. 199 Chapter Seven Targeting Attractive Market Segments More and more companies are approaching global market segmentation by attempting to identify consumers with similar needs and wants reflected in their behavior in the marketplace in a range of countries. This intercountry segmentation enables a company to develop reasonably standardized programs requiring little change across local markets, thereby resulting in scale economies. Star TV’s launch of a Pan-Asian satellite television service broadcasting throughout Asia in English and Chinese is an example of such a strategy. By 2011, Star reached more than 400 million viewers in 53 Asian countries.25 There are many reasons—beyond mere ambitions to grow—why companies expand internationally. Some companies go international to defend their home position against global competitors who are constantly looking for vulnerability. For example, Caterpillar, through a joint venture with Mitsubishi Heavy Industries, has for more than 30 years made a substantial investment in Japan to deny its Japanese competitor, Komatsu, strength at home, thereby taking away its profit sanctuary. Had Cat not been successful in doing so, Komatsu would have been able to compete more aggressively with Cat, not only in the United States, but also in other major world markets. Another reason a firm may go overseas and target a specific country is to service customers who are also engaging in global expansion. In recent years Japanese automobile companies that have created U.S. and other overseas manufacturing facilities have encouraged their parts suppliers to do the same. Firms also enter overseas markets to earn foreign exchange and, in some cases, are subsidized by their governments to do so. Others, like Coca-Cola, ramp up their international growth when opportunities for growth in their home markets falter. Whatever the motivation, though, the challenges entailed in crossing borders are always tricky. Companies that “go global” need to decide when to standardize their offerings, and when to tailor them to local needs in what remains a highly diverse global marketplace. Says Singapore-based brand strategist Martin Roll, “Contrary to many predictions, the flattening of the world has not flattened unique cultural ant national characteristics, or the idiosyncratic preferences of customers.”26 The need for marketers to hone their skills at segmenting markets and targeting those they see as the most attractive appears not to be going away any time soon. Take-aways 1. Marketers and entrepreneurs who find new and insightful ways to segment mature markets often uncover opportunities for uncontested market entry and rapid growth. 3. Focused market entry strategies conserve resources and facilitate early success. 2. Sharply focused target marketing enables marketers to differentiate from mass-market leaders by giving consumers in a narrowly defined market segment what they want. 5. The market-attractiveness/competitive-position matrix is a useful analytical framework for deciding which markets or market segments to enter and from which to withdraw. 4. The five-step procedure provided in this chapter identifies segments having the highest potential. 200 Section Two Market Opportunity Analysis Endnotes 1. Information to prepare this section was taken from John Parker, “Burgeoning Bourgeoisie” special report, The Economist, February 24, 2009, pp. 3–6; “Who’s in the Middle?” “Burgeoning Bourgeoisie” special report, The Economist, February 24, 2009, p. 4; and the Dinaz’s Fitness Studios website at www.dinazs.com. David Pilling, Kathrin Hille, and Amy Kazmin, “Stroll to a New Status.” Financial Times, January 5, 2011, p. 11; Donal Griffin, “Pandit Stakes Citi’s Future on Emerging Markets,” Bloomberg Business week European Edition, March 21–27, 2011, pp. 49–50; 13. Jean Halliday, “Sector Survey: Pinning Down the Numbers: Automakers Attempt to Quantify Their Share of the Market,” Advertising Age, December 2, 2002, p. 50. 2. Duane D. Stanford, “Coke’s Last Round,” Bloomberg Businessweek, November 1–7, 2010, pp. 54–61. 16. See www.claritas.com. 3. Marc Gunther, “The World’s New Economic Landscape,” Fortune European Edition, July 26, 2010, pp. 81–82. 4. Shelley Emling, “Buyers Want It to Be All About Me,” International Herald Tribune, January 21–22, 2006, p. 16. 5. Gunther, “The World’s New Economic Landscape.” 14. Mora Somassundarm, “Uni-Marts Inc.’s Small Town Strategy for Convenience Stores Is Paying Off,” The Wall Street Journal, November 20, 1995, p. B5A; Tom Dochat, “Uni-Marts Ponders Options,” Harrisburg Patriot, November 5, 2002, p. D02. 15. Gunther, “The World’s New Economic Landscape.” 17. Michael Arndt, “Quaker Oats Is Thirsty for Even More Gatorade Hits,” www.businessweek.com/bwdaily/dnflash/feb2000/nf202c.htm, February 2, 2000. 18. Stanford, “Coke’s Last Round.” 19. Laura Petrecca, “Tech Giants Target Older Users—and Their Cash,” USA Today, November 30, 2007, p. 5A. 6. Jack Ewing, “First Mover in Mobile,” BusinessWeek, European Edition, May 14, 2007, p. 60. 20. Matt Townsend, “Under Armour’s Daring Half-Court Shot,” Bloomberg Businessweek European Edition, November 1–7, 2010, pp. 24–25. 7. To see the vast array of customized products that such websites offer, see www.cafepress.com, www.zazzle.com, or www.spreadshirt.com. 21. Tom Mulier, “Nestlé’s Recipe for Juggling Volatile Commodity Costs,” Bloomberg Businessweek European Edition, March 21–27, 2011. 8. “NMA WIRELESS—Silver Texters,” New Media Age, November 28, 2002, p. 35. 22. Gunther, “The World’s New Economic Landscape.” 9. “Service for Women,” North West News, October 10, 2001, p. 20. 23. Douglas MacMillan, “Zynga and Facebook, It’s Complicated,” Bloomberg Businessweek European Edition, April 26–May 2, 2010, pp. 47–48. 10. Nanette Byrnes, “Secrets of the Male Shopper,” BusinessWeek, European Edition, September 4, 2006, pp. 45–51. 24. Ibid. 11. Gillian Reagan, “Nothing Tastes as Good as Skinny Feels,” Bloomberg Businessweek European Edition, February 21–27, 2011. 26. Gunther, “The World’s New Economic Landsape” p. 82. 12. Mark Levine, “The $19,450 Phone,” The New York Times, December 1, 2002, p. 66. 25. STAR TV website at www.startv.com/corporate/about/index.htm. This page intentionally left blank C HAPTER E IGHT Differentiation and Brand Positioning Fast Food Turns Healthy1 T HERE ARE MANY REASONS WHY CONSUMERS around the world have made the fastfood industry one of the world’s fastest growing over the past four decades, but healthy eating isn’t one of them. At least not until Subway, the ubiquitous U.S.-based sandwich chain, decided in the late 1990s that its downscale image had to go. Subway had grown from a single store in 1965 to a nationwide chain of stores whose sales volume had long since surpassed $1 billion. But it was known more for its belly-busting foot-long sandwiches and its gaudy yellow décor than for anything else. Subway needed a makeover—a new positioning in the marketplace—something that would distinguish Subway from its fat- and sugar-purveying competitors. The Jared Diet Fortuitously for Subway, at about the same time as the company decided to remake its image by adding some healthier sandwiches, a rotund college student at Indiana University who happened to live next door to the local Subway outlet decided that getting winded by dragging his 425-pound body across campus wasn’t much fun. Jared Fogle, a regular customer of the Subway store, saw the new healthier sandwiches—less than seven grams of fat, the signs proclaimed—and decided it was time to go on a diet. For lunch, it would be a six-inch turkey, no mayo, no oil, and hold the 202 cheese, please. For dinner, a footlong veggie sub, a bag of baked potato chips, and a diet beverage. The other element in his weight-loss strategy was walking. No more riding the campus bus. No more elevators. “Walking was the key,” said Fogle. “I walked an average of 1.5 miles a day, five days a week. It may not sound like a lot, but it sure was better than what I was doing.” A year later, he was down to 180 pounds on his 6-foot-2-inch frame. An editor at the student newspaper wrote about Jared’s feat, the national media picked up the story, and before long Fogle was Subway’s spokesman—“Jared, the Subway Guy.” Repositioning Fuels Subway’s Growth To reflect the new positioning, the stores’ interiors were updated. The dated graphics depicting the New York City subway system were dumped, and images of fresh tomatoes and other vegetables took their place. New heart-healthy sandwiches and, later, Atkins-friendly wraps—bowing to the growing popularity of the carbohydrate-controlled Atkins diet—were introduced. Jared went on a national tour, appearing in more than two dozen heart walks a year, as well as on talk shows everywhere. Subway’s new image as a place where you could get healthy fast food and all the hoopla that Jared generated paid the chain and its franchisees a twofold dividend. It helped stores grow their sales, as concerns over obesity became a compelling public health issue at the dawn of the new millennium. It enticed more people to sign up as franchisees and open new Subway stores in the United States and abroad. The results? In 2001, Subway surpassed McDonald’s as the most ubiquitous fast-food operator in the United States, with 13,247 stores at year-end, opening 904 stores in 2001 to McDonald’s 295. Value: A Second Dimension to Subway’s Positioning In 2004, Stuart Frankel, owner of two small Subway sandwich shops in Florida, struggled with the fact that sales were always soft on weekends. He decided to offer every foot-long sandwich for $5—weekends only—a savings of about a dollar. Sales soared, and overall profits rose, too, despite higher food costs. In 2007, as the financial crisis took hold, with devastating effect in much of Florida, Steve Sager, Subway’s development agent for 225 Florida stores, decided to copy Frankel’s idea in a troubled Fort Lauderdale store. Sales doubled on the first day, and the store nearly ran out of bread and meat. Eventually, the idea caught the attention of Jeff Moody, Subway’s marketing chief, who saw the $5 footlong as the basis for a value-oriented message that wouldn’t conflict with Subway’s existing “Eat Fresh” image and might help Subway compete with McDonald’s dollar menu and drive traffic into Subway’s stores. In March 2008 Moody, in the same week that venerable investment banker Bear Stearns collapsed, took the promotion into national distribution with a catchy new jingle. Within weeks, 3,600 videos of people performing Subway’s hokey jingle appeared on YouTube, and Fogel was serenaded with the song by college students at the NCAA Final Four basketball tournament. As its reputation for healthy and value-priced fast food grew, Subway’s appeal to both franchisees and consumers grew as well. It won plaudits from Entrepreneur magazine (the Number One Franchise Opportunity for 2009) and from the Zagat Survey, which rated Subway as the top overall provider of “Healthy Options” in its 2009 fast-food survey. Though McDonalds still held the lead in total sales, by 2009 Subway had passed both Burger King and Wendy’s in market share. Now the world’s largest submarine sandwich chain, Subway by late-2011 had more than 35,000 stores in 97 countries. Marketing Challenges Addressed in Chapter 8 As the Subway example illustrates, the success of a brand offered to a given target market depends on how well it is positioned within that market segment—that is, how well it performs relative to competitive offerings and to the needs of the target audience. Brand positioning (or repositioning, in the case of Subway) refers to both the place a brand occupies in customers’ minds relative to their needs and competing brands and to the marketer’s decision-making intended to create such a position. Positioning comprises both competitive and customer considerations. Brand positioning is basically concerned with differentiation. Ries and Trout, who popularized the concept of positioning, view it as a creative undertaking whereby an existing brand in an overcrowded marketplace of similar brands can be given a 203 204 Section Two Market Opportunity Analysis distinctive position in the minds of targeted prospects. While their concept was concerned with an existing brand, it is equally applicable for new brands.2 While typically thought of in relation to the marketing of consumer goods, it has equal value for industrial goods and for services, which require essentially the same procedure as consumer goods. Because services are characterized by their intangibility, perishability, consumer participation in their delivery, and the simultaneous nature of their production and consumption, they are generally more difficult for marketers to position successfully, notwithstanding Subway’s success. In Chapter 8, we take the final step in preparing the foundation on which effective marketing programs are based. Drawing on decisions made about target markets, as discussed in Chapter 7, we address the critical question: “How should a business position its product offering—whether goods or services—so customers in the target market perceive the offering as providing the benefits they seek, thereby giving the product an advantage over current and potential future competitors?” As we shall see, the brand positioning decision is a strategic one, with implications not only for how the firm’s goods or services should be designed, but also for developing the other elements of the marketing mix. Pricing decisions, promotion deciStrategic Issue sions, and decisions about how products are to be distributed all follow The brand positioning decision is a from and contribute to the effectiveness of the positioning of the prodstrategic one, with implications not only uct in its competitive space. Thus, the material in this chapter provides a for how the firm’s goods or services should be designed, but also for developing the foundation for virtually all of the strategic decision-making that follows other elements of the marketing mix. in the balance of this book. Differentiation: One Key to Customer Preference and Competitive Advantage Why do customers prefer one product, whether a good or a service, over another? In today’s highly competitive markets, consumers have numerous options. They can choose from dozens of best-selling novels to take along on an upcoming vacation. They can buy the novel they choose from an online merchant such as Amazon.com, from large chain booksellers such as Barnes and Noble or their online counterparts, from book clubs, from a local bookstore, or in some cases from their nearby supermarket or mass merchant. They can even borrow the book at their local library and not buy it at all! Whether it’s goods such as books or services such as libraries, consumers make choices such as these nearly every day. In most cases, consumers or organizational customers choose what they buy for one of two reasons: what they choose is better, in some sense, or cheaper. In either case, the good or service they choose is, in some way, almost always different from others they could have chosen. Differentiation is a powerful theme in developing business strategies, as well as in marketing. As Michael Porter points out, “A company can outperform its rivals only if it can establish a difference that it can preserve. It must Strategic Issue deliver greater value to customers or create comparable value at Most of the time differentiation is why a lower cost, or both.”3 Most of the time, differentiation is why people buy. people buy. They buy the latest John Grisham novel because they know it will be a page-turner, different from the last Grisham they read, and hard to put down. They buy it from Amazon.com because they know Amazon will have it in stock and its one-click ordering system takes only a minute. Or they buy it from the megastore because it’s fun to browse there or from their local bookseller because they feel good about supporting their local merchants. They buy it at the supermarket Chapter Eight 205 Differentiation and Brand Positioning because it’s convenient. All these book-selling strategies are different, and they appeal to different consumers (i.e., different market segments) at different points in time, for different book-buying purposes. If these strategies did not vary, consumers would have no reason to use some of them, and they would buy their books where they were cheapest or most convenient, though even in such a case, the cheaper pricing or greater convenience would still constitute differences. Differentiation among Competing Brands As we saw in Chapter 7, customers in one market segment have wants and needs that differ in some way from those of customers in other segments. Brand positioning allows the marketer to take advantage of and be responsive to such differences and Strategic Issue position particular goods and services to better meet the needs of conCreating both physical and perceptual sumers in one or more of these segments. These differences are often differences is what effective brand physical. Subway’s Atkins-friendly wraps and some of its sandwiches positioning seeks to accomplish. really do contain much less fat than a fast-food hamburger. But differences can also be perceptual, as when athletic footwear and apparel, for example, benefit from endorsements by Roger Federer, Kobe Bryant, or other famous athletes. Creating both physical and perceptual differences, using all the elements of the marketing mix—product, pricing, promotion, and distribution decisions—is what effective brand positioning seeks to accomplish. Physical Positioning One way to assess the current position of a brand relative to competitors is on the basis of how various brands compare on some set of objective physical characteristics. In many cases, a physical positioning analysis can provide useful information to a marketing manager, particularly in the early stages of identifying and designing new product offerings. Sometimes, physical differences provide the basis for entirely new product lines, even new companies, as the example of Geox shoes in Exhibit 8.1 demonstrates. Exhibit 8.1 N Your Feet Want to Breathe early 20 years ago, Mario Moretti Polegato was out hiking under the hot summer sun of his native Italy. In an effort to relieve the discomfort of his sweaty feet, Polegato poked holes in the soles of his hiking shoes. “Why doesn’t anyone make shoes that can breathe?” he wondered. After trying unsuccessfully to sell his idea of breathable shoes to Nike and Adidas, he decided to strike out on his own. Polegato founded Geox in 1995, starting with children’s shoes and later adding adult styles. Customers responded. In 2007, his Milanlisted company sold 21 million pairs of shoes, some $1.2 billion worth, everything from rhinestone-studded but breathable sandals fit for a night on the town to earthy moccasins to a new line of athletic footwear. Thousands of tiny holes in the sole of every Geox shoe lets air in but keeps water out. In Polegato’s view, most athletic shoe makers focus on performance and competitive advantage. The Geox mind-set—it’s all about comfort—is different. He says, “Feet have to breathe.” Source: Jennifer L. Schlenker, “Geox Takes On the Goliaths of Sport,” BusinessWeek, European Edition, April 14, 2008, p. 58. For more on Geox see www.geox.com. 206 Section Two Market Opportunity Analysis Despite being based primarily on technical rather than on market data, physical comparisons can be an essential step in undertaking a positioning analysis, which sets the foundation for brand positioning decisions. This is especially true with the competitive offerings of many industrial goods and services, which buyers typically evaluate largely on the basis of such characteristics. In addition, it contributes to a better marketing/R&D interface by determining key physical product characteristics; helps define the structure of competition by revealing the degree to which the various brands compete with one another; and may indicate the presence of meaningful product gaps (the lack of products having certain desired physical characteristics), which, in turn, may reveal opportunities for a new product entry, such as Polegato’s breathable shoes. Limitations of Physical Positioning A simple comparison of only the physical dimensions of alternative offerings usually does not provide a complete picture of relative positions because, as we noted earlier, positioning ultimately occurs in customers’ minds. Even though a Strategic Issue brand’s physical characteristics, package, name, price, and ancillary A simple comparison of only the physical services can be designed to achieve a particular position in the mardimensions of alternative offerings usually ket, customers may attach less importance to some of these characterdoes not provide a complete picture of istics than, or perceive them differently from, what the firm expects. relative positions. Also, customers’ attitudes toward a product are often based on social or psychological attributes not amenable to objective comparison, such as perceptions of the product’s aesthetic appeal, sportiness, or status image (for example, in the United States, French wine from Bordeaux has traditionally been thought of as expensive or as an accompaniment to French food). Consequently, perceptual positioning analysis— whether aimed at discovering opportunities for new product entries or evaluating and adjusting the position of a current offering—is critically important. Perceptual Positioning Consumers often know very little about the essential physical attributes of many of the brands they buy, especially household products. The same is true for many services. Even if they did, they might not understand the physical attributes well enough to use them as a basis for choosing between competitive offerings. (For the major differences between physical and perceptual product positioning analyses, see Exhibit 8.2.) Many consumers do not want to be bothered about a product’s physical characteristics because they are not buying these physical properties but rather the benefits they provide. While the physical properties of a product certainly influence the benefits provided, a consumer can typically evaluate a product better on the basis of what it does than what it is. Thus, for example, a headache remedy may be judged on how quickly it brings relief, a toothpaste on the freshness of breath provided, a beer on its taste, and a vehicle on how comfortably it rides. The evaluation of many goods and services is subjective because it is influenced by factors other than physical properties, including the way products are presented, our past experiences with them, and the opinions of others. Thus, physically similar products may be perceived as being different because of different histories, names, and advertising campaigns. For example, Sri Lankan tea producer Dilmah positions its teas in the same way wine has been positioned for years (see Exhibit 8.3). Chapter Eight 207 Differentiation and Brand Positioning Exhibit 8.2 Comparison of Physical and Perceptual Positioning Analyses Exhibit 8.3 Physical Positioning Perceptual Positioning • Technical orientation • Consumer orientation • Physical characteristics • Perceptual attributes • Objective measures • Perceptual measures • Data readily available • Need for marketing research • Physical brand properties • Perceptual brand positions and positioning intensities • Large number of dimensions • Limited number of dimensions • Represents impact of product specs • Represents impact of product specs and communication • Direct R&D implications • R&D implications need to be interpreted Not Your Ordinary Cup of Tea W hat’s grown on that field,” says the Dilmah Group’s Dilhan Fernando, “will differ drastically from what’s grown over here.” Fernando and his brother Malik think it’s high time for a revolution in the way tea is blended and marketed. Their Ceylon teas, as they call them, harking back to Sri Lanka’s colonial heritage, are positioned like fine wine, with elegant packaging extolling the subtly distinctive flavors of teas grown on a single hillside. In the declining and still relatively fragmented global tea industry, which has lost $70 billion in sales to coffee in recent years, Dilmah has risen out of nowhere. Founded in the midst of Sri Lanka’s civil war in 1988, it now ranks as the third-largest standalone tea brand, behind Unilever’s Lipton and Associated British Foods’ Twinings and about even with Tetley, owned by India’s Tata Group. The multinational players scoff at Dilmah’s success. “The wine analogy is fairly ridiculous,” says John “ Cornish, Twinings’ international marketing director. But William Gorman, executive chair of Britain’s Tea Council, says, “Dilmah is a very interesting company. This is an industry that has been incredibly slow to innovate, and Dilmah has shown it how.” With Starbucks having acquired Tazo Tea in 1999 and other boutique brands also making headway, Dilmah’s positioning strategy may be just the ticket to turning tea’s sales trend around. With a growing number of chic Dilmah T-bars now open in countries where the majors have limited clout—65 bars and rising, in places such as Poland, Kazakstan, and the United Arab Emirates—the Fernando brothers are making sure they don’t leave distribution and brand awareness to chance. Source: Eric Ellis, “Vintage Ceylon,” Fortune, International Edition, June 25, 2007, pp. 22–24. For more on Dilmah, see www.dilmahtea .com. Levers Marketers Can Use to Establish Brand Positioning Customers or prospective customers perceive some physical as well as other differences between goods or services within a product category, of course. Marketing decisionmakers seeking to win a particular position in customers’ minds will seek to endow their brand with various kinds of attributes, which may be categorized as follows: ● Simple physically based attributes. These are directly related to a single physical dimension such as quality, power, or size. While there may be a direct correspondence between a physical 208 Section Two ● ● ● Market Opportunity Analysis dimension and a perceptual attribute, an analysis of consumers’ perception of products on these attributes may unveil phenomena of interest to a marketing strategy. For instance, two cars with an estimated gasoline mileage of 23.2 and 25.8 miles per gallon may be perceived as having similar gasoline consumption. Complex physically based attributes. Because of the presence of a large number of physical characteristics, consumers may use composite attributes to evaluate competitive offerings. The development of such summary indicators is usually subjective because of the relative importance attached to different cues. Examples of composite attributes are the speed of a computer system, roominess of a car, and a product or service being user-friendly. Essentially abstract attributes. Although these perceptual attributes are influenced by physical characteristics, they are not related to them in any direct way. Examples include the sexiness of a perfume, quality of a French wine, and prestige of a car. All of these attributes are highly subjective and difficult to relate to physical characteristics other than by experience. Price. A brand’s price may imply other attributes, such as high or low quality. The importance of perceptual attributes with their subjective component varies across consumers and product classes. Thus, it can be argued that consumers familiar with a given product class are apt to rely more on physical characteristics and less on perceptual attributes than consumers who are less familiar with that product class. It can also be argued that while perceptual positioning is essential for many consumer goods, such is not necessarily the case for many industrial goods. Even though there is considerable truth in these statements, perceptual attributes must be considered in positioning most products. One reason is the growing similarity of the physical characteristics of more and more brands. This increases the importance of other, largely subjective dimensions. Consider, for Strategic Issue example, whether Nike’s Zoom Kobe VI basketball shoes would have Perceptual attributes must be considered sold as well without basketball star Kobe Bryant endorsement and his in positioning most brands. presence in their ads. Preparing the Foundation for Marketing Strategies: The Brand Positioning Process Positioning a new brand in customers’ minds or repositioning a current brand involves a series of steps, as outlined in Exhibit 8.4. These steps are applicable to goods and services, in domestic or international markets, and to new and existing brands. Thus, when we say “brand” in the rest of this chapter and those that follow, we include both existing goods and services and planned new products—goods or services—that do not yet exist. We do not suggest that the determinant product attributes and the perceptions of consumers of various competitive offerings will remain constant across countries or other market segments; in fact they are likely to vary with most products. After managers have selected a relevant set of competing offerings serving a target market (Step 1), they must identify a set of critical or determinant product attributes important to customers in that target market (Step 2). Step 3 involves collecting information from a sample of customers about their perceptions of the various offerings, and in Step 4 researchers analyze this information to determine the brand’s current position in customers’ minds and the intensity thereof (does it occupy a dominant position), as well as those of competitors. Managers then ascertain the customers’ most preferred combinations of determinant attributes, which requires the collection of further data (Step 5). This allows an examination of the fit between the preferences of a given target segment of customers and the current positions of competitive offerings (Step 6). Finally, in Step 7, managers write a concise Chapter Eight 209 Differentiation and Brand Positioning Exhibit 8.4 Steps in the Positioning Process for Goods and Services 1. Identify relevant set of competitive products serving a target market. 2. Identify the set of determinant attributes that define the “product space” in which positions of current offerings are located. 3. Collect information from a sample of customers and potential customers about perceptions of each product on the determinant attributes. 4. Determine brand’s current location (positioning) in the product space and intensity thereof. 5. Determine customers’ most preferred combination of determinant attributes. 6. Examine the fit between preferences of market segments and current position of brands. Identify positions where additional new brands might be placed. 7. Write positioning statement or value proposition to guide development and implementation of marketing strategy. statement that communicates the positioning decision they have reached. A discussion of these steps in the positioning process takes up most of the remainder of this chapter. Step 1: Identify a Relevant Set of Competitive Products Positioning analyses are useful at many levels: company, business unit, product category, and specific product line or brand. At the company or business unit level, such analyses are useful to determine how an entire company or business unit is positioned relative to its competitors. Even countries can be thought of as having brand positions in the marketplace. Unfortunately for Chinese manufacturers, a string of toy recalls for safety reasons, incidents of poisonous pet foods, and other scares mean that the words “Made in China” do not ring with confidence in consumers’ ears. Positioning that says “cheap” in the mind of the consumer is not what quality and globally oriented Chinese companies such as personal computer manufacturer Lenovo and brewer Tsingtao want to hear.4 210 Section Two Market Opportunity Analysis At the product category level, the analysis examines customers’ perceptions about types of products they might consider as substitutes to satisfy the same basic need. Suppose, for example, a company is considering introducing a new instant breakfast drink. The new product would have to compete with other breakfast foods, such as bacon and eggs, breakfast cereals, and even fast-food drive-throughs. To understand the new product’s position in the market, a marketer could obtain customer perceptions of the new product concept relative to likely substitute products on various critical determinant attributes, as we describe in Steps 3 and 4 of the positioning process (see Exhibit 8.4). A positioning analysis at the product or brand level can be helpful to better understand how various brands appeal to customers, to position proposed new products or brands or reposition current ones, and to identify where new competitive opportunities might be found. The new supplement-fortified “relaxation beverage,” Just Chill, presents itself as a clear alternative to the likes of Red Bull, coffee, and the increasingly overcrowded energy drink category. Will an overstimulated public go for Just Chill? Its retail distribution is confined to Southern California and a few online retailers as we write. But, as Just Chill creator Max Baumann says, “People don’t need more energy drinks or caffeine; they need something to chill them out.”5 At whichever level the positioning analysis is to be done, the anaStrategic Issue lyst’s choice of competing products (or product categories or firms) is Marketers who omit important substitute products or potential competitors critical. Marketers who omit important substitute products or potential risk being blindsided by unforeseen competitors risk being blindsided by unforeseen competition. Just ask competition. Kodak or Fuji who their key competitors are today! Step 2: Identify Determinant Attributes Positioning, whether for goods or services, can be based on a variety of attributes—some in the form of surrogates that imply desirable features or benefits as a positioning base. Some common bases are the following.6 ● ● ● ● ● ● ● ● Features are often used in physical product positioning and, hence, with industrial products. An example of emphasizing features with a consumer good is U.S. high-end home appliance maker Jenn-Air’s claim; “This is the quietest dishwasher made in America.” Amazon.com has a unique “1-click®” ordering system. Benefits, like features, are directly related to a product. Examples here include Volvo’s emphasis on safety, Toyota’s emphasis on reliability, and Norelco’s promising a “close and comfortable shave.” Parentage includes who makes it (“At Fidelity, you’re not just buying a fund, a stock, or a bond—you’re buying a better way to manage it”) and prior products (“Buying a car is like getting married. It’s a good idea to know the family first—followed by a picture of the ancestors of the Mercedes-Benz S class model”). Manufacturing process is often the subject of a firm’s positioning efforts. An example is Jaeger-LeCoultre’s statement about its watches; “We know it’s perfect, but we take another 1,000 hours just to be sure.” Ingredients as a positioning concept is illustrated by some clothing manufacturers’ saying their shirts are made only of organic cotton. Endorsements are of two types—those by experts (“Discover why over 5,000 American doctors and medical professionals prescribe this Swedish mattress”—Tempur-Pedic) and those via emulation as with Kobe Bryant wearing Nike shoes. Comparison with a competitor’s product is common (“Tests prove Pedigree is more nutritious than IAMS, costs less than IAMS, and tastes great, too”—Pedigree Mealtime pet food). Proenvironment positioning seeks to portray a company as a good citizen (“Because we recycle over 100 million plastic bottles a year, landfills can be filled with other things, like land, for instance”—Phillips Petroleum, part of Conoco Phillips). Chapter Eight 211 Differentiation and Brand Positioning ● Price/quality is used in cases such as Walmart successfully positioning itself as the lowestprice seller of household products. Theoretically, consumers can use many attributes to evaluate competing brands, but the number actually influencing a consumer’s choice is typically small, partly because consumers can consider only attributes of which they are aware. The more variables used in positioning a given brand, the greater the chance of confusion and even disbelief on the part of the consumer. The positioning effort must be kept as simple as possible and complexity should generally be avoided at all costs. Subway’s positioning is based on only two elements, healthy and good value. Even marketers of bottled water are seeking to differentiate and better position their products (see Exhibit 8.5). In using one or more attributes as the basis of a brand’s positioning effort, it is important to recognize that the importance attached to these attributes often varies. For example, while the brands of soap or shampoo provided by a hotel may be an attribute that some consumers use in evaluating hotels, most are unlikely to attach much importance to this when deciding which hotel chain to patronize. Bedding, however, is another story, as specialty linens maker Anichini has found. Its exquisite bedding helps luxury boutique hotels and resorts like the Bacara Resort in Santa Barbara, California, stand out from the sameness of the ubiquitous—and in some people’s minds, boring—chain hotels.7 Even an important attribute may not greatly influence a consumer’s preference if all the alternative brands are perceived to be about equal on that dimension. Deposit safety is an important attribute in banking, but most consumers perceived all banks to be about equally safe, at least until the recent financial crisis. Consequently, deposit safety has not been a determinant attribute: It does not play a major role in helping customers to differentiate among the alternatives and to determine which bank they prefer. Marketers should rely primarily on determinant attributes, whether benefits or features, in defining the product space in a positioning analysis. The question is: “How can a marketer find out which product dimensions are determinant attributes?” Doing so typically requires conducting some kind of marketing research. This brings us to Step 3. Exhibit 8.5 T Can You Position Bottled Water? he growth category called bottled water has suddenly come to a screeching halt. Growth in the United States in 2008 slowed to 2 percent, down from near-double-digit rates earlier. Environmental concerns are the driver, at least in part. The energy costs and pollution that the bottled products generate are far higher compared to plain old tap water, which arrives in your home or workplace much more efficiently. The slump was expected to turn into a full-fledged downturn in 2009, as budget-squeezed customers turn to the tap. Big players such as Coca-Cola, PepsiCo, and Nestle are jostling for position to reverse the decline. “But it’s all just water,” you might say. Not so fast. They are scrambling to offer products that put something in the bottle other than just plain water. Coke’s Dasani has introduced a flavored version called Dasani Essence. Pepsi’s SoBe Lifewater added stevia, a new all-natural sweetener. Other companies are focused on refillable bottles, a bit better environmentally, at least at the margin. Meanwhile water filter manufacturers, such as Clorox’s Brita and Procter & Gamble’s PUR, are enjoying healthy sales increases. Who will prosper in this shakeout? It’s too soon to tell, but positioning one bottled water as fundamentally different from another is a stern test of these companies’ marketing prowess or, as some observers lament, an indicator of consumer marketing run amok. Source: Christopher Palmeri and Nanette Byrnes, “Coke and Pepsi Try Reinventing Water,” BusinessWeek, European Edition, March 2, 2009, p. 58. 212 Section Two Market Opportunity Analysis Step 3: Collect Data about Customers’ Perceptions for Brands in the Competitive Set Having identified a set of competing brands, the marketer needs to know what attributes are determinant for the target market and the product category under consideration. He or she also needs to know how different brands in the competitive set are viewed on these attributes. Typically, this market knowledge is developed by first conducting qualitative research, perhaps interviews or focus groups, to learn which attributes are determinant. Then quantitative research follows, perhaps a survey of consumers about their perceptions, to gather data on how competing brands score on these attributes. Later in this chapter, we discuss several statistical and analytical tools that are useful at this step of the positioning process. Step 4: Analyze the Current Positions of Brands in the Competitive Set Whether the positioning process is directed at a new brand not yet introduced or repositioning one that already exists, it is important to develop a clear understanding of the positioning of the existing brands in the competitive set (see Step 1). There are two useful tools for doing so. One is the positioning grid, also called a perceptual map. The other is the value curve. The positioning grid provides a visual representation of the positions of various products or brands in the competitive set in terms of (typically) two determinant attributes. Where more than two attributes are to be considered in a positioning analysis, multidimensional grids, or multiple grids, are produced. Alternatively, a value curve, which comprises more than just two dimensions, can be generated (see following). But not all brands exist in the awareness of most consumers. A brand that is not known by a consumer cannot, by definition, occupy a position in that consumer’s mind. Often the awareness set for a given product class is three or fewer brands. Thus, many if not most brands have little or no position in the minds of many consumers. Consider coffee bars, which, in recent years, have become ubiquitous in cities worldwide. In London, three major chains dominate—Starbucks, Coffee Republic, and Caffé Nero—each with its own ambience and image with consumers. There are also several smaller chains and numerous independents, most of which are largely unknown—thus with no clear positioning—to most Londoners. With consumers having so many coffee bars to choose from already—often several shops within a few hundred feet of each other on any busy street—for a new coffee bar entrant to be successful, it must adopt a clear positioning in consumers’ minds to give consumers a reason to switch. Determining the attributes on which the brand’s positioning will be based is a key outcome of the positioning process and a driver of the marketing communication strategy, as well as the marketing strategy overall, that will ultimately be developed. Without clear guidance about the intended position of the brand, advertising agencies, salesforces, and others charged with building the awareness and recognition of the product in the marketplace will be ill-equipped to do this important job. Building a Positioning Grid An example of what can be done with data gathered in Step 3 is found in Exhibit 8.6, which shows the results obtained from a classical study that portrays how a sample of consumers positioned a number of women’s clothing retailers in the Washington, D.C., area. Respondents rated the various stores on the two determinant attributes of value and fashionability. Some stores, such as Nordstrom and Kmart, occupy relatively distant positions from one another, indicating that consumers see them as very different. Other stores occupy positions comparable to one another (Neiman Marcus, Saks) and thus are considered relatively alike, meaning the intensity of competition between these stores is likely to be considerably greater than for those that occupy widely divergent positions. Chapter Eight 213 Differentiation and Brand Positioning The store positioning shown in Exhibit 8.6 also provides useful information about possible opportunities for the launching of a new store or the repositioning of an existing one. Positioning for a new store could be done by examining the positioning map for empty spaces (competitive gaps) where no existing store is currently located. There is such a gap in the upper-right quadrant of the “value/fashionability” map in Exhibit 8.6. This gap may represent an opportunity for developing a new entry or repositioning an old one that is perceived to offer greater fashionability than Nordstrom at a lower price. Of course, such gaps may exist simply because a particular position is either (1) impossible for any brand to attain because of technical constraints or (2) undesirable since there are few prospective customers for a brand with that set of attributes. It is important that positioning grids be built on a foundation of well-designed marketing research, rather than naive hunches. Several software tools have been developed for designing positioning studies and analysing the results, some of which we identify in Exhibit 8.7. Building a Value Curve Given that crafting strategies involves making choices— choices about what not to do, as well as what to do—another useful tool for positioning Exhibit 8.6 Perceptual Map of Women’s Clothing Retailers in Washington, D.C. Washington 1990 women’s fashion market The Limited Women’s wear fashionability Conservative versus current versus very latest Neiman Marcus Saks Bloomingdale’s Macy’s Nordstrom Hit or Miss Dress Barn Garfinkels T.J. Maxx The Gap Sassafras Casual Corner L&T Britches Kmart Sears Loehmann’s Marshalls Hecht’s JCPenney Woodward & Lothrop Talbots Women’s wear value for the money Worst value Best value Source: Adapted from Douglas Tigert and Stephen Arnold, “Nordstrom: How Good Are They?” Babson College Retailing Research Reports, September 1990, as shown in Micheal Levy and Barton A. Weitz, Retailing Management (Burr Ridge, IL: Richard D. Irwin. 1992), p. 205. 214 Section Two Exhibit 8.7 S Market Opportunity Analysis Software Tools for Positioning Decision Making oftware tools useful for making positioning decisions include applications that identify important determinant attributes, as well as statistical applications that can plot positioning grids from market research data. Conjoint analysis: As we mention in Step 5 of the positioning process, it is important to learn which key attributes are important to consumers. Conjoint analysis is one tool for doing so. Conjoint analysis determines which combination of a limited number of attributes consumers most prefer. The technique is helpful for identifying appealing new product designs and important points that might be included in a product’s advertising. Although it can provide some insights about consumer preferences, it cannot provide information about how consumers perceive the positioning of existing products in relation to product dimensions. Conjoint analysis is one way to narrow down a set of product attributes to those most important to consider in product design and positioning decisions. Most often, it is used with physical attributes, not perceptual ones. Several widely used conjoint analysis applications are available from Sawtooth Software, Inc. (www.sawtoothsoftware.com). Factor analysis and discriminant analysis: Factor analysis and discriminant analysis are two statistical techniques useful in constructing positioning grids based on actual marketing research data. They are included in most broad-based statistical packages, such as SPSS MR (www.spss.com/spssmr). To employ factor analysis, the analyst must first identify the salient attributes consumers use to evaluate products in the category under study. The analyst then collects data from a sample of consumers concerning their ratings of each product or brand on all attributes. The factor analysis program next determines which attributes are related to the same underlying construct (“load” on the same factor). The analyst uses those underlying constructs or factors as the dimensions for a product space map, and the program indicates where each product or brand is perceived to be located on each factor. Discriminant analysis requires the same input data as factor analysis. The discriminant analysis program then determines consumers’ perceptual dimensions on the basis of which attributes best differentiate, or discriminate, among brands. Once again, those underlying dimensions can be used to construct a product space map, but they are usually not so easily interpretable as the factors identified through factor analysis. Also, as with factor analysis, the underlying dimensions may be more a function of the attributes used to collect consumer ratings than of the product characteristics that consumers actually consider to be most important. Multidimensional scaling: Unlike the other techniques in which the underlying dimensions identified depend on the attributes supplied by the researcher when collecting data, multidimensional scaling produces dimensions based on consumer judgments about the similarity of, or their preferences for, the actual brands. These underlying dimensions are thought to be the basic dimensions that consumers actually use to evaluate alternative brands in the product class. Multidimensional scaling programs that use data on similarities construct geometrically spaced maps on which the brands perceived to be most similar are placed close together. Those that use consumer preferences produce joint space maps that show consumer ideal points and then position the mostpreferred brands close to those ideal points. Unfortunately, the underlying dimensions of the maps produced by multidimensional scaling can be difficult to interpret. Also, the dimensions identified are only those that already exist for currently available brands. This makes the technique less useful for investigating new product concepts that might involve new characteristics. Finally, the technique is subject to statistical limitations when the number of alternative brands being investigated is small. As a rule, such techniques should be applied only when at least eight or more different products or brands are being examined. decisions is the value curve.8 Value curves indicate how products within a category compare in terms of the level—high or low—of as many attributes as are relevant. Thus, unlike perceptual maps, which are most easily viewed in just two dimensions, value curves are more multidimensional. Sometimes, value is best delivered by eliminating or reducing the level of some attributes, especially those not really desired or appreciated by the target customer, and increasing the level of others, the ones the customer really wants. Let’s imagine that in addition to the data shown on the perceptual map in Exhibit 8.6, we have data about Chapter Eight 215 Differentiation and Brand Positioning Exhibit 8.8 Value Curves for Neiman Marcus, JC Penney, and Sears Level of each attribute High JCPenney Sears Neiman Marcus Value for money Fashionability Category depth Ambience Customer service Low several other variables for three stores: Neiman Marcus, Sears, and JC Penney: We could build value curves for the three retailers by plotting these hypothetical data as shown in Exhibit 8.8. The value curves show that, among other things, Sears and JC Penney choose to compete by reducing their level of customer service, ambience, category depth, and fashionability, presumably in order to deliver increased value for money. Neiman Marcus offers higher levels of customer service, ambience, category depth, and fashionability, presumably because the target customer it seeks to serve is willing to pay for these attributes. Marketing Opportunities to Gain a Distinct Position In situations where one or a limited number of brands dominate a product class (or type) in the minds of consumers, the main opportunity for competitors generally lies in obtainStrategic Issue ing a profitable position within a market segment not dominated by Competing head-on against the leaders on the basis of attributes appropriated a leading brand. Competing head-on against the leaders on the basis by larger competitors is not likely to be of attributes appropriated by larger competitors is not likely to be effective. effective. A better option is to concentrate on an attribute prized by members of a given market segment. Toyota, with its traditional baby-boomer customer base getting older, launched its Scion brand in 2004, targeted at American youth. Instead of transitional mass marketing, the Scion team used edgy internet-based marketing, including making virtual Scions available for virtual purchase on Second Life, a website that was then growing in popularity with the younger set.9 Scion’s hip, youthful image has helped the new brand score with its Generation Y target market. Constraints Imposed by an Intense Position Although marketers should generally seek a distinctive and intense position for their brands, attaining such a position imposes constraints on future strategies. If shifts in the market environment cause 216 Section Two Market Opportunity Analysis customers to reduce the importance they attach to a current determinant attribute, marketers may have difficulty repositioning a brand with an intensely perceived position on that attribute. Repositioning carries with it the threat of alienating part or all of the product’s current users regardless of success with its newly targeted group. Success in its repositioning efforts may well ensure losing its current group of users. Another concern is the dilution of an existing intense position as a result of consolidation. For example, British Leyland was formed through a series of mergers involving a number of British car manufacturers. For years, the company did not have a clear identity because it was new and manufactured a variety of brands, including Rover, Triumph, and Austin-Morris. Most Europeans had difficulty spontaneously recalling any British car manufacturer since once-strong brand names such as Austin and Morris had lost their identity and meaning. Following a long series of divestitures, buyouts, and reorganizations, British Leyland’s successor company, MG Rover, went bankrupt in 2005. While there’s little doubt that high-cost manufacturing contributed to the company’s demise, a lack of clear positioning for many of its brands was surely a contributing factor.10 Another danger associated with an intensely positioned brand is the temptation to overexploit that position by using the brand name on line extensions and new products. The danger here is that the new products may not fit the original positioning and the brand’s strong image is diluted. For example, for many years, the Holiday Inn Group offered travelers the choice of staying in Holiday Inn, Holiday Inn Express, Holiday Inn Select, or Holiday Inn Garden Court, each of which operated at a different price point and service offering. Such a diverse offering bearing a single brand can be very confusing to consumers. Limitations of Product Positioning Analysis The analysis depicted in Exhibit 8.6 is often referred to as product positioning because it indicates how alternative products or brands are positioned relative to one another in customers’ minds. The problem with this analysis is that it does not tell the marketer which positions are most appealing to customers.11 Thus, there is no way to determine if there is a market for a new brand or store that might locate in an “open” position or whether the customers in other market segments prefer brands or stores with different attributes and positions. To solve such problems, it is necessary to measure customers’ preferences and locate them in the product space along with their perceptions of the positions of existing brands. This is called a market positioning analysis. We deal with this issue in Step 5. Step 5: Determine Customers’ Most Preferred Combination of Attributes There are several ways analysts can measure customer preferences and include them in a positioning analysis. For instance, survey respondents can be asked to think of the ideal brand within a category—a hypothetical brand possessing the perfect combination of attributes (from the customer’s viewpoint). Respondents could then rate their ideal product and existing products on a number of attributes. An alternative approach is to ask respondents not only to judge the degree of similarity among pairs of existing brands, but also to indicate their degree of preference for each. In either case, the analyst, using the appropriate statistical techniques, can locate the respondents’ ideal points relative to the positions of the various existing brands on the product space map. Another method of assessing customers’ preferences and trade-offs among them is a statistical technique called conjoint analysis.12 Customers are surveyed and asked their preferences among various real or hypothetical product configurations, each with Chapter Eight 217 Differentiation and Brand Positioning attributes that are systematically varied. By analyzing the resulting data, the marketer can learn which of several attributes are more important than the others. These results can then be used in positioning analyses such as those described here. Whichever approach is used, the results will look something like Exhibit 8.9, which shows a hypothetical cluster of ideal points for one segment of women’s clothing consumers. As a group, this segment would seem to prefer Nordstrom over any other women’s clothing retailer on the map. There are, however, several reasons not all customers in this segment are likely to prefer Nordstrom. First, the ideal points of some customers are actually closer to Macy’s than Nordstrom. Second, customers whose ideal point is equidistant between the two stores may be relatively indifferent in their choice of which store to patronize. Finally, customers sometimes may patronize stores somewhat further away from their ideal—particularly when buying low-involvement, nondurable goods or services—to Exhibit 8.9 Perceptual Map of Women’s Clothing Retailers in Washington, D.C., Showing the Ideal Points of a Segment of Consumers Washington 1990 women’s fashion market The Limited Women’s wear fashionability Conservative versus current versus very latest Neiman Marcus Saks Bloomingdale’s Macy’s Nordstrom Hit or Miss Dress Barn Garfinkels T.J. Maxx The Gap Sassafras Casual Corner L&T Loehmann’s Marshalls Hecht’s Britches Kmart Sears JCPenney Woodward & Lothrop Talbots Women’s wear value for the money Worst value Best value Source: Adapted from Douglas Tigert and Stephen Arnold, “Nordstrom: How Good Are They?” Babson College Retailing Research Reports, September 1990. 218 Section Two Market Opportunity Analysis assess the qualities of new stores, to reassess older stores from time to time, or just for the sake of variety. Using price as one dimension of a positioning grid, or as a key dimension on which a brand is positioned, is typically not very useful unless price is a key driver of the marketing strategy. This is the case for two reasons. First, price is easily imiStrategic Issue table by competitors. Unless the firm has a clear cost advantage over Using price as one dimension of a its competitors, by virtue of its processes or other sources of efficiency, positioning grid is typically not very useful. using low price as a basis for positioning can be a fast road to a price war that no one (except consumers) will win. Second, claims that one’s brand—whether a good or a service—is low-priced are sometimes not very credible because so many marketers make such claims. It is often better to position around more enduring differentiators and let price speak more subtly for itself. Walmart, an exception, has been able to sustain its low-price positioning in the United States because its costs and its prices on many items, compared to its chief competitors, actually are lower. Step 6: Consider Fit of Possible Positions with Customer Needs and Segment Attractiveness An important criterion for defining market segments is the difference in the benefits sought by different customers. Because differences between customers’ ideal points reflect variations in the benefits they seek, a market positioning analysis can simultaneously identify distinct market segments as well as the perceived positions of different brands. When customers’ ideal points cluster in two or more locations on the product space map, the analyst can consider each cluster a distinct market segment.13 For analytical purposes, each cluster is represented by a circle that encloses most of the ideal points for that segment; the size of the circle reflects the relative proportion of customers within a particular segment. Exhibit 8.10 groups the sample of Washington, D.C. respondents into five distinct segments on the basis of clusters of ideal points.14 Segment 5 contains the largest proportion of customers; segment 1, the smallest.15 By examining the preferences of customers in different segments along with their perceptions of the positions of existing brands, analysts can learn much about (1) the competitive strength of different brands in different segments, (2) the intensity of the rivalry between brands in a given segment, and (3) the opportunities for gaining a differentiated position within a specific target segment. Step 6 not only concludes the analysis portion of the positioning process and crystallizes the decision about the positioning a brand should hold, but it also can uncover locations in the product space where additional new brands could be positioned to serve customer needs not well served by current competitors. Thus, as Exhibit 8.4 suggested, a side benefit of the positioning process is recognition of underserved positions where additional new products might be placed. Step 7: Write Positioning Statement or Value Proposition to Guide Development of Marketing Strategy The final decision about where to position a new brand or reposition an existing one should be based on both the market targeting analysis discussed in Chapter 7 and the results of a brand positioning analysis. The position chosen should match the preferences of a particular market segment and should take into account the current positions of competing brands. Chapter Eight 219 Differentiation and Brand Positioning Exhibit 8.10 Perceptual Map of Women’s Clothing Retailers in Washington, D.C., Showing Five Segments Based on Ideal Points Washington 1990 women’s fashion market Women’s wear fashionability Conservative versus current versus very latest The Limited Neiman Marcus 2 Saks 3 Bloomingdale’s Macy’s 4 Nordstrom Hit or Miss Dress Barn Garfinkels T.J. Maxx The Gap Sassafras Casual Corner L&T Loehmann’s Marshalls Hecht’s 1 5 Britches Kmart Sears JCPenney Woodward & Lothrop Talbots Women’s wear value for the money Worst value Best value Source: Adapted from Douglas Tigert and Stephen Arnold, “Nordstrom: How Good Are They?” Babson College Retailing Research Reports, September 1990. It should also reflect the current and future attractiveness of the target market (its size, expected growth, and environmental constraints) and the relative strengths and weaknesses of competitors. Such information, together with an analysis of the costs required to acquire and maintain these positions, allows an assessment of the economic implications of different market positioning strategies. Most successful products are positioned based on one or, at most, two determinant attributes, whether physical or perceptual. Using more attributes simply confuses customers. Domino’s Pizza in the United States, in its early days, focused its posiStrategic Issue tioning solely on its fast delivery, since that was the principal dimension Most successful products are positioned on which it established its competitive advantage. While there are many based on one or, at most, two determinant things Domino’s could have said about the pizza itself, it chose to focus attributes. its positioning on its key point of differentiation: fast delivery. Later, when fast delivery became common in the pizza industry, Domino’s added a heat retention device to its delivery containers and added a second positioning attribute: hot. Papa John’s, a later entrant in the pizza business, positions its offering around a single attribute, the quality of its pizza, with its promotional phrase “Better ingredients. Better pizza.” 220 Section Two Market Opportunity Analysis Where there are no real product differences, as in so-called me-too products, or no differential benefits to the user, not only is success hard to achieve, but also ethical issues may arise. For an example of ethical issues involving positioning in the pharmaceutical industry, see Ethical Perspective 8.1. Once the desired positioning for the product has been determined, it’s a good idea to write it down so those charged with developing and implementing the marketing strategy have a clear understanding of what is intended for the product and where it will fit in its competitive set. Two approaches are commonly used for doing so. In the classical approach, a positioning statement is written. A more recent approach, one adopted by a growing number of firms, involves writing a value proposition for the product. Writing a Positioning Statement or a Value Proposition A positioning statement is a succinct statement that identifies the target market for which the product is intended and the product category in which it competes and states the unique benefit the product offers. An example of a positioning statement that reflects Volvo’s marketing strategy in the United States is shown in Exhibit 8.11. A value proposition is similarly explicit about what the product does for the customer (and sometimes, what it does not do) and typically also includes information about pricing relative to competitors. Both positioning statements and value propositions should generally reflect a unique selling proposition (USP) that the product embodies. In this sense, they reflect the basis on which the marketer intends to win sustainable competitive advantage by differentiating the product from others in its competitive space. The notion of the USP has been oversold, however, since in many product categories, especially mature ones, customers are more interested in the degree to which particular products meet their already well-established needs rather than the degree to which they differ from others. Newness and differentiation are not always what the customer wants! We address this issue later in this chapter. A value proposition is another way to clearly and succinctly state a product’s positioning. In its shortest form, a value proposition typically looks like this: ● ● ● Target market Benefits offered (and not offered) Price range (relative to competitors) Exhibit 8.11 also provides a value proposition for Volvo. More fully developed value propositions sometimes identify the best competing alternatives available to the customer Ethical Perspective 8.1 Positioning in the Pharmaceutical Industry—An Ethical Quagmire Under constant and ever-increasing pressure to perform, the pharmaceutical industry is frequently cited for practices that are ethically questionable. An article in the British journal The Lancet provided an assessment of advertisements in Spanish medical journals in 1997 for antihypertensive (drugs used to treat high blood pressure) and lipid-lowering (i.e., cholesterollowering) drugs. The advertisements studied in a six-month period (264 different ads for antihypertensives and 23 different ads for lipid-lowering drugs) made a total of 125 referenced claims. After excluding the 23 claims that did not have published data, the researchers found that in 44 percent of the cases, the published data did not support the statements made in the ads. This study is a note of caution for doctors who prescribe medicines based on the evidence of reported research on drugs. Is such marketing really in the best long-term interests of the shareholders? Source: Pilar Villanueva, Salvador Peiró, Julián Librero, and Inmaculada Pereiró, “Accuracy of Pharmaceutical Advertisements in Medical Journals,” The Lancet, January 4, 2003. Chapter Eight 221 Differentiation and Brand Positioning Exhibit 8.11 Positioning Statement and Value Proposition for Volvo Automobiles in the United States Positioning Statement For upscale American families, Volvo is the automobile that offers the utmost in safety. Value Proposition • Target market: Upscale American families • Benefits offered: Safety • Price range: 20% premium over similar cars and specify the benefits, in measurable terms, that the customer can expect to receive by using the proposed product. Detailed value propositions such as these are particularly helpful in positioning industrial goods and services, where quantifiable customer benefits are often essential to make the sale. It is important that the positioning statement or value proposition Strategic Issue states benefits that the user of the product will obtain, rather than It is important that the positioning features or attributes of the product itself or vague or ambiguous statement or value proposition states benefits that the user of the product will platitudes about high quality or excellent service. By benefits, we mean obtain, rather than features or attributes of the resulting measurable end-use consequences that the user will expethe product itself. rience through the use of the product, in comparison to others. The marketer generally writes positioning statements and value propositions for use internally and by others, such as advertising agencies engaged to develop the marketing strategy. They are short and succinct and are typically not written in catchy consumer language, though catchy slogans and tag lines for communication with customers often follow. They are most commonly written for a product line or a brand, as is the case in our Volvo example, but sometimes for a single product or for a business as a whole. For products, they play several important roles. They provide direction for R&D and product development about what kind of attributes should be built into the product (side-door airbags, for example, in Volvo’s case). They provide direction for those who create advertising campaigns about what the focus of those campaigns should be (for example, Volvo’s ads almost always focus on safety, even though Volvo could say other things about its cars). The value proposition also provides direction for pricing decisions. Thus, in a very real sense, the positioning statement or value proposition constitutes the foundation upon which the marketing strategy is built. More broadly, when used at the business level, as they sometimes are, these statements articulate the strategic direction toward which the company’s activities in all arenas should be directed. Promising a certain sort of positioning, or value, to the target market is one thing. Delivering it is another. Clear and concise positioning statements and value propositions can play important roles in effectively executing the intended strategy. The Outcome of Effective Positioning: Building Brand Equity Brand equity is the term marketers use to refer to the value created by establishing customer preference for one’s brand. It reflects how consumers feel, think, and act toward the brand, and it has implications for the prices and profits the brand can achieve in the marketplace and for the market capitalization of the company owning the brand.16 When companies create differences between their brands and other brands, differences that 222 Section Two Market Opportunity Analysis consumers view as meaningful, brand equity is the result. Effective positioning decisions that lead to effective marketing programs are critical to this process. Consider Procter & Gamble, arguably one of the world’s most successful marketers over the past century. Its market capitalization of $180 million in 2011 is due in large part to the brand equity it has built for its portfolio of brands in the more than 140 countries in which it does business. As P&G’s global marketing officer James Stengel notes about consumers, “They want to trust something. People really do care what’s behind the brand, what’s behind the business. They care about the values of a brand and the values of a company. We can never be complacent about that. Businesses and brands that are breaking records are those that inspire trust and affection and loyalty by being authentic, by not being arrogant, and by being empathetic to those they serve.”17 In India, for example, P&G sells shampoo one sachet at a time, rather than in the giant economy-size bottles found in American showers, reflecting Indian consumers’ limited purchasing power. In North America, P&G has turned its trusted detergent brand, Tide, into a growth machine by adding innovative new cleaning products such as the Tide Stain Stick that people can carry with them.18 Managing Brand Equity While brand positioning decisions are crucial in large companies such as P&G and to the development of new brands, whether goods or services, in entrepreneurial start-ups, there are two ongoing issues that are essential if whatever brand value that’s been built is to be maintained and grown: brand reinforcement and brand revitalization. Some companies have maintained strong brands for many decades—for example, P&G’s Tide, Crest, and Pampers, Wrigley’s gum, Coca-Cola, Disney, and numerous others. Other brands with substantial brand equity are more recent phenomena—including Nike, Dell Apple, and Google, all of which made BusinessWeek’s 2011 list of the 100 best global brands.19 All of these companies, young and old, nurture and protect their brands, ensuring that the products that bear their brands stand for something consistent and that marketing messages reinforce the brand strategy and personality. Sometimes, however, market conditions or marketing mistakes make it necessary to revitalize a brand that has lost its lustre. The emergence of new competitors or changes in consumer tastes and preferences can affect a brand’s fortunes, sometimes for the worse. For an example of how one automobile brand is working to remake its stuffy and outdated image, see Exhibit 8.12. Additionally, rebranding can sometimes help marketers achieve a more unified approach in their marketing efforts. Federated Stores, a collection of U.S. department stores operating under a variety of hundred-year-old brands of their long-departed founders—from Wanamakers in Philadelphia to Marshall Field in Chicago—was unable to build a coherent nationwide marketing strategy. “Since we weren’t a national brand, I couldn’t even advertise during the Macy’s Thanksgiving Day Parade,” says Federated CEO Terry Lundgren.20 Federated was printing 16 different shopping bags, running 16 different catalogs, and buying merchandise locally in 16 different regions across the United States. Despite a lot of push-back from local managers, Lundgren thought there was an opportunity to take advantage of the Macy’s parade and put the Macy’s brand on most of the Federated stores. Converting more than 600 stores from their former nameplates and creating a centralized hut localized strategy took nearly five years, but has delivered impressive results. Same-store sales were up 4.6 percent and Macy’s nearly doubled its operating profit in 2010 over 2009. Says Lundgren of the rebranding decision, “If we hadn’t made that decision a few years ago, the external environment would have forced it on us. It was the right choice.21 Chapter Eight Exhibit 8.12 I 223 Differentiation and Brand Positioning Not Your Grandfather’s Car Any More n his 1977 film, Annie Hall, the character played by Woody Allen remarked, “There’s a spider in your bathroom the size of a Buick.” But Buick’s image of a maker of “land barges” suitable for drivers with plenty of gray hair is changing. Roger G. McCormack, Buick’s product director, describes Buick’s new positioning as “approachable luxury.” Slick, adventurous styling, along with a recognition that its 70-plus market was no longer buying Buicks, is driving the change. Darrell Bostic, age 30 with a wife and young children, recently bought a Buick Lacrosse, choosing it over Toyota’s Camry and Nissan’s Maxima. “The look of this car really got us,” says Bostic, a U.S. Navy man based in Corpus Christi, Texas. Buick’s sales, up 60 percent in 2010, make it the fastest-growing auto brand in the United States. Remaking a brand’s image is never easy, though, and Buick’s job is not yet done. Departing from its geezer history is the best way for Buick to go, says CEO Jeremy Anwyl of the Edmunds auto website, “It’s better than where they were.” Source: David Welch, “For Buick, Signs of Life beyond the Retiree Market,” Bloomberg Businessweek European Edition, October 4–10, 2010, pp. 19–20. For more on Buick, see www.buick.com. As we have seen in this chapter, brand positioning is much more than a one-time exercise. It’s an ongoing, never-ending process, one in which the best marketers keep abreast of market and competitive changes in order to maintain and grow the brand equity they have built. Positioning decisions, important as they are, only set the foundation for the development and implementation of effective marketing programs, however. It is those marketing programs whose job is to deliver on the brand promise. Developing and implementing marketing programs and strategies is the focus of much of the remainder of this book. Before turning to those issues, we wrap up our work on positioning by identifying some of the growing array of software tools to aid in the positioning process, and we address a few caveats to which attention should be given along the way. Some Caveats in Positioning Decision Making We noted earlier in this chapter that it’s generally desirable to identify a unique selling proposition that clarifies how the product is differentiated from others. A book by Patrick Barwise and Seán Meehan argues, however, that contrary to conventional wisdom, buyers only rarely look for uniqueness. They argue that the degree to which a brand can grow to dominate its category is a reflection of how many users in the category believe it delivers the main category benefits.22 They say the infinitesimal differentiators that some marketers worry so much about make little real difference. Thus, they argue that marketing strategists should focus their efforts on delivering the benefits that matter most to the target customer—even if other competitors do so as well—and not worry so much about inventing trivial differences that don’t really matter. A second caveat is the question of whether, if one is to differentiate, the focus should be on features—tangible attributes of the good or service itself, such as Volvo’s side-door airbags and other safety features—or the benefits the features deliver—safety, in Volvo’s case. At the end of the day, customers buy what they buy, whether goods or services, in order to obtain certain benefits. They could care less about features for their own sake. Thus, it’s the benefits that matter. But words are cheap, for marketers as well as for politicians’ election-year promises. To be credible in telling the benefits story, marketers must back up their words with features that actually deliver the benefits that are promised. The challenge for marketing strategists is to keep benefits as the focus of the value proposition and at the top of everyone’s mind—copywriters, salespeople, everyone who sells in one way or another—but find a way to credibly support and effectively communicate the benefits that are claimed. Doing so is far more difficult than it sounds, which is why so many ads and so many salespeople talk about features instead of benefits. 224 Section Two Market Opportunity Analysis Take-aways 1. Clear and distinctive positioning that differentiates a brand from others with which it competes is usually essential for developing a winning marketing strategy. effective development and execution of a marketing strategy. This chapter provides templates for writing these materials. 2. The positioning process outlined in this chapter helps decision makers choose a position that maximizes their chance of establishing sustainable competitive advantage. 5. Effective brand positioning decisions establish the foundation upon which successful marketing strategies and programs are built, thereby setting the stage for the creation of brand equity. 3. Distinctive and intense positioning is best accomplished when based on one or at most two attributes. More are likely to be confusing to customers. 4. Writing clear and succinct positioning statements or value propositions can play an important role in ensuring Self-diagnostic questions to test your ability to apply the analytical tools and concepts in this chapter to marketing decision making may be found at this book’s website at www.mhhe.com/ mullins8e. Endnotes 1. The Subway case example is drawn from Jessica Pasley, “Jared of Subway Fame Touts Healthy Lifestyle at Heart Walk Kickoff,” The Reporter, Vanderbilt Medical Center, October 3, 2003; CNN.com, “Jared the Subway Guy, Superstar,” November 17, 2003, www.cnn.com/2003/SHOWBIZ/ TV/11/17/subway/guy.ap/; Matthew Boyle, “The Accidental Hero,” BusinessWeek European Edition, November 16, 2009, pp. 58–61; and the Subway Restaurants website at www.subway.com. 2. Al Ries and Jack Trout, Positioning: The Battle for Your Mind (New York: Warner Books, 1982). 3. Michael Porter, “What Is Strategy?” Harvard Business Review, November–December 1996, p. 62. 4. Dexter Roberts, “China’s Brands: Damaged Goods,” BusinessWeek, European Edition, September 24, 2007, p. 47. 5. Adam Baer, “The Big Chill,” Hemispheres, April 2011, pp. 50–52. 6. Adapted from C. Merle Crawford and C. Anthony Di Benedetto, New Products Management (Burr Ridge, IL: McGraw-Hill/Irwin, 2008). 7. See the company’s website at www.anichini.com. 8. For more on strategy making as choices, see Constantinos C. Markides, All the Right Moves: A Guide to Crafting Breakthrough Strategy (Cambridge, MA: Harvard Business School Press, 2000). For more on value curves, see W. Chan Kim and Renée Mauborgne, “Value Innovation: The Strategic Logic of High Growth,” Harvard Business Review (January– February, 1997), pp. 103–12. 9. Roland Jones, “Can Toyota’s Scion Keep Its Edge?” www.msnbc.msn .com/id/17688646/, March 21, 2007. 10. Lindsay Brooke, “Mini: The Real Story,” Automotive Industries, April 2002. For more on BL’s history, see also “British Leyland Motor Corporation,” http://en.wikipedia.org/wiki/British_Leyland. 11. Existing brands’ attractiveness can be inferred from current sales volumes and market shares. The position occupied by the share leader is obviously more appealing to a greater number of customers than are the positions occupied by lesser brands. 12. For more on conjoint analysis, see Vithala Rao, Applied Conjoint Analysis (New York: Springer Publishing, 2009). 13. When using preference data to define market segments, however, the analyst should also collect information about customers’ demographic characteristics, lifestyle, product usage, and other potential segmentation variables. This enables the analyst to develop a more complete picture of the differences among benefit segments. Such information can be useful for developing advertising appeals, selecting media, focusing personal selling efforts, and designing many of the other elements of a marketing program that can be effective in appealing to a particular segment. 14. The size of the individual circles in Exhibit 8.10 is fictitious and designed for illustrative purposes only. 15. The map in Exhibit 8.10 shows five distinct preference segments but only one set of perceived product positions. The implication is that consumers in this sample were similar in the way they perceived existing brands but different in the product attributes they preferred. This is the most common situation; customers tend to vary more in the benefits they seek than in how they perceive available products or brands. Sometimes, however, various segments may perceive the positions of existing brands quite differently. They may even use different determinant attributes in assessing these positions. Under such circumstances, a marketer should construct a separate market-positioning map for each segment. 16. Kevin Lane Keller, Strategic Brand Management, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2008). 17. Geoff Colvin, “Selling P&G,” Fortune, International Edition, September 17, 2007, p. 82. 18. Ibid., pp. 81–87. 19. “100 Best Global Brands,” Bloomberg BusinessWeek, November 29, 2011. 20. Terry Lundgren, “Hard Choices,” Bloomberg Businessweek, November 29–December 5, 2010, p.104. 21. Macy’s Inc 2010 Annual Report at http://www.macysinc.com/Investors/ vote/2010_ar.pdf. 22. Patrick Barwise and Seán Meehan, Simply Better: Winning and Keeping Customers by Delivering What Matters Most (Cambridge, MA: Harvard Business School Press, 2004). Section Three Developing Strategic Marketing Programs Ch ap t e r 9 Business Strategies: A Foundation for Marketing Program Decisions Ch ap t e r 1 0 Product Decisions Ch ap t e r 1 1 Pricing Decisions C h apter 1 2 Distribution Channel Decisions C h apter 1 3 Integrated Promotion Decisions 225 C HAPTER N INE Business Strategies: A Foundation for Marketing Program Decisions Business Strategies and Marketing Programs at 3M1 T HE MINNESOTA MINING AND MANUFACTURING Company, better known as 3M, began manufacturing sandpaper a century ago. Today it is the leader in dozens of technical areas from fluorochemistry to fiber optics. The firm makes more than 60,000 different products, which generated $26.7 billion in global sales in 2010. The company produced $5.9 billion in operating profits. As you might expect of a firm with so many products, 3M is organized into a large number of strategic business units (SBUs). The company contains 38 such SBUs or product divisions organized into six market sectors: ● ● ● The Industrial and Transportation Sector makes a variety of tapes, abrasives, adhesives, filters, and specialty chemicals for industrial applications ranging from electronics to aerospace to automobile manufacturing. The Health Care Sector markets a variety of medical, surgical, pharmaceutical, and dental products and services. The Consumer and Office Sector offers products for homes and offices, such as Post-it brand repositionable notes and Scotch brand tapes. 226 ● ● ● The Electro and Communications Sector supplies connecting, splicing, and protective products for electronics and telecommunications markets. The Display and Graphics Sector is a world leader in the sale of films and reflective materials for electronic displays, touch screens, commercial graphics, and traffic control. The Safety, Security and Protection Services Sector makes a wide variety of products ranging from respirators for worker safety to cleaning supplies to fire-protection products. While 3M has acquired many smaller firms over the years, its growth strategy has focused primarily on internal new product development, emphasizing both improved products for existing customers and new products for new markets. One formal objective assigned to every business unit is to obtain at least 30 percent of annual sales from products introduced within the past four years. The company supports its growth strategy with an R&D budget of more than $1.45 billion, almost 5.5 percent of total revenues. The company also pursues growth through the aggressive development of foreign markets for its many products. A seventh organizational sector is responsible for coordinating the firm’s marketing efforts across countries. In 2010, 3M attained $17.4 billion in sales—68 percent of its total revenue—from outside the United States. Differences in customer needs and life-cycle stages across industries, however, lead 3M’s various business units to pursue their growth objectives in different ways. The Industrial Tape Division within the Industrial and Transportation Sector, for example, operates in an industry where both the product technologies and the customer segments are relatively mature and stable. Growth in this group results from extending the scope of adhesive technology (for instance, attaching weather-stripping to auto doors), product improvements and line extensions targeted at existing customers, and expansion into global markets. In contrast, the firm’s Drug Delivery Systems Division within the Health Care Sector develops new medical applications for emerging technologies developed in 3M’s many R&D labs. It sells a variety of technologies for the delivery of medications that are inhaled or absorbed through the skin. Most of the unit’s growth comes from developing new products, often through alliances with other pharmaceutical firms, aimed at new markets. The competitive strategies of 3M’s various business units also differ. For instance, the industrial tape unit is primarily concerned with maintaining its commanding market share in existing markets while preserving or even improving its profitability. Its competitive strategy is to differentiate itself from competitors on the basis of product quality and excellent customer service. But the drug delivery systems unit’s strategy is to avoid head-to-head competitive battles by being the technological leader and introducing a stream of unique new products. To be successful, though, the unit must devote substantial resources to R&D and to the stimulation of primary demand. Thus, its main objective is volume growth; and it must sometimes sacrifice shortrun profitability to fund the product development and marketing efforts needed to accomplish that goal. These differences in competitive strategy, in turn, influence the strategic marketing programs within the various business units. For instance, the firm spends little on advertising or sales promotion for its mature industrial tape products. However, it does maintain a large, well-trained technical salesforce that provides valuable problem-solving assistance and other services to customers and informed feedback to the firm’s R&D personnel about potential new applications and product improvements. In contrast, the pioneering nature of the drug delivery unit’s technologies calls for more extensive promotion to attract potential alliance partners, develop awareness among prescribing physicians, and stimulate primary demand. Consequently, the unit devotes a relatively large portion of its revenues to advertising in technical journals aimed at the pharmaceutical industry, physicians, and other medical professionals. It also supports a well-trained salesforce, but those salespeople spend much of their time demonstrating new technologies and building relationships with drug manufacturers who are prospective customers and partners. While different business and marketing strategies make sense for business units facing different market and competitive conditions, they pose a dilemma for top management. Can a variety of competitive strategies and marketing programs be consistent with, and effective under, a single corporate strategy or company policy? George Buckley had to address this issue when he took over as 3M’s CEO in 2005. His predecessor had instituted a “six sigma” program throughout the firm. Six sigma is a quality control approach for systematically analyzing a problem (e.g., high shipping costs) and then using data to solve each component of the problem. It seeks to use rigorous statistical analysis to remove variability from a process, thereby reducing defects, improving quality, and lowering costs. Six sigma’s objectives and methods make good sense for mature businesses like 3M’s Industrial Tape unit where the product line is well-established and improving quality and lowering costs are important means of maintaining profitability. But what about a business whose competitive strategy focuses on innovation and new product development, like the Drug Delivery Systems unit? As one management guru points out, “The more you hardwire a company for 227 228 Section Three total quality management (e.g., six sigma), the more it is going to hurt breakthrough innovation. The mindset that is needed, the capabilities that are needed, the metrics that are needed . . . for discontinuous innovation are fundamentally different.” Consequently, CEO Buckley has made adjustments in the firm’s corporate strategy to accommodate some Developing Strategic Marketing Programs of the differences in objectives and competitive strategies across the firm’s business units. For instance, while he has continued to emphasize six sigma goals and projects in 3M’s mature businesses, he has loosened the reins a bit by de-emphasizing the six sigma approach in the firm’s research labs and some of its pioneering business units. Marketing Challenges Addressed in Chapter 9 The situation at 3M again illustrates that large firms with multiple businesses usually have a hierarchy of strategies extending from the corporate level down to the individual product-market entry. As we saw in Chapter 2, corporate strategy addresses such issues as the firm’s mission and scope and the directions it will pursue for future growth. Thus, 3M’s corporate growth strategy focuses primarily on developing new products and new applications for emerging technologies. The major strategic question addressed at the business-unit level is, How should we compete in this business? For instance, 3M’s industrial tape unit attempts to maintain its commanding market share and high profitability by differentiating itself on the basis of high product quality and good customer service. The drug delivery unit, on the other hand, seeks high growth via aggressive new product and market development. Finally, the strategic marketing program for each product-market entry within a business unit attempts to allocate marketing resources and activities in a manner appropriate for accomplishing the business unit’s objectives. Thus, most of the strategic marketing programs within 3M’s drug delivery unit involve relatively large expenditures for marketing research and introductory advertising and promotion campaigns aimed at achieving sales growth. One key reason for 3M’s continuing success is that all three levels of strategy within the company have usually been characterized by good internal and external consistency, or strategic fit. The company’s managers have done a good job of monitoring and adapting their strategies to the market opportunities, technological advances, and competitive threats in the company’s external environment. The firm’s marketing and sales managers play critical roles both in developing market-oriented strategies for individual products and in influencing and helping to formulate corporate and business-level strategies that are responsive to environmental conditions. At the same time, those strategies are usually internally compatible. Each strategy fits with those at other levels as well as with the unique competitive strengths and competencies of the relevant business unit and the company as a whole. As 3M’s new CEO discovered, however, maintaining good strategic fit in a firm with many diverse business units may require some adjustments to one or more levels of strategy. Recent empirical evidence shows that when there is a good fit between a business’s competitive strategy and the strategic marketing programs of its various product or service offerings, the business will achieve better results in terms of sales growth, market share, and profitability than when the two levels of strategy are inconsistent with one another.2 Therefore, this chapter focuses on what marketing decision makers can Strategic Issue and should do to help ensure that the strategic marketing plans they When there is a good fit between a develop are appropriate in light of the available resources and competibusiness’s competitive strategy and the tive thrust of the business that is their organizational home. strategic marketing programs of its various product or service offerings, the business First, we examine the question of how a business might choose to will achieve better results. compete. What generic competitive strategies might a business pursue, Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 229 and in what environmental circumstances is each strategy most appropriate? We’ll also explore whether the same kinds of competitive strategies are relevant for small, singlebusiness organizations and entrepreneurial start-ups as for large multi-SBU firms such as 3M and whether technological shifts, such as the growth of e-commerce, are likely to give birth to new competitive strategies or make some old ones obsolete. Next, we examine the interrelationships between different business competitive strategies and elements of the strategic marketing programs for the various products within the business. How does—or should—a particular competitive strategy influence or constrain marketing programs for the business’s product offerings? And what happens if the market positioning or specific marketing actions that would be most effective for appealing to a product’s target customers do not fit very well with the competitive strategy of the larger business unit? For example, as some of the products made by the drug delivery unit at 3M— such as the inhalers they make for delivering asthma medications—become well-established and mature, they may require marketing actions (e.g., more competitive pricing) that are not consistent with the aggressive product development strategy of the business unit. What should 3M and the marketing manager responsible for inhalers do under such circumstances? How Do Businesses Compete? As mentioned, the essential strategic question at the SBU level is, How are we going to compete in this business? Thus, business strategies are primarily concerned with allocating resources across functional activities and product-markets to give the unit a sustainable advantage over its competitors. Of course, the unit’s core competencies and resources, together with the customer and competitive characteristics of its industry, determine the viability of any particular competitive strategy.3 The 3M drug delivery unit’s strategy of gaining revenue growth via technological leadership and aggressive new product and market development, for instance, will continue to work only if the firm’s R&D, engineering, and marketing competencies and resources continue to outweigh those of its competitors. Consequently, most SBUs pursue a single competitive strategy—one that best fits their market environments and competitive strengths—across all or most of the productmarkets in which they compete. The question is, What alternative strategies are available to a business unit? What are the basic, or generic, competitive strategies most SBUs choose to pursue? Generic Business-Level Competitive Strategies Researchers have identified general categories of business-level competitive strategies based on overall patterns of purpose, practice, and performance in different businesses. As we saw in Chapter 8, Michael Porter distinguishes three strategies—or competitive positions—that businesses pursue to gain and maintain competitive advantages in their various product-markets: (1) overall cost leadership; (2) differentiation—building customer perceptions of superior product quality, design, or service; and (3) focus, in which the business avoids direct confrontation with its major competitors by concentrating on narrowly defined market niches. Porter describes firms that lack a distinctive strategy as being “stuck in the middle” and predicts that they will perform poorly.4 Robert Miles and Charles Snow identified another set of business strategies based on a business’s intended rate of product-market development (new product development, penetration of new markets).5 They classify business units into four strategic types: prospectors, defenders, analyzers, and reactors. Exhibit 9.1 describes each of these business 230 Section Three Developing Strategic Marketing Programs Exhibit 9.1 Definitions of Miles and Snow’s Four Business Strategies Prospector • Operates within a broad product-market domain that undergoes periodic redefinition. • Values being a “first mover” in new product and market areas, even if not all of these efforts prove to be highly profitable. • Responds rapidly to early signals concerning areas of opportunity, and these responses often lead to new rounds of competitive actions. • Competes primarily by stimulating and meeting new market opportunities, but may not maintain strength over time in all markets it enters. Defender • Attempts to locate and maintain a secure position in relatively stable product or service areas. • Offers relatively limited range of products or services compared with competitors. • Tries to protect its domain by offering lower prices, higher quality, or better service than competitors. • Usually not at the forefront of technological/new product development in its industry; tends to ignore industry changes not directly related to its area of operation. Analyzer • An intermediate type; makes fewer and slower product-market changes than prospectors, but is less committed to stability and efficiency than defenders. • Attempts to maintain a stable, limited line of products or services, but carefully follows a selected set of promising new developments in its industry. • Seldom a first mover, but often a second or third entrant in product-markets related to its existing market base—often with a lower-cost or higher-quality product or service offering. Reactor • Lacks any well-defined competitive strategy. • Does not have as consistent a product-market orientation as its competitors. • Not as willing to assume the risks of new product or market development as its competitors. • Not as aggressive in marketing established products as some competitors. • Responds primarily when it is forced to by environmental pressures. Source: Robert E. Miles and Charles C. Snow, Organizational Strategy, Structure, and Process (Palo Alto, CA: Stanford University Press, 1978). Copyright © 2003 by the Board of Trustees of the Leland Stanford Jr. University. strategies briefly. As you can see, businesses pursuing a prospector strategy focus on growth through the development of new products and markets. 3M’s drug delivery business unit illustrates this. Defender businesses concentrate on maintaining their positions in established product-markets while paying less attention to new product development, as is the case with 3M’s industrial tape business unit. The analyzer strategy falls in between these two. An analyzer business attempts to maintain a strong position in its core productmarket(s) but also seeks to expand into new—usually closely related—product-markets. Finally, reactors are businesses with no clearly defined strategy. Even though both the Porter and Miles and Snow typologies have received popular acceptance and research support, neither is complete by itself. For example, a defender business unit could pursue a variety of competitive approaches to protect its market position, such as offering the lowest cost or differentiating itself on quality or service. Chapter Nine 231 Business Strategies: A Foundation for Marketing Program Decisions Thus, we have combined the two typologies in Exhibit 9.2 to provide a more comprehensive overview of business strategies. Exhibit 9.2 classifies business strategies on two primary dimensions: the unit’s desired rate of product-market development (expansion) and the unit’s intended method of competing in its established product-markets. Each of our strategic categories could be further subdivided according to whether a business applies the strategy across a broadly defined product-market domain or concentrates on a narrowly defined segment where it hopes to avoid direct confrontation with major competitors (the focus strategy of Porter). Although this distinction is useful, it is more germane to a discussion of the business’s target market strategy (as discussed in Chapter 7) than to its competitive strategy. Most businesses compete in a reasonably consistent way across all of their product-markets, whether their domain is broad or narrow. Exhibit 9.2 describes only six business strategies, rather than the eight that one might expect. We view reactor and prospector business units as two homogeneous categories. Evidence suggests that a substantial portion of businesses fall into the reactor category. One study, for instance, found that 50 out of 232 businesses examined could be classified as reactors.6 By definition, however, such businesses do not have well-defined or consistent approaches either to new product development or to ways of competing in existing product-markets. In other words, reactors have no clear competitive strategy. Therefore, we will largely ignore them during the rest of this discussion. Prospectors are also shown as a single strategic category in Exhibit 9.2 because the desire for rapid new product or market development is the overriding aspect of their strategy. There is little need for a prospector business to consider how it will compete in the new product-markets it develops because it will face little or no competition—at least not until those markets become established and other firms begin to enter. Exhibit 9.2 Combined Typology of Business-Level Competitive Strategies Emphasis on new product-market growth Heavy emphasis Differentiation Cost leadership Competitive strategy Prospector Units primarily concerned with attaining growth through aggressive pursuit of new product-market opportunities No emphasis Analyzer Defender Units with strong core business; actively seeking to expand into related productmarkets with differentiated offerings Units primarily concerned with maintaining a differentiated position in mature markets Units with strong core business; actively seeking to expand into related productmarkets with low-cost offerings Units primarily concerned with maintaining a low-cost position in mature markets Reactor Units with no clearly defined product-market development or competitive strategy 232 Section Three Developing Strategic Marketing Programs Do the Same Competitive Strategies Work for Single-Business Firms and Start-ups? Even small firms with a single business and only a few related product offerings or startups with a single product must decide how they will compete. And just like an SBU in a major corporation such as 3M, their competitive strategies should be tailored to their unique resources and competencies and aimed at securing a sustainable advantage over existing or potential competitors. Therefore, the same set of generic competitive strategies are just as appropriate for small firms as for business units within larger ones. For example, Pinkberry frozen yogurt shops have captured a significant portion of the upscale ice cream/gelato/ frozen yogurt market in the United States with a differentiated defender strategy. They have successfully differentiated their stores by (1) hiring and training friendly, enthusiastic store personnel, (2) offering more flavors and many more unique toppings than competitors, and (3) generating promotional buzz via celebrity endorsements. Their strategy enabled them to expand to 120 shops in only five years, even though the U. S. frozen dessert market is mature. Impressively, too, Pinkberry has been able to generate substantial global sales by adapting their flavors and toppings to local cultures and tastes. For instance, they offer green tea flavored yogurt in Asian shops, date and pistachio toppings in Kuwait, and Nutrella spread in Russia. By adjusting their differentiated defender strategy from country to country the firm has been able to generate more than a quarter of its income from outside the United States, and that portion is expected to grow in the future.7 However, there is one important difference between single-business and multi-SBU organizations. In smaller single-business firms the distinction between business-level competitive strategy and marketing strategy tends to blur and the two strategies blend into one. Pinkberry’s competitive strategy, for instance, is essentially the same as the market positioning of its stores: shops that offer high-quality frozen yogurt with tons of unique flavors and toppings and fast, friendly customer service. Another difference applies to entrepreneurial start-ups. Most start-ups do not have the resources to succeed by competing as a “me-too” competitor in a well-established and highly competitive product-market. By definition they do not have an established market position to defend. Therefore, while the taxonomy of comStrategic Issue petitive strategies is still relevant to entrepreneurial firms, in reality most While the taxonomy of competitive of them—at least those that stand a reasonable chance of success—begin strategies is still relevant to entrepreneurial firms, in reality most of them—at least life as prospectors. They compete primarily by developing a unique those that stand a reasonable chance of product or service that meets the needs and preferences of a customer success—begin life as prospectors. segment that is not being well served by established competitors. The critical question for a start-up firm, though, is, What happens when the new product matures and competitors arrive on the scene? This and similar issues related to strategic change are examined in more detail later in this chapter. Do the Same Competitive Strategies Work for Service Businesses? What is a service? Basically, services can be thought of as intangibles and goods as tangibles. The former can rarely be experienced in advance of the sale, while the latter can be experienced, even tested, before purchase.8 Using this distinction, a service can be defined as “any activity or benefit that one party can offer to another that is essentially intangible and that does not result in the ownership of anything. Its production may or may not be tied to a physical product.”9 Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 233 We typically associate services with nonmanufacturing businesses, even though service is often an indispensable part of a goods producer’s offering. Services such as applications engineering, system design, delivery, installation, training, and maintenance can be crucial for building long-term relationships between manufacturers and their customers, particularly in consumer durable and industrial products businesses. Thus, almost all businesses are engaged in service to some extent. Many organizations are concerned with producing and marketing a service as their primary offering rather than as an adjunct to a physical product. These organizations include public-sector and not-for-profit service organizations, such as churches, hospitals, universities, and arts organizations. The crucial question is this: To be successful, must service organizations employ different competitive strategies than goods manufacturers? The framework we used to classify business-level competitive strategies in Exhibit 9.2 is equally valid for service businesses. Some service firms, such as Super 8 or Days Inn in the lodging industry, attempt to minimize costs and compete largely with low prices. Other firms, like Marriott, differentiate their offerings on the basis of high service quality or unique benefits. Similarly, some service businesses adopt prospector strategies and aggressively pursue the development of new offerings or markets. For instance, American Express’s Travel Related Services Division has developed a variety of new services tailored to specific segments of the firm’s credit-card holders. Other service businesses focus narrowly on defending established positions in current markets. Still others can best be described as analyzers pursuing both established and new markets. For instance, Emirates, an airline whose competitive strategy is discussed in Exhibit 9.3, might best be described as a low-cost analyzer. Exhibit 9.3 H Emirates Airline—Competing for Business Travelers while Building New Markets abib Fekih was traveling the Mideast as a salesman for European planemaker Airbus in 1985, the year Dubai’s ruling family started a small airline called Emirates to shuttle Pakistani workers between Karachi and Dubai aboard two leased planes. “Nobody believed Emirates could be a successful airline,” recalls Fekih, who now heads Airbus’ Mideast subsidiary. “It was the joke of the day.” Emirates is a joke no longer. It has grown into the world’s tenth-largest airline, earning $964 million in profits in 2010 on sales of nearly $12 billion. One important factor underlying Emirates’ success is simply the geographic location of Dubai. It provides a convenient hub that has enabled Emirates to offer more convenient routes for business travelers shuttling between Europe or the United States and Asia. And the rapid growth of many Asian economies in recent years has, in turn, generated increased demand and new customers for Emirates’ flights. Of course, many other airlines fly between Asia and the West, so Emirates has attempted to strengthen and defend its share of that market by offering good service with very low fares. Aggressive expansion via the purchase of new planes from Boeing and Airbus has made the company’s fleet of 142 all wide-body jets the youngest and most efficient of any airline. And when its recent order of 90 Airbus A380 superjumbo jets is delivered, it will be even more efficient. The A380’s operating costs are 12 percent lower than the newest 747, and it carries about 500 passengers. Therefore, Emirates’s cost per passenger mile are lower than any other intercontinental airline, and will be even lower in coming years. This allows the company to charge lower fares while still maintaining good service, expanding its routes to “secondary” airports like Manchester in the UK and Kolkata in India, and still make money; In other words, to implement a very successful low-cost analyzer strategy. Sources: Steve Rothwell and Andrea Rothman, “Emirates Wins with Big Planes and Low Costs,” Bloomberg Businessweek, July 5, 2010, pp. 18–19; “Rulers of the New Silk Road,” The Economist, July 5, 2010, pp. 75–77; and the Emirates Group’s 2009–2010 Annual Report on the firm’s website, www.ekgroup.com. 234 Section Three Developing Strategic Marketing Programs A study of the banking industry provides empirical evidence that service businesses actually do pursue the same types of competitive strategies as goods producers. The 329 bank CEOs who responded to the survey had little trouble categorizing their institution’s competitive strategies into one of Miles and Snow’s four types. Fifty-four of the executives reported that their banks were prospectors, 87 identified their firms as analyzers, 157 as defenders, and 31 as reactors.10 Do the Same Competitive Strategies Work for Global Competitors? In terms of the strategies described in Exhibit 9.2, businesses that compete in multiple global markets almost always pursue one of the two types of analyzer strategy. They must continue to strengthen and defend their competitive position in their home country—and perhaps in other countries where they are well-established—while simultaneously pursuing expansion and growth in new international markets. When examined on a country-by-country basis, however, the same business unit might be viewed as pursuing different competitive strategies in different countries. For instance, while 3M’s industrial tape group competes like a differentiated defender in the United States, Canada, and some European countries where it has established large market shares, it competes more like a prospector when attempting to open and develop new markets in emerging economies such as China and Mexico. This suggests that a single SBU may need to engage in different functional activities (including different strategic marketing programs)—and perhaps even adopt different organizational structures to implement those activities—across the various countries in which it competes. For example, Huawei Technologies Co., located in Shenzhen, China, was able to compete very effectively in its home market as a low-cost analyzer. The company earned $2.4 billion in revenues in 2001 selling internet switches and routers patterned after the equipment manufactured by Cisco Systems and Alcatel, but at prices as much as 40 percent lower. However, only 10 percent of those revenues came from outside China. In order to compete more effectively in the developed markets of Europe and North America, Huawei had to expand its product line and develop new equipment with more innovative features and greater functionality. In other words, it had to compete more like a prospector in those markets. Consequently, the firm greatly increased its R&D spending and product development efforts. It also developed marketing programs geared to generating brand awareness and trial among potential customers. For the time being, Huawei relies heavily on alliances with established distributors and value-added resellers to develop and implement marketing programs in developed markets. For instance, the Vierling Group serves as Huawei’s distributor in Germany, and the firm has also signed a distribution deal with IBM. As a result of these strategic adjustments, Huawei’s contract sales topped $28.5 billion in 2010, and nearly two-thirds of those sales came from outside China.11 Will the Internet Change Everything? Some analysts argue that the internet will change the way firms compete. The internet makes it easier for buyers and sellers to compare prices, reduces the number of middlemen necessary between manufacturers and end users, cuts transaction costs, improves the functioning of the price mechanism, and thereby increases competition.12 One possible outcome of all these changes is that it will be harder for firms to differentiate themselves on any basis other than low price. All the business-level competitive strategies focused on differentiation will become less viable, while firms pursuing low-cost strategies will be more successful. Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 235 While we agree that the internet has increased both efficiency and competitiveness in many product-markets, we doubt that competition will focus exclusively on price. For one thing, innovation is likely to continue—and probably accelerate—in the future. Unique new products and services will continue to emerge and provide a way for the innovator to gain a competitive advantage, at least in the short term. Thus, firms with the resources and competencies necessary to produce a continuing stream of new product or service offerings that appeal to one or more customer segments—that is, to effectively implement a prospector strategy—should be successful regardless of whether they are the lowest-cost producers in their industries. Amazon, the largest e-tailer as of early 2011, is generally not the lowest priced. In addition, the internet is primarily a communications channel. While it facilitates the dissemination of information, including price information, the goods and services themselves will continue to offer different features and benefits. As customers gather more information from the internet and become better informed, they are less likely to be swayed by superficial distinctions between brands. But if a firm offers unique benefits that a segment of customers perceive as meaningful, it should still be able to differentiate its offering and command a premium price, at least until its competitors offer something similar. Finally, the internet will make it easier for firms—both manufacturers and retailers—to customize their offerings and personalize their relationships with their customers. Such personalization should differentiate the firm from its competitors in the customer’s Strategic Issue eyes and improve customer loyalty and retention. For instance, in Chapter The internet will make it easier for firms to 5 we discussed the role of the internet in developing logistical alliances customize their offerings and personalize among organizational buyers and their suppliers. Consumer goods and sertheir relationships with their customers. vices firms, internet portals, and social networking sites are also using the internet’s interactive capabilities to acquire and communicate information and build customer relationships. For example, about 40 percent of shoppers who buy clothing at Lands’ End— both men and women—choose a customized garment tailored to their personal dimensions over the standard-sized equivalent, even though each customized garment costs more and takes longer to arrive. And customers who customize are more loyal to the company. Reorder rates for custom-clothing buyers are 35 percent higher than for buyers of Land’s End’s standard items.13 How Do Competitive Strategies Differ from One Another? In Chapter 2 we said that all strategies consist of five components or underlying dimensions: scope (or breadth of strategic domain), goals and objectives, resource deployments, a basis for achieving a sustainable competitive advantage, and synergy. But the generic strategies summarized in Exhibit 9.2 are defined largely by their differences on only one dimension: the nature of the competitive advantage sought. Each strategy also involves some important differences on the other four dimensions—differences that are outlined in Exhibit 9.4 and discussed below. Those differences provide insights concerning the conditions under which each strategy is most appropriate and about the relative importance of different marketing actions in implementing them effectively. Differences in Scope Both the breadth and stability of a business’s domain are likely to vary with different strategies. This, in turn, can affect the variables the corporation uses to define its various businesses. At one extreme, defender businesses, whether low-cost or differentiated, tend 236 Section Three Developing Strategic Marketing Programs Exhibit 9.4 How Business Strategies Differ in Scope, Objectives, Resource Deployments, and Synergy Differentiated defender Prospector Analyzer Mature/stable/well-defined domain; mature technology and customer segments Mature/stable/ well-defined domain; mature technology and customer segments Broad/dynamic domains; technology and customer segments not well-established Mixture of defender and prospector strategies Very little Little Extensive Mixture of defender and prospector strategies Effectiveness (increase in market share) Low Low High Mixture of defender and prospector strategies Efficiency (ROI) High High Low Mixture of defender and prospector strategies • Resource deployment Generate excess cash (cash cows) Generate excess cash (cash cows) Need cash for product development (question marks or stars) Need cash for product development but less so than do prospectors • Synergy Need to seek operating synergies to achieve efficiencies Need to seek operating synergies to achieve efficiencies Danger in sharing operating facilities and programs—better to share technology/ marketing skills Danger in sharing operating facilities and programs— better to share technology/ marketing skills Dimensions Low-cost defender • Scope • Goals and objectives Adaptability (new product success) to operate in relatively well-defined, narrow, and stable domains where both the product technology and the customer segments are mature. At the other extreme, prospector businesses usually operate in broad and rapidly changing domains where neither the technology nor customer segments are well established. The scope of such businesses often undergoes periodic redefinition. Thus, prospector businesses are typically organized around either a core technology that might lead to the development of products aimed at a broad range of customer segments or a basic customer need that might be met with products based on different technologies. The latter is the approach taken by 3M’s drug delivery systems business. Its mission is to satisfy the health needs of a broad range of patients with new products developed from technologies drawn from other business units within the firm. Analyzer businesses, whether low-cost or differentiated, fall somewhere in between the two extremes. They usually have a well-established core business to defend, and often their domain is primarily focused on that business. However, businesses pursuing this intermediate strategy are often in industries that are still growing or experiencing technological changes. Consequently, they must pay attention to the emergence of new customer segments and/or new product types. As a result, managers must review and adjust the domain of such businesses from time to time. Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 237 Differences in Goals and Objectives Another important difference across generic business-level strategies with particular relevance for the design and implementation of appropriate marketing programs is that different strategies often focus on different objectives. SBU and product-market objectives might be specified on a variety of criteria, but to keep things simple, we focus on only three performance dimensions of major importance to both business-unit and marketing managers: 1. Effectiveness. The success of a business’s products and programs relative to those of its competitors in the market. Effectiveness is commonly measured by such items as sales growth relative to competitors or changes in market share. 2. Efficiency. The outcomes of a business’s programs relative to the resources used in implementing them. Common measures of efficiency are profitability as a percent of sales and return on investment. 3. Adaptability. The business’s success in responding over time to changing conditions and opportunities in the environment. Adaptability can be measured in a variety of ways, but the most common ones are the number of successful new products introduced relative to competitors or the percentage of sales accounted for by products introduced within the last five years. However, it is very difficult for any SBU, regardless of its competitive strategy, to simultaneously achieve outstanding performance on even this limited number of dimensions, because they involve substantial trade-offs. Good performance on one dimension often means sacrificing performance on another.14 For example, developing successful new products or attaining share growth often involves large marketing budgets, substantial up-front investment, high operating costs, and a shaving of profit margins—all of which reduce ROI. This suggests that managers should choose a competitive strategy with a view toward maximizing performance on one or two dimensions, while expecting to sacrifice some level of performance on the others, at least in the short term. Over the longer term, of course, the chosen strategy should promise discounted cash flows that exceed the business’s cost of capital and thereby increase shareholder value. As Exhibit 9.4 indicates, prospector businesses are expected to outperform defenders on both new product development and market-share growth. On the other hand, both defender strategies should lead to better returns on investment. Differentiated defenders likely produce higher returns than low-cost defenders, assuming that the greater expenses involved in maintaining their differentiated positions can be more than offset by the higher margins gained by avoiding the intense price competition low-cost competitors often face. Once again, both low-cost and differentiated analyzer strategies are likely to fall between the two extremes.15 Differences in Resource Deployments Businesses following different strategies also tend to allocate their financial resources differently across product-markets, functional departments, and activities within each functional area. Prospector—and to a lesser degree, analyzer—businesses devote a relatively large proportion of resources to the development of new product-markets. Because such product-markets usually require more cash to develop than they produce short term, businesses pursuing these strategies often need infusions of financial resources from other parts of the corporation. In portfolio terms, they are “question marks” or “stars.” Defenders, on the other hand, focus the bulk of their resources on preserving existing positions in established product-markets. These product-markets are usually profitable; therefore, defender businesses typically generate excess cash to support product and market development efforts in other business units within the firm. They are the “cash cows.” 238 Section Three Developing Strategic Marketing Programs Resource allocations among functional departments and activities within the SBU also vary across businesses pursuing different strategies. For instance, marketing budgets tend to be the largest as a percentage of an SBU’s revenues when the business is pursuing a prospector strategy; they tend to be the smallest as a percentage of sales under a low-cost defender strategy. We discuss this in more detail later. Differences in Sources of Synergy Because different strategies emphasize different methods of competition and different functional activities, a given source of synergy may be more appropriate for some strategies than for others. At one extreme, the sharing of operating facilities and programs may be an inappropriate approach to gaining synergy for businesses following a prospector strategy. And to a lesser extent, this may also be true for both types of analyzer strategies. Such sharing can reduce an SBU’s ability to adapt quickly to changing market demands or competitive threats. Commitments to internally negotiated price structures and materials, as well as the use of joint resources, facilities, and programs, increase interdependence among SBUs and limit their flexibility. It is more appropriate for such businesses to seek synergy through the sharing of a technology, engineering skills, or market knowledge—expertise that can help improve the success rate of their product development efforts. Thus, 3M’s drug delivery systems business attempts to find medical applications for new technologies developed in many of the firm’s other business units. At the other extreme, however, low-cost defenders should seek operating synergies that will make them more efficient. Synergies that enable such businesses to increase economies of scale and experience curve effects are particularly desirable. They help reduce unit costs and strengthen the strategy’s basis of competitive advantage. The primary means of gaining such operating synergies is through the sharing of resources, facilities, and functional activities across product-market entries within the business unit or across related business units.16 Emerson Electric, for instance, formed an “operating group” of several otherwise autonomous business units that make different types of electrical motors and tools. By sharing production facilities, marketing activities, and a common salesforce, the group was able to reduce the costs of both per-unit production and marketing. Deciding When a Strategy Is Appropriate: The Fit between Business Strategies and the Environment Because different strategies pursue different objectives in different domains with different competitive approaches, they do not all work equally well under the same environmental circumstances. The question is, Which environmental situations are most amenable to the successful pursuit of each type of strategy? Exhibit 9.5 outlines some major market, technological, and competitive conditions—plus a business units’ strengths relative to its competitors—that are most favorable for the successful implementation of each generic business strategy. We next discuss the reasons each strategy fits best with a particular set of environmental conditions. Appropriate Conditions for a Prospector Strategy A prospector strategy is particularly well suited to unstable, rapidly changing environments resulting from new technology, shifting customer needs, or both. In either case, such industries tend to be at an early stage in their life cycles and offer many opportunities for Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 239 Exhibit 9.5 Environmental Factors Favorable to Different Business Strategies Differentiated defender External factors Prospector Analyzer Low-cost defender Industry and market Industry in introductory or early growth stage of life cycle, many potential customer segments as yet unidentified and/or undeveloped. Industry in late growth or early maturity stage of life cycle, one or more product offerings currently targeted at major customer segments, but some potential segments may still be undeveloped. Industry in maturity or decline stage of life cycle; current offerings targeted at all major segments; sales primarily due to repeat purchases/replacement demand. Technology Newly emerging technology; many applications as yet undeveloped. Basic technology well developed but still evolving; product modifications and improvements—as well as emergence of new competing technologies—still likely. Basic technology fully Basic technology developed and stable; fully developed few major modifications and stable; or improvements likely. few major modifications or improvements likely. Competition Few established competitors; industry structure still emerging; single competitor holds commanding share of major market segments. Large number of competitors, but future shakeout likely; industry structure still evolving; one or more competitors hold large shares in major segments but continuing growth may allow rapid changes in relative shares. Small to moderate Small to moderate number of wellnumber of wellestablished established competitors; industry competitors; structure stable, though industry structure acquisitions and stable, though consolidation possible; acquisitions and maturity of markets consolidation means relative shares possible; maturity of competitors tend to of markets means be reasonably stable relative shares of over time. competitors tend to be reasonably stable over time. Business’s relative strengths SBU (or parent) has strong R&D, product engineering, and marketing research and marketing capabilities. SBU (or parent) has good R&D, product engineering, and marketing research capabilities, but not as strong as some competitors’; has either low-cost position or strong sales, marketing, distribution, or service capabilities in one or more segments. SBU has no outstanding strengths in R&D or product engineering; costs are higher than at least some competitors’; SBU’s outstanding strengths are in process engineering and quality control and/or in marketing, sales, distribution, or customer services. Industry in maturity or decline stage of life cycle; current offerings targeted at all major segments; sales primarily due to repeat purchase/ replacement demand. SBU (or parent) has superior sources of supply and/or process engineering and production capabilities that enable it to be low-cost producer; R&D, product engineering, marketing, sales, or service capabilities may not be as strong as some competitors’. 240 Section Three Developing Strategic Marketing Programs new product-market entries. Industry structure is often unstable because few competitors are present and their relative market shares can shift rapidly as new products are introduced and new markets develop. Because they emphasize the development of new products and/or new markets, the most successful prospectors are usually strong in, and devote substantial resources to, two broad areas of competence: first, R&D, product engineering, design, and other functional areas that identify new technology and convert it into innovative products; second, marketing research, marketing and sales—functions necessary for the identification and development of new market opportunities. In some cases, however, even though a prospector business has strong product development and marketing skills, it may lack the resources to maintain its early lead as productmarkets grow and attract new competitors. For example, Minnetonka was the pioneer in several health and beauty-aid product categories with brands like Softsoap liquid soap and Check-Up plaque-fighting toothpaste. However, because competitors like Procter & Gamble and Colgate-Palmolive introduced competing brands with advertising and promotion budgets much larger than Minnetonka could match, the firm was eventually forced to change its strategy and concentrate on manufacturing products under licenses from larger firms. Appropriate Conditions for an Analyzer Strategy The analyzer strategy is a hybrid. On the one hand, analyzers are concerned with defending—via low costs or differentiation in quality or service—a strong share position in one or more established product-markets. At the same time, the business must pay attention to new product development to avoid being leapfrogged by competitors with more technologically advanced products or being left behind in newly developing application segments within the market. This dual focus makes the analyzer strategy appropriate for well-developed industries that are still experiencing some growth and change as a consequence of evolving customer needs and desires or continuing technological improvements. Automobile manufacturing is an example of such an industry. Competitors are relatively few and well-established, the market is relatively mature except in emerging economics like China, but technology continues to advance. And recent changes in the industry’s environment—such as rising fuel prices and concerns over the impact of auto emissions on global warming—have underscored the need for more efficient and ecologically friendly technologies. Thus, auto manufacturers around the world, including Toyota, Honda, General Motors, and many others, are investing billions in a variety of different technologies to develop a new generation of cars, as described in Exhibit 9.6. The actions of Toyota and Honda illustrate one problem with an analyzer strategy. Few businesses have the resources and competencies needed to successfully defend an established core business while generating revolutionary new products at the same time. Success on both dimensions requires strengths across virtually every functional area, and few businesses (or their parent companies) have such universal strengths. Also, defending a successful core business can produce a corporate culture and policies that are difficult to change and that may resist the kind of innovative thinking and risk taking needed to develop radical new products. Therefore, analyzers are often not as innovative in new product development as prospectors. And they may not be as profitable in defending their core businesses as defenders. Appropriate Conditions for a Defender Strategy A defender strategy makes sense only when a business has something worth defending. It is most appropriate for units with a profitable share of one or more major segments in a relatively mature, stable industry. Consistent with the “constant improvement” principles Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions Exhibit 9.6 241 Analyzer Strategies in the Auto Industry G iven that Toyota was already selling 300,000 of its Prius gas–electric hybrid cars annually by 2008, it was in the strongest position to respond to the double whammy of rising gas prices and growing concerns over the impact of exhaust emissions on global warming that caught the auto industry off guard that year. The firm’s strategy, at least for the short term, was to rapidly expand its hybrid offerings and invest in R&D to further improve their efficiency. New hybrid models—including one in the firm’s luxury Lexus line—were introduced in 2009 along with a lighter, more fuel-efficient version of the Prius. Longer term, the company is eyeing plug-in electric cars. To that end, Toyota has created a special battery research division, complete with more than 100 engineers and technicians. As a first step, Toyota plans to introduce a plug-in version of the Prius hybrid in 2012. Honda also plans to beef up its hybrid offerings in the short term, but it also offers new clean-diesel engines, which are purportedly 25 percent more fuel efficient than gas engines, in its larger cars—including those that carry the luxury Acura brand. For the longer term, Honda is focusing on fuel cell vehicles which run on liquid hydrogen and emit only water. In 2008 the firm began production on a fuel cell model called the FCX Clarity which can go 280 miles on a tank of hydrogen and boast better fuel efficiency than comparable gas or hybrid cars. While Honda will lease just 200 Claritys in Japan and the United States through the early 2010s, it hopes to have the technology ready for the mass market within 10 years. But since every Clarity currently costs an estimated $1 million to produce, cost reductions via economies of scale and experience will be critical for the car’s future. Many other auto companies are placing their bets on electric motors. Electric cars come in two varieties. Pure electric cars, like the Nissan Leaf and the Mitsubishi i-MiEV (introduced in 2010) can be driven for 100 miles or so before they need to be plugged in and recharged. Range-extenders, like the General Motors’ Volt (introduced as the Ampera in Europe in 2010), can be recharged either by plugging into an outlet or by a small onboard gas engine. And all of the current competitors are nervously looking over their shoulders in anticipation of electric vehicles from China. The Chinese government is supporting electric car technology more than any other country. Beijing has already pledged over $17 billion for R&D, the installation of charging stations, customer subsidies, and the like. Katsuaki Watanabe, Toyota’s president, declared, “Without focusing on measures to address global warming and energy issues, there can be no future for our auto business.” The interesting question is which of the many new technologies being pursued will prove the most effective and appealing means of addressing those issues. Sources: Ian Rowley, “Japan’s New Green Car Push,” www .businessweek.com, July 2, 2008; “A Sparky New Motor,” The Economist, October 9, 2010, pp. 89–90; and Brian Dumaine, “China Charges into Electric Cars,” Fortune. November 1, 2010, pp. 138–48. of total quality management, most successful defenders initiate process improvements, product improvements, or line extensions to help protect and strengthen their established positions. But they devote relatively few resources to basic R&D or the development of innovative new products. Thus, a defender strategy works best in industries where the basic technology is not very complex or where it is well-developed and unlikely to change dramatically over the short term. For instance, Pillsbury’s prepared-dough products SBU— now part of the General Mills Company—has pursued a differentiated defender strategy for years. The unit generates substantial profits from well-established refrigerated dough products like Pillsbury Crescent rolls and Grands biscuits. But while it has introduced a number of line extensions over the years, most have been reconfigurations of the same basic dough-in-a-can technology, such as Soft Breadsticks. Differentiated Defenders To effectively defend its position by differentiation, a business must be strong in those functional areas critical for maintaining its particular competitive advantages over time. If a business’s differentiation is based on superior 242 Section Three Developing Strategic Marketing Programs product quality, those key functional areas include production, process engineering, quality control, and perhaps product engineering to develop product improvements. The effort to develop and maintain a quality differentiation can be worthwhile, though, because evidence suggests that superior product quality has a strong impact on a business’s return on investment—an important performance objective for defenders.17 Regardless of the basis for differentiation, marketing is also important for the effective implementation of a differentiated defender strategy. Marketing activities that track changing customer needs and competitive actions and communicate the product offering’s unique advantages through promotional and sales efforts to maintain customer awareness and loyalty are particularly important. Low-Cost Defenders Successful implementation of a low-cost defender strategy requires the business to be more efficient than its competitors. Thus, the business must establish the groundwork for such a strategy early in the growth stage of the industry. Achieving and maintaining the lowest per-unit cost usually means that the business has to seek large volume from the beginning—through some combination of low prices and promotional efforts—to gain economies of scale and experience. At the same time, such businesses must also invest in more plant capacity in anticipation of future growth and in state-of-the-art equipment to minimize production costs. This combination of low margins and heavy investment can be prohibitive unless the parent corporation can commit substantial resources to the business or unless extensive sharing of facilities, technologies, and programs with other business units is possible. In recent years, some firms—particularly those in more developed economies—have tried to reduce their costs by outsourcing production and a few other corporate functions, such as customer call centers and human resources departments. However, outsourcing can lead to problems, like reduced quality control and more complicated logistics, that may raise the firm’s costs in other areas. And because the efficiencies gained through outsourcing can be easily duplicated by competitors, it is not an effective way to build a sustainable low-cost advantage.18 The low-cost defender’s need for efficiency typically forces the standardization of product offerings and marketing programs across customer segments to achieve scale effects. Thus, such a strategy is usually not so effective in fragmented markets desiring customized offerings as it is in commodity industries such as basic chemicals, steel, or flour, or in industries producing low-technology components such as electric motors or valves. While low-cost defenders emphasize efficiency and low price as the primary focus of their competitive strategy, it is important to keep in mind that businesses pursuing other strategies should also operate as efficiently as possible given the functional activities necessary to implement those strategies. Some of the most effective businesses are those that work simultaneously to lower costs and improve quality and service.19 And operating efficiency is likely to become even more critical as the internet makes it easier for customers to compare prices across alternative suppliers or to obtain low-price bids via “buyers’ auction” sites, such as www.MetalSite.com, as discussed in Chapter 5. How Different Business Strategies Influence Marketing Decisions Business units typically incorporate a number of distinct product-markets. A given entry’s marketing manager monitors and evaluates the product’s environmental situation and develops a marketing program suited to it. However, the manager’s freedom to design Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 243 such a program may be constrained by the business unit’s competitive strategy. This is because different strategies focus on different objectives and seek to gain and maintain a competitive advantage in different ways. As a result, different functions within the SBU— and different activities within a given functional area, such as marketing—are critical for the success of different strategies. There are, therefore, different key success factors inherent in the various generic business strategies. This constrains the individual marketing manager’s freedom of action in two basic ways. First, because varying functions within the business Strategic Issue unit are more important under different strategies, they receive differThe SBU’s strategy influences the amount ent proportions of the SBU’s total resources. Thus, the SBU’s strategy of resources committed to marketing and influences the amount of resources committed to marketing and ultiultimately the budget available. mately the budget available to an individual marketing manager within the business unit. Second, the SBU’s choice of strategy influences both the kind of market and competitive situation that individual product-market entries are likely to face and the objectives they are asked to attain. Both constraints have implications for the design of marketing programs for individual products within an SBU. It is risky to draw broad generalizations about how specific marketing policies and program elements might fit within different business strategies. While a business strategy is a general statement about how an SBU chooses to compete in an industry, that unit may comprise a number of product-market entries facing different competitive situations in various markets. Thus, there is likely to be a good deal of variation in marketing programs, and in the freedom individual marketing managers have in designing them, across products within a given SBU. Still, a business’s strategy does set a general direction for the types of target markets it will pursue and how the unit will compete in those markets. And it does have some influence on marketing policies that cut across product-markets. Exhibit 9.7 outlines differences in marketing policies and program elements that occur across businesses pursuing different strategies, and those differences are discussed below. Product Policies One set of marketing policies defines the nature of the products the business will concentrate on offering to its target markets. These policies concern the breadth or diversity of product lines, their level of technical sophistication, and the target level of product quality relative to competitors. Because prospector businesses rely heavily on the continuing development of unique new products and the penetration of new markets as their primary competitive strategy, policies encouraging broader and more technically advanced product lines than those of competitors should be positively related to performance on the critical dimension of share growth. The diverse and technically advanced product offerings of 3M’s drug delivery systems SBU are a good example of this. Whether a prospector’s products should be of higher quality than competitors’ products is open to question. Quality is hard to define; it can mean different things to different customers. Even so, it is an important determinant of business profitability. Thus, Hambrick suggests that in product-markets where up-to-the-minute styling or technical features are key attributes in customers’ definitions of quality, high-quality products may play a positive role in determining the success of a prospector strategy. In markets where the critical determinants of quality are reliability or brand familiarity, the maintenance of relatively high product quality is likely to be more strongly related to the successful performance of defender businesses, particularly differentiated defenders.20 244 Section Three Developing Strategic Marketing Programs Exhibit 9.7 Differences in Marketing Policies and Program Components across Businesses Pursuing Different Strategies Strategy Prospector Differentiated defender Low-cost defender Product-line breadth relative to competitors ⫹ ⫹ ⫺ Marketing policies and program components Product policies • • Technical sophistication of products relative to competitors ⫹ ⫹ ⫺ • Product quality relative to competitors ? ⫹ ⫺ • Service quality relative to competitors ? ⫹ ⫺ ⫹ ⫹ ⫺ Price policies • Price levels relative to competitors Distribution policies • Degree of forward vertical integration relative to competitors ⫺ ⫹ ? • Trade promotion expenses as percent of sales relative to competitors ⫹ ⫺ ⫺ Promotion policies • Advertising expenses as percent of sales relative to competitors ⫹ ? ⫺ • Sales promotions expenses as percent of sales relative to competitors ⫹ ? ⫺ • Salesforce expenses as percent of sales relative to competitors ? ⫹ ⫺ Key: Plus sign (⫹) = greater than the average competitor. Minus sign (⫺) = smaller than the average competitor. Question mark (?) = uncertain relationship between strategy and marketing policy or program component. Differentiated defenders compete by offering more or better choices to customers than do their competitors. For example, 3M’s commercial graphics business, a major supplier of sign material for truck fleets, has strengthened its competitive position in that market by developing products appropriate for custom-designed signs. Until recently, the use of film for individual signs was not economical. But the use of computer-controlled knives and a new Scotch-brand marking film produce signs of higher quality and at lower cost than those that are hand-painted. This kind of success in developing relatively broad and technically sophisticated product lines should be positively related to the long-term ROI performance of most differentiated defender businesses. However, broad and sophisticated product lines are less consistent with the efficiency requirements of the low-cost defender strategy. For one thing, maintaining technical sophistication in a business’s products requires continuing investments in product and process R&D. For another, broad, complex lines can lead to short production runs and larger inventories. Some of the efficiency problems associated with broader, more-customized product lines may disappear, however, with continuing improvements in computer-assisted design and manufacturing, process reengineering, three-dimensional printing, and the like.21 Instead of, or in addition to, competing on the basis of product characteristics, businesses can distinguish themselves relative to competitors on the quality of service they offer. Such service might take many forms, including engineering and design services, Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 245 alterations, installation, training of customer personnel, or maintenance and repair services. A policy of high service quality is particularly appropriate for differentiated defenders because it offers a way to maintain a competitive advantage in well-established markets.22 The appropriateness of an extensive service policy for low-cost defenders, though, is more questionable if higher operating and administrative costs offset customer satisfaction benefits. Those higher costs may detract from the business’s ability to maintain the low prices critical to its strategy, as well as lowering ROI—at least in the short term. Further, a study of 71 SBUs pursuing a range of competitive strategies suggests that investments aimed at improving service efficiency and thereby reducing costs generally do not have as positive an impact on a unit’s financial performance as service improvements aimed at increasing revenues via improved customer satisfaction and loyalty.23 Pricing Policies Success in offering low prices relative to those of competitors should be positively related to the performance of low-cost defender businesses—for low price is the primary competitive weapon of such a strategy. However, such a policy is inconsistent with both differentiated defender and prospector strategies. The higher costs involved in differentiating a business’s products on either a quality or service basis require higher prices to maintain profitability. Differentiation also provides customers with additional value for which higher prices can be charged. Similarly, the costs and benefits of new product and market development by prospector businesses require and justify relatively high prices. Thus, differentiated defenders and prospectors seldom adhere to a policy of low competitive prices. Distribution Policies Some observers argue that prospector businesses should show a greater degree of forward vertical integration than defender businesses.24 The rationale for this view is that the prospector’s focus on new product and market development requires superior market intelligence and frequent reeducation and motivation of distribution channel members. This can best be accomplished through tight control of company-owned channels. However, these arguments seem inconsistent with the prospector’s need for flexibility in constructing new channels to distribute new products and reach new markets. Attempting to maintain tight control over the behavior of channel members is a more appropriate policy for defenders who are trying to maintain strong positions in established markets. This is particularly true for defenders who rely on good customer service to differentiate themselves from competitors. Thus, it seems more likely that a relatively high degree of forward vertical integration is found among defender businesses, particularly differentiated defenders, while prospectors rely more heavily on independent channel members—such as manufacturer’s representatives or wholesale distributors—to distribute their products.25 Because prospectors focus on new products where success is uncertain and sales volumes are small in the short run, they are likely to devote a larger percentage of sales to trade promotions than are defender businesses. Prospectors rely on trade promotion tools such as quantity discounts, liberal credit terms, and other incentives to induce cooperation and support from their independent channel members. Promotion Policies Extensive marketing communications also play an important role in the successful implementation of both prospector and differentiated defender strategies. The form of that communication, however, may differ under the two strategies. Because prospectors 246 Section Three Developing Strategic Marketing Programs must constantly work to generate awareness, stimulate trial, and build primary demand for new and unfamiliar products, high advertising and sales promotion expenditures are likely to bear a positive relationship to the new product and share-growth success of such businesses. The drug delivery SBU at 3M, for instance, devotes substantial resources to advertising in professional journals and distributing samples of new products, as well as to maintaining an extensive salesforce. Differentiated defenders, on the other hand, are primarily concerned with maintaining the loyalty of established customers by adapting to their needs and providing good service. These tasks can best be accomplished—particularly in industrial goods and services industries—by an extensive, well-trained, well-supported, salesforce.26 Therefore, differentiated defenders are likely to have higher salesforce expenditures than are competitors. Finally, low-cost defenders appeal to their customers primarily on price. Thus, high expenditures on advertising, sales promotion, or the salesforce would detract from their basic strategy and may have a negative impact on their ROI. Consequently, such businesses are likely to make relatively low expenditures as a percentage of sales on those promotional activities. What If the Best Marketing Program for a Product Does Not Fit the Business’s Competitive Strategy? What should a marketing manager do if the market environment facing a particular product or service demands marketing actions that are not consistent with the overall competitive strategy of the business to which it belongs? What if, for example, the product’s target market is rapidly becoming more mature and competitive, but it is housed in a prospector business unit that does not have the cost structure or the personnel to allow the aggressive pricing or excellent customer service that may be needed for the product to compete successfully? Or what if newly emerging technology demands that a mature product category undergo an innovative redesign even though the defender SBU does not have extensive R&D and product development capabilities? If a business unit is focused on a single product category or technological domain—as is the case with 3M’s industrial tape unit—the ideal solution might be for the whole SBU to change its strategy in response to shifting industry circumstances. As the product category matures, for instance, the SBU might switch from a prospector to an analyzer strategy, and ultimately to one of the defender strategies. The problem is that—as we shall see in Chapter 17—effective implementation of different business strategies requires not only different functional competencies and resources but also different organizational structures, decision-making and coordination processes, reward systems, and even personnel. Because such internal structures and processes are hard to change quickly, it can be very difficult for an entire SBU to make a successful transition from one basic strategy to another.27 For example, many of Emerson Electric’s SBUs historically were successful low-cost defenders, but accelerating technological change in their industries caused the corporation to try to convert them to low-cost analyzers who would focus more attention on new product and market development. Initially, however, this attempted shift in strategy resulted in some culture shock, conflict, and mixed performance outcomes within those units. In view of the implementation problems involved, some firms do not try to make major changes in the basic competitive strategies of their existing business units. Instead, they might form new prospector SBUs to pursue emerging technologies and industries rather than expecting established units to handle extensive new product development efforts. Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 247 Similarly, as individual product-market entries gain successful positions in growing markets, some firms move them from the prospector unit that developed them into an existing analyzer or defender unit, or even into a newly formed SBU, better suited to reaping profits from them as their markets mature. For example, a number of innovative products developed at 3M, such as Post-it repositionable notes, have enjoyed sufficient success that new business units were formed to concentrate on defending them as their markets matured. Many successful entrepreneurial start-ups eventually reorganize into two or more business units, one to continue prospecting new products and markets and another to defend the firm’s initial product offering as its market matures. Finally, some firms that are technological leaders in their industries may divest or license individual product-market entries as they mature rather than defend them in the face of increasing competition and eroding margins. This approach is relatively common at firms such as 3M and DuPont. Because the marketing manager responsible for a given product-market entry is usually most closely tuned-in to changes in the market environment, he or she bears the responsibility for pointing out any mismatches between what is best for the product and the capabilities of the organizational unit to which it belongs. The marketer should develop a marketing strategy that makes the most sense in light of a detailed analysis of the available customer and competitive information and present a strong case for the resources necessary to implement the plan. If those resources are not available within the business unit, or if the marketing strategy is inconsistent with the SBU’s objectives or competitive strategy, top management faces a choice of moving the product to a more benign unit of the firm or rejecting the recommended strategy. If the strategy is rejected, the marketer will likely have to make compromises to the strategy to make it fit better with the competitive thrust of the SBU, even though an attractive opportunity may be lost. But if the marketer has great confidence in the recommended strategy, he or she might opt to quit the firm and pursue the opportunity elsewhere, as was the case with Jim Watkins as discussed in Exhibit 9.8. Exhibit 9.8 W Jim Watkins Takes a Hike hen he was a product manager at the Pillsbury Company in the early 1970s, James D. Watkins became convinced that microwave technology represented a major opportunity for the packaged food industry. Consequently, he developed a marketing plan that proposed the pioneering development and aggressive introduction of a line of microwavable food products, starting with microwave popcorn. However, the business unit he worked for—and the entire Pillsbury Company at that time—was focused on defending strong positions in established markets, largely through incremental line extensions and product improvements. In other words, it was pursuing more of an analyzer strategy. As a result, top management rejected Watkins’s proposal as being too risky and requiring resources and capabilities that were in short supply. Watkins subsequently quit Pillsbury, founded a new firm called Golden Valley Microwave, attracted venture capital, hired some food scientists to do the necessary R&D, and began to market ActII microwave popcorn through large mass merchandisers such as Walmart. As Watkins had predicted in his original marketing plan, the availability of microwavable foods spurred a rapid increase in consumer demand for microwave ovens, which in turn increased demand for more microwavable foods. His new company grew rapidly, and a few years later he sold it to ConAgra for many millions of dollars. But don’t be too critical of Pillsbury. Like a good analyzer, the company avoided playing the risky role of the pioneer, but it eventually responded to the growing potential of microwave technology and successfully launched its own line of microwavable foods, including popcorn. 248 Section Three Developing Strategic Marketing Programs Take-aways 1. Research suggests that a business is likely to achieve superior revenue growth, market share, and profitability when there is a good fit between its competitive strategy and the strategic marketing programs of its various product or service offerings. 4. Because the various business-level strategies focus on different objectives and seek to gain a competitive advantage in different ways, marketing may play a different role under each of the strategies, and varying marketing actions may be called for. 2. Business-level competitive strategies can be usefully categorized into (1) prospector strategies focused on growth via the development of new products and markets; (2) defender strategies primarily concerned with defending strong positions in established markets through either low prices or offering customers superior value in terms of product quality or service; and (3) analyzer strategies, which are hybrids of the other two strategies. 5. The marketing decision maker’s job is to develop a sound, evidence-based marketing strategy for his or her offering and to make a persuasive case for its support. If that strategy does not fit the objectives or available resources and competencies of the business unit in which the product is housed, top management may choose to move the product to a more amenable unit or require adjustments to the strategy. 3. The generic competitive strategies described in the previous point apply equally well to services and physical products, single-product start-ups and multidivisional corporations, and global and domestic operations, and they are unlikely to change dramatically due to the rise of e-commerce. Self-diagnostic questions to test your ability to apply the analytical tools and concepts in this chapter to marketing decision making may be found at this book’s website at www.mhhe.com/mullins8e. Endnotes 1. Material for this example was obtained from The 3M Company 2010 Annual Report and other information found on the company’s website, www.3m.com; Jerry Useem, “Scotch Tape Plus Innovation Equals?”, Fortune, August 12, 2002, pp. 127–32; Brian Hindo, “At 3M, A Struggle between Efficiency and Creativity,” BusinessWeek—Indepth, June 2007, pp. in8–in14; and Will Daley, “3M Moves Most Capital Spending Outside U. S. for First Time,” Bloomberg Businessweek Online (www.Businessweek .com), April 26, 2011. 2. Stanley F. Slater and Eric M. Olson, “Marketing’s Contribution to the Implementation of Business Strategy: An Empirical Analysis,” Strategic Management Journal 22 (November 2001), pp. 1055–67; Eric M. Olson, Stanley F. Slater, and G. Tomas Hult, “The Performance Implications of Fit among Business Strategy, Marketing Organization Structure, and Strategic Behavior,” Journal of Marketing 69 (July 2005), pp. 49–65; and Stanley F. Slater, Eric M. Olson, and G. Thomas M. Hult, “Worried about Strategy Implementation? Don’t Overlook Marketing’s Role,” Business Horizons 53 (2010), pp. 469–79. 3. C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review 68 (May–June 1990), pp. 79–91. 4. Michael E. Porter, Competitive Strategy (New York: Free Press, 1980). Also see Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985). 7. Leslie Patton, “Pinkberry Looks Abroad to Keep Its Cool,” Bloomberg Businessweek. May 2, 2011, pp. 18–20. 8. Theodore Levitt, The Marketing Imagination (New York: Free Press, 1986), pp. 94–95. 9. Philip Kotler and Gary Armstrong, Principles of Marketing (Englewood Cliffs, NJ: Prentice Hall, 1989), p. 575. 10. Daryl O. McKee, P. Rajan Varadarajan, and William M. Pride, “Strategic Adaptability and Firm Performance: A Market-Contingent Perspective,” Journal of Marketing, July 1989, pp. 21–35. 11. Bruce Einhorn and Ben Elgin, “The Well-Heeled Upstart on Cisco’s Tail,” BusinessWeek, October 28, 2002, p. 91; and Bruce Einhorn, “The World’s Most Influential Companies—Huawei,” BusinessWeek. December 22. 2008, p. 5l; and Huawei Technologies Co. 2010 Annual Report on the company’s website at www.huawei.com. 12. For examples, see Rajiv Lal and Miklos Savary, “When and How Is the Internet Likely to Decrease Price?” Marketing Science 18 (Fall 1999), pp. 485–503; Paul Markillie, “A Perfect Market: A Survey of E-Commerce,” The Economist, May 15, 2004, pp. 13–20; and Florian Zettlemeyer, Fiona Scott Morton, and Jorge Silva-Risso, “How the Internet Lowers Prices: Evidence from Matched Survey and Automobile Transaction Data,” Journal of Marketing Research 43 (May 2006), pp. 168–81. 5. Robert E. Miles and Charles C. Snow, Organizational Strategy, Structure, and Process (New York: McGraw-Hill, 1978). For another taxonomy of business-level competitive strategies that incorporates elements of both the Porter and Miles and Snow frameworks, see Michael Treacy and Fred Wiersema, The Discipline of Market Leaders (Reading, MA: AddisonWesley, 1995). 13. Larry Chiagouris and Brant Wansley, “Branding on the Internet,” Marketing Management 9 (Summer 2000), pp. 35–38; Faith Keenan, Stanley Holmes, Jay Greene, and Roger O. Crockett, “A Mass Market of One,” BusinessWeek, December 2, 2002, pp. 68–72; Julie Schlosser, “Cashing in on the New World of Me,” Fortune, December 13, 2004, pp. 244–50; and Nanette Byrnes, “More Clicks at the Bricks,” BusinessWeek, December 17, 2007, pp. 50–52. 6. Charles C. Snow and Lawrence G. Hrebiniak, “Strategy, Distinctive Competence, and Organizational Performance,” Administrative Science Quarterly 25 (1980), pp. 317–35. 14. Gordon Donaldson, Managing Corporate Wealth (New York: Praeger, 1984). Also see Spencer E. Ante, “Giving the Boss the Big Picture,” BusinessWeek, February 13, 2006, pp. 48–50. Chapter Nine Business Strategies: A Foundation for Marketing Program Decisions 15. Donald C. Hambrick, “Some Tests of the Effectiveness and Functional Attributes of Miles and Snow’s Strategic Types,” Academy of Management Journal 26 (1983), pp. 5–26; and McKee, Varadarajan, and Pride, “Strategic Adaptability and Firm Performance.” 16. Robert W. Ruekert and Orville C. Walker, Jr., “The Sharing of Marketing Resources across Strategic Business Units: The Effects of Strategy on Performance,” in Review of Marketing 1990 (Chicago: American Marketing Association, 1990). 17. Robert D. Buzzell and Bradley T. Gale, The PIMS Principles: Linking Strategy to Performance (New York: Free Press, 1987), chap. 6. 18. Peter Engardio, “The Future of Outsourcing,” BusinessWeek, January 30, 2006 pp. 50–64; and Peter Engardio, “Can the U. S. Bring Jobs Back from China?” BusinessWeek, June 30, 2008, pp. 39–43. 19. For example, see Ronald Henkoff, “Cost Cutting: How to Do It Right,” Fortune, April 9, 1990, pp. 40–49. 20. Hambrick, “Some Tests of Effectiveness.” 21. Keenan, et al., “A Mass Market of One”; and Anthony Bianco, “The Vanishing Mass Market,” BusinessWeek, July 12, 2004, pp. 61–72; and “The Printed World,” The Economist, February 12, 2011, pp. 77–79. 249 22. Wolfgang Ulaga and Andreas Eggert, “Value-Based Differentiation in Business Relationships: Gaining and Sustaining Key Supplier Status,” Journal of Marketing 70 (January 2006), pp. 119–36. 23. Roland T. Rust, Christine Moorman, and Peter R. Dickson, “Getting Return on Quality: Revenue Expansion, Cost Reduction, or Both?” Journal of Marketing 66 (October 2002), pp. 7–24. 24. Miles and Snow, Organizational Strategy, Structure, and Process; and Hambrick, “Some Tests of Effectiveness.” 25. Although Hambrick argues for the reverse relationship, data from his study of 850 SBUs actually support our contention that defenders have more vertically integrated channels than do prospectors. See Hambrick, “Some Tests of Effectiveness.” 26. Jaclyn Fierman, “The Death and Rebirth of the Salesman,” Fortune, July 25, 1994, pp. 80–91; and Ulaga and Eggert, “Value-Based Differentiation in Business Relationships.” 27. Connie J. G. Gersick, “Revolutionary Change Theories: A Multilevel Exploration of the Punctuated Equilibrium Paradigm,” Academy of Management Review 16 (1991), pp. 10–36; and Michael L. Tushman, William H. Newman, and Elaine Romanelli, “Convergence and Upheaval: Managing the Unsteady Pace of Organizational Evolution,” California Management Review 29 (1986), pp. 29–44. C HAPTER T EN Product Decisions Product Decisions in a Services Business1 A LMOST NO ONE LIKES BANKS. From surly tellers to long lines, from “bankers’ hours” to fees for just about everything, consumers are fed up. But Prudential, the big British insurer, was convinced things didn’t have to be this way. Way back in October 1998, Prudential launched Egg, which has gone on to become one of Europe’s largest online financial services providers. Egg, unlike many in the banking industry, believes superlative customer service is the key to growth. But can such service be delivered online? “The aim of all Egg’s communication is to make the customer feel like an individual,” says Patrick Muir, Egg’s director of marketing. “We want to make money easier to understand and easier to manage.” Offering great customer service is easy to say, but is much harder to deliver consistently. Egg has succeeded by making a series of decisions about the product it offers—various services, in its case, rather than goods—and then managing its execution and service delivery very well through the use of technology. Banking with Egg is a far cry from conventional banking or most other applications of customer relationship management technology, for that matter, which often infuriate rather than please customers. What were the product decisions that helped Egg succeed? First, Egg offers its customers a variety of channels of communication. There’s the internet, of course, but Egg doesn’t stop there. Egg TV offers interactive access from the comfort of one’s living room. Further, Egg’s 1,200 call center associates are available round the clock to help customers who want to speak to a real person. “You actually have a 250 conversation with someone, rather than sticking with a rigid script,” says Muir. What Egg also does differently is to offer a wide variety of financial services. Checking accounts, savings, credit cards with cashback discounts financed out of retailers’ commission to Egg, mortgages, even insurance. Egg’s wide range of financial services offers one-stop shopping to Egg customers. And each Egg customer can access a personal balance sheet that displays all his or her assets and liabilities on one screen. Even accounts with other online providers can be included. Egg’s multichannel strategy provides customers with more access points and enables them to access their money where, when, and as they wish. At home? Use Egg TV. At the office? Use the internet. On holiday at a beach resort? Find an internet café, and access your account. Egg says it’s committed to mobile banking, too, as wireless technology deployment permits. Egg’s technology gives it a comprehensive customer-by-customer view that enables Egg to come up with suitable products and service to offer, based on each customer’s own profile. “We want to put great offers in front of our customers that we believe are right for them rather than pushing unwanted products through hard-hitting sales campaigns,” says Muir. Egg’s early results spoke for themselves. In 1999, it won 22 percent of net new deposits in the U.K. banking system. Within 18 months of launch, Egg had attracted more than one million customers. By 2002, brand awareness had reached 88 percent and its customers numbered over 2.1 million. Egg’s success in the United Kingdom led management to believe it could replicate the Egg model elsewhere. But its foray across the English Channel was not à la mode. French consumers didn’t respond in the same way Brits had, and by 2004, Prudential was forced to shut down the French operation, posting an overall loss for the year of £107 million. But it was not just the French business that fared poorly. Prudential sold Egg’s investments business to Fidelity at a small loss and put its investment wrap business, Funds Direct, up for sale. Chastened by these setbacks, management refocused on its basic UK business, returned the company to profitability, and—with Egg’s stock price in the tank—bought the company back from its public shareholders, taking it private. In May 2007, having returned the business to health, Prudential then sold Egg to CitiGroup for £546 million, or just over $1 billion. Despite the somewhat rocky road it has traveled, Egg’s service-centric focus has served it well. Whether that focus is sufficient to fuel future growth in the hotly competitive online finance industry, where just about every brick-and-mortar bank is also now online, remains to be seen. But CitiGroup’s billion-dollar bet suggests that it believes Egg still has room to run. Marketing Challenges Addressed in Chapter 10 As the story of Egg illustrates, decisions about product attributes—whether for goods or services—can make a huge difference in attracting customers. In this chapter, we examine the first of the four Ps—the many kinds of product decisions that Strategic Issue marketers must make to provide the value that customers want. As we Going to market with an undifferentiated shall see, such decisions include those about attributes to include in the product can be hazardous. product (such as Egg’s decision to offer account access via interactive TV), how to package the product (the level of access that Egg offers its customers), as well as decisions about branding, services related to the product, warranties, and so on. These decisions grow out of the need to differentiate one’s products from those of competitors, as we discussed in Chapter 8, the brand positioning chapter. As we observed in Chapter 8, going to market with an undifferentiated product can be hazardous. Thus, Chapter 10 addresses several critical questions that marketers face in differentiating their offerings from those of their competitors. How should our product offering, whether a good or a service, be designed to give it a chance to win competitive advantage? What product decisions must we make to deliver the benefits and value promised in our positioning statement or value proposition? Finally, given the importance of new products in the long-term success of most firms, how can new product development be managed, from a process perspective, to ensure a timely flow of new products that enjoy favorable reception by customers? Answering these questions thoughtfully, using evidence-based and up-to-date market knowledge as a foundation, often gives the firm its best chance to offer goods and services that consumers want—as opposed to products its engineers can develop (“It’s the latest technology!”), its merchants are excited about (“I have a hunch purple will be hot this year!”), or its CEO loves. In the first portion of the chapter, we address the content of product decision making: decisions about product quality and features, packaging, brand names, related services, and so on. These decisions, which we refer to as whole product or augmented product 251 252 Section Three Developing Strategic Marketing Programs Exhibit 10.1 rs ery, installatio eliv n, Warranty rep ai r, Pro ct featu Core benefit s re du g kaging Pac n ini Oth e d s— ce i v tra er The Augmented Product Concept decisions (see Exhibit 10.1), are applicable to both new and existing products, and they comprise the heart of any marketer’s product decision making. Then we address the process of new product development. An abundance of recent evidence indicates that how the new product development process is managed—whether for new-to-the-world products born in high-tech research labs or simple product modifications or line extensions— can have important implications for time to market and, ultimately, for product success or failure. Finally, to close the chapter, we examine product decisions over the product life cycle, from product introduction to a product’s maturity and possible decline. Product Design Decisions for Competitive Advantage A product can be defined as anything that satisfies a want or need through use, consumption, or acquisition. Thus, products include objects (TVs, radios, cars), services (medical, educational), places (New York, Moscow), people (Barack Obama and other politicians everywhere), activities (entering a contest or visiting a weight-loss clinic), and ideas (have you hugged your kids today?). Conceptually, products should be thought of as problem solvers since they are purchased because of the core benefits they provide—not because of the product per se.2 Jain Irrigation Systems, a marketer of drip-irrigation technology in India, found that it Strategic Issue needed to sell more than just its gear. Guidance on choosing appropriate Most customers are far more interested in crops for a farmer’s fields, given the local soil conditions and terrain, benefits than they are in features. as well as after-market service, like replacing any parts where maintenance had been improper or the local rats had gnawed through them, were essential.3 What is important is how the consumer perceives the product as satisfying a need, not how the seller sees the product. The seller must turn the wanted benefits into a tangible product with features, as well as other elements, of the augmented product, or attributes that will provide the intended satisfaction better than competitive products. But benefits and features are not the same. Features are the tangible or intangible attributes 253 Chapter Ten Product Decisions given the product by its designers. Benefits are the solutions to customer problems or needs delivered by the product. Thus, what Jain Irrigation really sells is not tubes and connectors. It sells reduced water usage—in a country where water is an increasingly scarce resource—and higher crop yields. Ultimately, most customers are far more interested in benefits than they are in features, though marketers sometimes forget this fact in designing ads or other marketing communications messages. Goods and Services: Are the Product Decisions the Same? What is a service? As we discussed in Chapter 9, services can be thought of as intangibles versus goods as tangibles. Thus, services can rarely be experienced in advance of the sale, while tangible goods can be directly experienced, even tested, before purchase. As we have seen with Egg, the principles entailed in product decision making apply to services as well as goods. Thus, when we say product in this book we mean both goods and services. As shown in Exhibit 10.2, different kinds of goods and services often call for different marketing strategies, but the decision-making content and processes for both goods and services are similar. Product Quality and Features Decisions A well-developed positioning statement or value proposition plays an important role in designing products, whether goods or services. It tells the product’s designers what benefits are to be delivered, so designers can imbue the product with the necessary features or other attributes, such as those we’ve seen at Egg, to deliver those benefits. Positioning makes clear how the product—an account with Egg—is to be differentiated from other products in its category. As we have seen in the brand positioning chapter, products—whether goods or services— can be differentiated by both physical and perceptual means. One important dimension on which goods or services are physically differentiated is on the basis of quality—seeking to be better, in some sense, in the customers’ eyes than competing products (see Exhibit 10.3). Differentiating on quality can occur on any of the eight dimensions of quality for goods—attributes Exhibit 10.2 Marketing Strategy Implications of Consumer Goods Classification Examples Strategy elements typically stressed Convenience goods and services Dentifrice, soap, razor blades, magazines, many packaged food products, haircuts Maximum distribution (product availability), consumer advertising (awareness and brand recognition), merchandising (in-store displays) Shopping goods and services Color TVs, cars, major appliances, homes, car repair, family doctors Available in limited number of stores, personal selling important, limited to extensive advertising, seller often offers financing, warranties, and postpurchase service Specialty goods and services Musical instruments, stereo equipment, some brands of men’s clothing, college consultants Limited distribution, high price, strong advertising to promote brand uniqueness and to inform where available locally Unsought goods and services Certain medical services, personal liability insurance, encyclopedias Strong promotion, including personal selling 254 Section Three Exhibit 10.3 Developing Strategic Marketing Programs Soft Football Helmets for Tough Athletes I ndustrial designer Bert Straus has worked on everything from sports equipment to streetcars. He and his small Pennsylvania company, Protective Sports Equipment, Inc., want to make head injuries to football players a thing of the past. His multilayered Gladiator helmet—foam on the outside and inside, sandwiching a harder middle layer—is designed to distribute the energy of impact. Straus is hoping to win approval for his Gladiator helmet from a national standards group. Mark Kelso, a hard-hitting safety for the Buffalo Bills and now an investor in Straus’s company, switched to an earlier Straus model, the ProCap, after suffering concussions. Former NFL player Steve Wallace, who also wore the ProCap, is convinced that Straus’ multilayered helmets are better than the current two-layer models. “I never had another concussion when I wore it.” If the Gladiator wins approval, a large market of college and youth teams—not to mention the National Football League—awaits. Source: James Strengold, “Innovator: Bert Straus,” Bloomberg Businessweek, December 13–19, 2010, p. 44. like reliability, durability, and performance4—or the five dimensions of service quality: empathy, assurance, responsiveness, reliability, and tangibles.5 So how should decisions about product features be made? Typically, consumers’ choice criteria are limited to relatively few attributes or quality dimensions for a given product category. Thus, most products use only a few dimensions of quality as Strategic Issue the basis on which they compete. Attempting to differentiate on too many How should decisions about product features can be confusing to consumers and can lead to “feature fatigue.”6 features be made? Feature fatigue was blamed for making 2010 a flat year in television, leaving retailers like Best Buy stacked to the rafters with unsold flat-screen TVs.7 Decisions about which dimensions of quality should be designed into a product are driven by earlier choices about the product’s target market and positioning. When the product and product category, its users, and its uses are well understood, the marketing research techniques discussed in Chapter 6 can be employed to determine consumer needs and assess consumer preferences for products having various features. Some analytical techniques (and software packages for running them) commonly employed in determining the best set of features for a product are discussed in Exhibit 10.4. In some situations, especially when the task is to design a breakthrough product that differs significantly from prior products, traditional marketing research is less likely to elicit the information needed to design a new product. For such situations, new techniques Exhibit 10.4 Marketing Decision Support Tools for New Product Decision Making Tool or technique Software packages What they do Brand development software NamePro® from the Namestormers, www.namestormers.com Helps create distinctive, memorable brands for goods or services Quality function deployment QFD/CAPTURE; see www.qfdcapture.com Measures links between known customer needs, engineering characteristics, and product design features to assess product preferences Conjoint analysis Several programs from Sawtooth Software, see www.sawtoothsoftware.com Assesses consumers’ preferred trade-offs among different product attributes 255 Chapter Ten Product Decisions Exhibit 10.5 Bikes as Bikes Used to Be I n the summer of 2007, 55-year-old grandmother Alice Wilkes bought a brand new Trek bicycle, her first in more than 40 years. But it wasn’t a mountain bike or a sleek road racer, and she didn’t buy tight cycling clothes to go with it. “I like to feel free, with the wind flying up my sleeves,” she says. What Wilkes bought was an outgrowth of some ethnographic research that product design firm IDEO carried out for Shimano, the Microsoft of the cycling industry. Shimano components—from gears to brakes to derailleurs—are found on the majority of bikes these days, and sales of bicycles have been down in recent years. When the bike industry is down, so, too, is Shimano. So Shimano’s senior manager for product development and marketing, David Lawrence, asked IDEO to find out why people weren’t riding as much any more, and come up with some solutions that might energize the industry. IDEO sent its designers and researchers into the homes of baby boomers who no longer ride. They discovered that the lack of riding wasn’t because people were getting lazy or out of shape. Many were simply intimidated by the increasing technical complexity and the hard-core nature of something that once had been just plain fun, rather than the serious sport that cycling had become. Perhaps what was needed were “just plain bikes.” As Lawrence put it, cycling “had gone from fun to being a sport, and no one had noticed.” The result was coasting bikes, like the Trek model that Wilkes tools around on, that look and work much like the bikes of yesteryear. Pedaling backward even puts on the brakes. And Shimano’s new automatic shifting technology means that Wilkes never has to shift gears. Her bike does it for her. Easy and fun, just as cycling used to be. And a big comfortable seat, too! Lance Armstrong, eat your heart out! Source: Jay Greene, “Return of the Easy Rider,” BusinessWeek European Edition, September 17, 2007, pp. 78–81. have been developed to go beyond what consumers can easily articulate and uncover needs they may not have yet identified (see Exhibit 10.5). The use of techniques such as ethnography and empathic design is one way to respond to critics who charge that excessively customer-led decision processes can blind companies to the needs of customers it does not currently serve.8 Companies that adopt a true market orientation use techniques such as these to obtain a broader view of their markets than their current customers can provide. Branding Decisions As we saw in Chapter 8, branding identifies and helps differentiate the goods or services of one seller from those of another. It consists of a name, sign, symbol, or some combination thereof. Branding is important to consumers because it simplifies shopping, facilitates the processing of information concerned with purchase options, provides confidence that the consumer has made the right decision, helps to ensure quality, and often satisfies certain status needs. Through its branding efforts, a company improves its brand equity position, which consists of four major asset categories—brand name awareness, brand loyalty, perceived quality, and brand association. Thus, given the value-enhancing power of branding, it is not surprising that more and more attention is being given to managing brands, especially in terms of developing a winning brand identity. The latter will be discussed in Chapter 13, in which we focus in greater detail on advertising. The decision issue we address here is what brand to give to a new product. This decision may involve developing a new brand, as Toyota Strategic Issue did when it introduced its upscale Lexus automobiles into the United The decision issue here is what brand to States, or using one of the firm’s existing brands, as Toyota did with the give to a new product. introduction of its Toyota Prius model. 256 Section Three Developing Strategic Marketing Programs Branding Strategies A company has a number of branding-strategy options, one of which is whether to brand each individual product or to use a family brand name. Individual branding requires the company to provide each product or product line with a distinctive name. This type of branding is practiced by such firms as Procter & Gamble (Tide and Ariel detergent, Crest toothpaste), Diageo (Smirnoff vodka, Guiness stout, Baileys Irish Cream, Jose Cuervo tequila), and Accor hotels (Mercure, Novotel, Motel 6). Individual branding reduces a company’s risk in that a new product failure is not readily associated with the firm’s other products. Further, it enables a firm to compete via multiple entries within the same product class. When developing a new brand, whether in a new or existing company, one key decision is whether to have the brand clearly indicate what the product is or stands for (Burger King, Pizza Hut, Healthy Choice cookies) or to develop a brand whose meaning must be built (Amazon, Nestlé, McDonald’s). The former approach may make it easier and less costly to build market awareness and gain customer trial at the outset, but it can limit the flexibility to adapt to changing market conditions (witness Kentucky Fried Chicken’s name change to KFC when fried became a negative attribute due to trends toward healthier eating). The former approach, however, is viewed by some as generic and boring and may make it harder to build an image for and differentiate one’s brand. Positioning guru Al Ries argues that the latter approach, whereby a brand is based on its own distinctive name (eBay, Google), is probably better than the generic approach (Auction.com, Diapers .com) in today’s rapidly changing and highly competitive marketplace.9 Family branding uses the same brand name to cover a group of products or product lines. There are several variations of family branding including its use primarily with related items (Campbell’s soups and Dyson vacuum cleaners), its use with all company items regardless of whether they are use-related (General Electric is an example), and the use of a family name combined with individual product names (Kellogg’s Raisin Bran cereal). The major arguments for using family branding are reduced costs and transfer of customer satisfaction from one product to another bearing the same name. This approach also makes it easier to launch product modifications such as new package sizes and types, or new products, as when Nike extended its footwear brand to cover athletic clothing. Family branding can also increase the impact of shelf facings in stores and make feasible the promotion of a product line comprising many low-volume items. Brand extension involves the use of a family brand name established in one product class as a vehicle to enter another product class. A majority of the new products introduced to supermarkets and drugstores fall in this category. The rationale for an extension is that the contribution of the brand name to the extension will be positive. The critical question here is the extent to which the brand name can provide a point of differentiation, including a quality association. Examples here include Arm and Hammer Carpet Deodorizer, Duracell Durabeam flashlights, and the use of the HP (HewlettPackard) name on thousands of items. By providing such an association, brand extensions can facilitate the acceptance of a new product by providing it with instantaneous familiarity. Bad brand extensions occur when the name adds little or no benefit to the extension and may cause confusion and, at worst, stimulate negative attribute association. Cobranding Cobranding uses multiple brand names with a single product or service offering, such as Häagen-Dazs’s Baileys Irish Cream ice cream.10 Cobranding is just getting started worldwide but is expected to grow. Global Branding Building a global brand is often difficult for a variety of reasons: the meaning of the brand name evoking negative associations in some countries, the Chapter Ten Product Decisions 257 presence of strong local brands, and the heavy investments required. Still, if successful, the scale effects can dramatically enhance sales and profits. Ketchup-maker Heinz has built a small sauce brand that it acquired in 1998, ABC, into the world’s second largestselling soy sauce, after Japan’s Kikkoman. ABC, whose home market is Indonesia, is seeking further growth at home by taking an exotic new product to Indonesian consumers: ketchup.11 Corporate Identity and Family Branding as a Source of Synergy Corporate identity—together with a strong corporate brand that embodies that identity—can help a firm stand out from its competitors and give it a sustainable advantage in the market. Corporate identity flows from the communications, impressions, and personality projected by an organization. It is shaped by the firm’s mission and values, its functional competencies, the quality and design of its goods and services, its marketing communications, the actions of its personnel, the image generated by various corporate activities, and other factors. In order to project a positive, strong, and consistent identity, firms as diverse as Caterpillar, Walt Disney, and The Body Shop have established formal policies, criteria, and guidelines to help ensure that all the messages and sensory images they communicate reflect their unique values, personality, and competencies. One rationale for such corporate identity programs is that they can generate synergies that enhance the effectiveness and efficiency of the firm’s marketing efforts for its individual product offerings. By focusing on a common core of corporate values and competencies, every impression generated by each product’s design, packaging, advertising, and promotional materials can help reinforce and strengthen the impact of all the other impressions the firm communicates to its customers, employees, shareholders, and other audiences, and thereby generate a bigger bang for its limited marketing bucks. For example, by consistently focusing on values and competencies associated with providing wholesome family entertainment, Disney has created an identity that helps stimulate customer demand across a wide range of product offerings—from movies to TV programs to licensed merchandise to theme parks and cruise ships. Retailer and Distributor Brands In recent years, private label store brands have gained considerable ground versus national brands. Such labels represent over $50 billion at retail in the United States and a 20 percent share of all items purchased in supermarkets, drug chains, and mass merchandisers. Private labels have won even greater success in Europe, taking a 45 percent share of retail products sold locally.12 The explanation for the increasing importance of store brands is that over the last two decades, the national and global brands regularly increased their prices along with massive distributions of coupons, thereby training consumers to shop on price. They also undertook large numbers of line extensions and, in general, focused less on brand equity. Such fast-growing discounters as Walmart and France’s Carrefour have moved aggressively to take advantage of the price vulnerability of many national brands. Strong retailer brands have also become very important in the soft goods trade. Ralph Lauren and a number of European retailers such as Burberry and Laura Ashley have opened their own U.S. stores. But there are some countertrends to the above. A number of consumer goods companies have been acquired over the past several years at substantial multiples of their book value because of the value of their brand names (for instance, the acquisition of Richardson/ Vicks by Procter & Gamble and various liquor brands by Diageo). The reasoning behind such acquisitions is the high cost of creating a well-known brand and the low success rate of new products. Thus, buying popular brands can be a shortcut to growth. 258 Section Three Developing Strategic Marketing Programs Packaging Decisions A product’s package serves several functions—protecting, facilitating use of, and promoting the product, as well as providing information about the product and its use. The protection function is critical in both transport and storage. Protecting an item under a variety of temperatures and moisture conditions and against being crushed or dropped during handling is no small undertaking. Because of increasing competition among brands within stores, packages have become an extension of the product and a way of identifying and differentiating products that can lead to increased loyalty and growth in sales. Packaging often facilitates use of the product, as in aerosol cans and disposable and unbreakable bottles. Packaging can also increase consumer safety, as proved by child-proof tops on drugs and tamper-resistant packages. Packaging can give a product strong promotional support at the point Strategic Issue of purchase. Many more potential customers may see the package than Packaging can give a product strong see advertising—and at more opportune times. More and more sellers are promotional support at the point of purchase. Many more potential customers may attempting to develop a common package design for their products, thereby see the package than see advertising—and creating a greater impact on the consumer. Allowing for the needs of varat more opportune times. ied groups of consumers is a real challenge, however (see Exhibit 10.6). Increasingly firms are recognizing the need to use environmentally sensitive packages. Given the growing concern about the disposal of solid waste, more recyclable and biodegradable materials are being used. Because consumers purchase a high percentage of supermarket items on impulse, packaging is especially important for such items. Packaging also can play an important role in the marketing of services. The blue suits and white shirts worn by high-priced strategy consultants are an example. The distinctive store décor of the various beauty salon chains is another. Services Decisions and Warranties The service component of a product can include a variety of activities; the following are among the more common: ● ● ● ● ● Exhibit 10.6 U Delivery reliability. Warranty. Repair and maintenance (including response time, spare parts availability, and effectiveness). Efficient handling of complaints and returns. Credit availability. Universal Design Meets Growing Acceptance niversal design is the concept of designing products and their packages in such a manner that the product or package can easily be used by people other than average healthy adults—the handicapped, the aging, and so on. The universal design movement has spawned numerous efforts to rethink how ordinary products and packages are designed (round doorknobs, for example, are difficult for arthritic hands to open; lever handsets are much easier). An entire conference at the School of Packaging at Michigan State University was held in 2006 with an interdisciplinary focus on such issues as the biomechanics of aging, cognition and aging, and their impact on packaging and the packaging industry. Source: Faraday Packaging Partnership, Events, at www .faraday-packaging.com. Chapter Ten Product Decisions ● ● ● ● ● 259 Prompt inquiries handling. Buyer personnel training. Prompt claim settlement. Fast price quotations. Fast order processing. Companies that excel at providing service find it a substantial competitive advantage. In most markets, it is a significant part of a firm’s quality rating. In many, it is more important than the product itself. Service is not just a competitive weapon; it also strongly affects the overall level of profitability since it typically costs more to get a new customer than to keep an old one. The more service-sensitive the market (the importance of service versus physical attributes), the greater the opportunity for profits. To be effective, a firm’s service program generally must contain performance standards and be monitored regularly. Warranties can play important roles in reducing the customer’s risk Strategic Issue of purchase and enhancing quality perceptions, thereby enhancing sales. Warranties can play important roles in Catalog retailer Lands’ End’s slogan “Guaranteed, period” is such an reducing the customer’s risk of purchase example. Similarly, Dell’s offer of extended three-year on-site warranand enhancing quality perceptions, thereby ties for computers it sells on its website helps reduce any concerns cusenhancing sales. tomers may have about buying Dell products sight unseen. Warranties are only part of the story in assuring customer satisfaction, however. Sometimes, products fail to perform as planned, and customers have unsatisfactory experiences with them that take the company beyond the terms of its warranties. The operating profit of Bridgestone Corp, the makers of Firestone tires, fell by 27 percent in 2001 following a poorly managed product recall that resulted from nearly 300 reports of Firestone tire failure on Ford’s hot-selling Explorer SUV. Putting the consumer first, even when it is costly to do so, at least in the short term, can be difficult for some companies to do. But as one former Firestone executive remarked, “They just don’t have a clue how to handle this.”13 Managing Product Lines for Customer Appeal and Profit Performance Whether a product line is too short or too long depends on the extent to which the market can be segmented and how the company wants to position itself. Much also depends on what stage the product-market evolution is in. A short product line is desirable during the early stages, given the difficulties of managing a long line. It is also generally more profitable given the economies of scale and that it simplifies the inventories of both the company and its channel members. In the longer term, however, a short line can come under fire as competitors segment the market and develop more specialized products to meet the needs of these segments. Thus, to survive and prosper, short lines must be uniquely positioned against competitors—and the firm must be able to maintain the line’s differential advantage. Longer product lines generally come about through a series of line extensions, in which additional products are developed to serve more narrowly targeted, or even different, market segments. But too few companies subject their product lines to a regular audit to determine which products, if any, should Strategic Issue be dropped.14 Too often a firm rationalizes the continuation of cerToo few companies subject their product lines to a regular audit to determine which tain products on the basis that they are at least covering direct costs, products, if any, should be dropped. perhaps even making a contribution to fixed costs. Such reasoning overlooks the opportunity costs of not getting rid of them, including 260 Section Three Developing Strategic Marketing Programs the disproportionate amount of management time spent on weak products. Substantial profit increases can often result from the elimination of weak items. Japan’s Shiseido Co., its largest cosmetics group, moved to profitability by streamlining product lines and improving inventory control.15 The criteria for identifying weak products focus largely on the trend of the product’s contribution to profit. Each such item should then be evaluated on such considerations as future sales of the item’s product type or class, its future market share assuming no changes in the product or its marketing, future market share assuming certain product and marketing changes, anticipated changes in the marketing of competitive products (including the price), the effect of dropping the product on the company’s channels of distribution, the cost of dropping the item (layoffs and inventory clearances), and the effect of dropping the product on the sales and profits of the firm’s other items because of joint costs or other factors. Product Systems Among the most strategically important product line decisions in today’s hotly competitive markets are those related to the development of product systems, whereby different product work together to create barriers to competition. Gillette sells razors and blades, selling razors at low prices to generate high-margin recurring revenue on the razor blades. Hewlett-Packard sells printers and ink cartridges. Inkjet cartridges are so lucrative for HP that they could practically give away the printers for free (see Exhibit 10.7). Apple, in its transformation from a marginally profitable maker of personal computers into a consumer electronics powerhouse, has used product systems like the iPod MP3 player and the iTunes music store to support its attractive profit margins on hardware— the iPod—by selling the software—the iTunes—at break-even pricing, effectively and ingeniously turning Gillette’s razor and razor blade model upside down. And by building common elements of usability into its iPod, iPhone, and iPad, Apple should help publishers like Time and Sports Illustrated take advantage of today’s latest digital technology.16 Exhibit 10.7 H Champagne for Your Printer ewlett-Packard, Epson, and the other makers of inkjet printers know a cash cow when they see one. At the equivalent of more than $2,000 per liter, ink for your printer is far pricier than a bottle of Dom Perignon! Printer consumables—principally those little black cartridges that we cannot live without— account for half of HP’s printer and imaging division’s sales and most of its profits. It’s no wonder that HP stuffs postage-paid envelopes into its packages so its customers will recycle their cartridges into raw materials for other plastic products, rather than refill them at one of the growing number of cartridge consumables stores. The printer companies’ profits are spawning a new industry to serve those who would refill cartridges, rather than recycling or disposing of them. “Inkjet refilling is a very lucrative market,” says Bill McKinney, CEO of InkTec Zone, a growing company that markets inkjet-filling machines to retailers wanting to cash in on these profits. Fortunately for the printer makers, though, some 86% of consumers still buy new brand-name cartridges, thereby making low prices on printers possible. Will the cartridge cash cow disappear? If so, printer prices are bound to rise. Sources: Drew Cullen, “Bring on the Empty Cartridges,” The Register, November 12, 2003, at www.theregister.co.uk/2003/11/12/ bring_on_the_empty_cartridges/; and ClickPress, “Liquid Gold Rush: Turning Inkjet Cartridges into Gold,” at www.clickpress.com/ releases/detailed/7143005cp.shtml. Chapter Ten Product Decisions 261 New Product Development Process Decisions As the Egg example that opened this chapter illustrates, a firm’s growth and profitability is significantly influenced by how well it succeeds in making product decisions, improving present products, and adding new ones to serve new markets or market segments. But developing new products is a costly and risky undertaking, as companies around the world have learned. This section examines a process by which a firm can better exploit the opportunities for new products and minimize the inherent risks.17 Before detailing this process, we need to discuss the role of new products in long-term profitability, new product success rates, and the major reason why new products fail. The Importance of New Products to Long-Term Profitability An abundance of research has established that new products constitute the lifeblood of long-term firm success and provide a central mechanism for firms’ adaptation to rapidly changing markets and the opportunities they offer. Radical innovations, defined as those based on new technology and that offer substantial increases in customer benefits, may be particularly important but tend to come from a minority of companies.18 There are a number of ways to classify new products. One of the simplest ways is to divide new products into four major classes: new to the world, new to the firm, productline extensions, and product improvements. Only a small percentage of products are new to the world. The vast majority are either product-line extensions or product improvements. The rationale for this focus on line extensions is—Why spend a lot of time and money to introduce a new product when most fail and it’s much less expensive and faster to introduce an extension or an improvement? But is this the best way to go? New Product Success and Failure Introducing new products is a notoriously risky business, as most new products—more than half, by many estimates—fail. They don’t usually fail for technical reasons, either. They fail because not enough people want to buy them.19 Thus, a crucial factor in successful new product development is to ensure that an adequate understanding of customer needs, preferences, and requirements is developed. Doing so is not as easy as it sounds, however. As we saw in Chapter 6, there is a wide array of marketing research tools that, at least in theory, should enable marketers to gain the customer understanding they require. In practice, though, it is not always easy for customers Strategic Issue to articulate what they want, particularly with new-to-the-world In practice, it is not always easy for products or product ideas that they can scarcely imagine. For this customers to articulate what they want. reason, some companies, such as Bang & Olufsen, the high-end Danish electronics maker, don’t bother doing marketing research on new product ideas (see Exhibit 10.8). Most companies, however, work diligently to understand how large the market is for new products, how fast that market is growing (using approaches and frameworks such as those discussed in Chapter 3), and to understand what customers really want and will pay for. For some—like Google, 3M, and Intel—these efforts along with these companies’ willingness to develop technology that may not pay off any time soon, have led to consistent new product success over many years and well-deserved reputations for their product innovation prowess.20 262 Section Three Exhibit 10.8 C Developing Strategic Marketing Programs At Bang & Olufsen, Designers Rule the Roost EO Torben Ballegaard Sorensen, of Bang & Olufsen, says it’s often the case that consumers don’t really know what they want. Thus, B&O doesn’t engage in extensive marketing research or follow an exhaustive new product development process. Instead, B&O’s ideas and the sometimes revolutionary products that flow from them arise not as the result of market analysis, “but rather a deep understanding of how our consumers live,” he says. And who has that understanding at B&O? A half dozen or so highly creative designers, not B&O managers. Depending on the instincts of quirky designers is not for everyone, however. And counting on the ability of managers to manage such individuals raises additional complications. But B&O wants its designers, none of whom are even employees, to call the shots, even when that means telling the engineers that a standard 2-inch screen with a black plastic frame simply won’t do for its new high-end cell phone. An elegant, frameless 2.1-inch screen is what designer Torsten Valeur had in mind. Samsung, the supplier, simply had to cancel its $2 million order and get what Valeur wanted in the first place. But, thanks to Valeur’s snazzy design, B&O’s Serene cell phone sells nicely at its $1,275 price point. More generally, its designers’ ability to intuit what B&O’s luxury customers want and will pay for means its BeoLab 5 stereo speakers, cranking out a thumping 2,500 watts per speaker, fetch $19,700 a pair. Its 50-inch BeoVision 9 plasma TV swivels to adjust itself to where you are sitting, a nice feature, for those who already have everything else money can buy. It’s a mere $19,900. Just think, for under $50,000, you can outfit the family with designer cell phones, a great sound system, and the TV, too! Source: Jay Greene, “Where Designers Rule,” BusinessWeek European Edition, November 5, 2007, pp. 46–51. Organizing for New Product Development At the outset of the development process, the firm must decide whether to keep its development activities in-house or go outside via subcontracting or some form of joint venture. The rationale for the latter is that large, integrated bureaucratic companies find it difficult during times of rapid technological changes to compete against smaller, more-focused companies that are highly flexible and can motivate their employees using stock incentives and bonuses. As a result, companies like Procter & Gamble, British Telecom, and IBM are building innovation networks with other companies to open up their innovation processes. Other companies are using another prime source to spur innovation—the customer.21 A new trend toward cocreation is bringing customers or prospective customers directly into the product development process. The idea underlying cocreation is that rather than inventing new goods or services on their own, companies engage their customers in the process. Facebook, for example, benefits from the more than 20,000 software applications that have been developed by Facebook users. Under the cocreation mantra, companies don’t bother to imagine, create, or deliver many of the new products. Instead, they provide a platform on which customers can do so. Cocreation defies the conventional organizational logic of having to own and protect one’s new goods and services, and calls for new skills and mind-sets to make it possible.22 Another new customer-driven approach is collective customer commitment.23 Under this approach, companies systematically solicit new product ideas from customers and ask for purchase commitments before going into production. While this idea is not a new one— indeed, business-to-business marketers, real estate developers, and others have long done so—it helps avoid expensive failures by ensuring demand before large production investments are made. This approach is now being extended into consumer markets, aided by the highly efficient customer engagement possibilities that the internet brings (see Exhibit 10.9). 263 Chapter Ten Product Decisions Exhibit 10.9 E Threadless Turns Online Marketing Research Into Revenue ach and every week, customers evaluate more than 400 new submissions for T-shirt designs on the website of Chicago-based Threadless .com . In 2000, Threadless founders Jake Nickeli and Jacob DeHart figured the best way to build their business was to let customers not only design their T-shirts, but evaluate which were the best designs. The Threadless community includes ordinary consumers and hobbyists, as well as hot-shot graphic designers, whose evaluations determine which styles Threadless produces and which it does not. Customers don’t just say which designs they like, however. They indicate their willingness to buy. Threadless examines the data, considers any possible legal issues and how the new styles fit into the overall Threadless product line, and produces a few or as many as a dozen new designs each week, putting the name of the winning designs’ creators on the labels and giving each of them a $2,000 reward plus a $500 gift certificate. To date, Threadless has paid out more than $1 million to its creators. It’s a way to get winning design solutions at minimal cost, and a great way to build an engaged customer community as well. Source: Susumu Ogawa and Frank T. Piller, “Reducing the Risks of New Product Development,” MIT Sloan Management Review, Winter 2006, pp. 65–71. For many companies, though, product innovation still happens largely internally, where customer insight is developed concurrently with product and process engineering to speed new products to market. Empirical research indicates that the way product development is best organized depends, in part, on the nature of the product under development. For line extensions and product improvements, where the degree of innovation is minor, relatively bureaucratic procedures appear to be better at getting products to market quickly. For more radical innovations, cross-functional teams are more efficient, both for time-to-market and cost considerations.24 A reduction in time to market can have a strong, positive effect on the product’s profitability, especially in fast-cycle industries in which product life cycles are short. Improved profitability results from extending the product’s sales life, creating opportunities to charge a premium price, providing for development and manufacturing cost advantages, and reducing the risks of a marketing shift since the development process started. Key Decisions in the New Product Development Process Given the importance of new products—whether goods or services—in long-term firm success, much attention has been paid to the generation and assessment of new product ideas and to improving the process of getting new products to market.25 One result of this attention has been the development of so-called stage-gate systems for managing new product development from idea generation to product launch.26 A diagram of the stagegate system is shown in Exhibit 10.10. In a stage-gate system, an idea for a new product must pass through a series of gates at each of which its merit is examined before it is allowed to continue Strategic Issue its journey toward market introduction. Between each gate, various The point is to “kill” ideas that lack analyses and development activities are conducted. The point is to strategic or market potential early in the “kill” ideas that lack strategic or market potential early in the proprocess, before significant resources are spent on these ideas, as well as to cess, before significant resources are spent on these ideas, as well as pave the way for high-potential ideas. to pave the way for high-potential ideas so that they not only get to 264 Section Three Developing Strategic Marketing Programs Exhibit 10.10 Stage-Gate New Product Development System Detailed Investigation (Business Case) Preparation Preliminary Assessment Idea Gate 1 Initial Screen Stage 1 Gate 2 Second Screen Stage 2 Gate 3 Decision on Business Case Stage 3 Full Production & Market Launch Testing & Validation Development Gate 4 Postdevelopment Review Stage 4 Gate 5 Stage 5 Precommercialization Business Analysis Postlaunch Review Source: Paul O’Connor, “Implementing a Stage-Gate Process: A Multi-Company Perspective,” Journal of Product Innovation Management 11 (1994), p. 185. Blackwell Publishers. market quickly but also have the “right” attributes to enhance their likelihood of market success. Simple new products, such as line extensions or product improvements, sometimes skip stages in the process, going directly from idea status to Stage 2, 3, or 4, for example. More innovative products whose market acceptance is unclear or whose product performance is uncertain typically must pass muster at each gate. Similarly, stages in the process are sometimes conducted concurrently, and backward loops in the process are common when the results of the analysis at a given stage do not support passing the product to the next stage. Managing the Stage-Gate Process Though the stage-gate process may appear lengthy and tedious, a principal goal of using such processes is to improve the speed with which a firm brings new products to market. This is accomplished in three principal ways. First, clear milestones are set at each gate to encourage new product teams to move quickly through the necessary activities to get through the next gate. Second, resource commitments are made along the way to ensure that inadequate resources, whether human or financial, do not delay promising products. Third, concurrent engineering is employed, whereby both market analyses and technical progress proceed concurrently. Previously, it was common for R&D to develop a product and “throw it over the wall” to marketing, who were asked to sell it. Marketing would then throw it back, asking for changes to make the product more acceptable to customers, and so on, through several iterations. By the time the tossing ended, a competitor’s product may have won the race to market. Thus, here, as with most other business processes, implementation is critical. In some fast-moving markets, firms seek first-mover advantage, whereby theirs is the first entrant in a new product category. There is much talk, especially in high technology and internet marketing circles, about the importance of first-mover advantage. As is discussed in Exhibit 10.11, however, bringing the right product to market and updating it to keep it ahead of competing products are far more important in the long run than being first to market, especially with a product that does not offer what customers really want or need. 265 Chapter Ten Product Decisions Exhibit 10.11 T Best Beats First here is much talk in business school classrooms and in the pages of business plans about first mover advantage. Indeed, many aspiring entrepreneurs are so enamored with being first to market that they seem to feel that little else matters. But how important is first-mover advantage? A candid look at business history in the 20th century indicates that being best in market is far more important than being first to market, notwithstanding the benefits that being first can bring to early leaders in any category. A 1999 review by Lambert and Slater of recent studies of first-mover advantage, as well as an abundance of anecdotal evidence [see Markides and Geroski (2004) and Collins (2000)], makes it clear that first movers are often successfully leapfrogged by later competitors, who benefit from the ability to observe and improve upon the market offerings of the early entrants. Where is VisiCalc, the first personal computer spreadsheet today? Where is Osborne, the first portable personal computer? Why are Palm Pilots now ubiquitous, while Apple’s earlier Newton failed? Thus, while faster time to market can provide a competitive edge, entrants who fail to introduce the right product or improve on their early offerings risk being overtaken by followers whose offerings are more attractive. As Collins observes, being best is typically far better than being first. Sources: Constantinos C. Markides and Paul A. Geroski, Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets, Jossey-Bass: 2004; Jim Collins, “Best Beats First,” Inc., August 2000, pp. 48–51; Denis Lambert and Stanley F. Slater, “First, Fast, and On Time: The Path to Success. Or Is It?” Journal of Product Innovation Management, 1999, pp. 427–38. Deciding Who Staffs the Gates, and How Many Gates In most companies or business units using stage-gate systems, a cross-disciplinary team is appointed to staff the gates. As new product ideas pass through the process, this team considers market, technical, and manufacturing or service deliverability criteria in deciding which ideas should pass through to the next stage. At minimum, marketing, R&D, and production perspectives are necessary, as is the presence of someone having the clout to commit resources needed for further development. One study showed that selecting gatekeepers who score high on measures of creativity, such as the MBTI® Creativity Index, enhances both the speed and productivity of the new product development process.27 The number of gates employed in the process varies in different firms, as some steps shown in Exhibit 10.10 can be combined or broken into additional steps. Gate 1: Idea Generation and Initial Screening Decisions To have an effective new product strategy, a firm needs to establish objectives for its new product effort. In what customer markets does it wish to grow? What capabilities does it have? What product lines should be expanded? In a large multidivisional firm, which divisions should get greater R&D and new product funds? These decisions, which were addressed from a strategic perspective in Chapter 9, provide guidance for idea generation. Typically, a substantial number of new product ideas must be generated to get one successful product. Ideas for new products can come from customers, as we have seen earlier in this chapter; from the company’s own staff, R&D people, the salesforce, product managers, marketing researchers; from members of its distribution channels; even from competitors. Whatever the source, at Gate 1 an initial screening is made to determine the idea’s strategic fit. Does the idea align with the company’s mission, does it take advantage of or strengthen its competencies, and are the resources needed to develop and market the product available? If the answer to any of these questions is no, the idea will likely be rejected. Some ethical considerations in making these decisions are discussed in Ethical Perspective 10.1. 266 Section Three Ethical Perspective 10.1 Issues in Idea Generation and Screening Business is often criticized for excessive production of me-too products, which leads to waste in the economic system. This is a difficult criticism to refute except to note that under certain conditions the development of a me-too product is justified, such as when it can be produced at a lower price or made available to more people. Some consumers argue that business produces too many wasteful products. But what is such a product? Also, most companies don’t create the desire for wasteful products; it already exists. There is also reverse criticism that business fails to produce products that are needed, such as products for people with unusual physical attributes (too tall, too short). In the medical field the development of new drugs is inhibited by risk (vaccines for children) and the uneconomic size of the market. In the latter case, the U.S. government provides federal funds for the development and marketing of so-called orphan drugs having only a very limited application. It seems clear that sellers need to design safety into their products, but to what extent? Often consumers are not willing to pay the price of the added safety, as was initially the case with flame-resistant children’s pajamas and auto seat belts. Both were finally mandated by the federal government. How a product is positioned and communicated affects how a product is used and, thus, can relate to safety (car acceleration and braking power). And what should a Developing Strategic Marketing Programs company do when one of its products is designed for an innocent use but contributes to violence, like a high-powered toy water gun that can shoot a variety of liquids, some not so pleasant to the person on the receiving end? In recent years societies around the world have become increasingly concerned about the impact of products and their packaging on the environment. There are several ways in which both new and old products can harm the environment—through the use of destructive raw materials (asbestos and lead), the use of a manufacturing process that pollutes (use of chemicals in the production of paper), the use of the final product (automobiles and air pollution), and the disposal of the used product (tires, motor oil, beverage containers). Firms vary in their response to the ecological problem. Some largely ignore the problem, while others go so far as to disinvest in businesses that may harm the environment. Since being ethically right is not always the most profitable position, firms face the question of how best to trade off the environmental benefits versus profits. Small businesses (some of which account for considerable pollution) in particular are often hard pressed to take even a reasonable environmental point of view because of their lack of funds and technological know-how. Source: Philip R. Cateora, International Marketing, 7th ed. (Burr Ridge, IL: Richard D. Irwin, 1990), pp. 149–54. Gate 2: Secondary Screening Decisions In Stage 1, prior to reaching Gate 2, managers are typically asked to undertake preliminary assessments of the idea’s technical and market feasibility. First, can the product be developed and Strategic Issue delivered? For a high-technology product, will the technology pan To invest new product development reout? Second, how large is the market, and what is the estimated marsources wisely, it is necessary to “kill” ket potential for the proposed product? Will customers like it? This weak ideas at Gate 2, because significant resources in marketing research and in screening is typically based largely or entirely on secondary data and product development are likely to be on the market and technical know-how resident in the company. The incurred for products that pass this gate. tools presented in Chapter 6 for estimating market potential are useful at this stage. A “classic” qualitative scoring model used by some companies at Gate 2 is shown in Exhibit 10.12. To invest new product development resources wisely, it is necessary to “kill” weak ideas at Gate 2, because significant resources in marketing research and in product development are likely to be incurred for products that pass this gate. Thus, a weak screening process can waste resources on obvious losers or misfits and can lead to a creeping commitment to the wrong projects. An overly rigid process, on the other hand, can lead to lost opportunities. 267 Chapter Ten Product Decisions Exhibit 10.12 New Product Scoring Model (1) (2) (3) (4) (5) (6) (7) V ERY G OOD (10) Good (8) Average (6) Poor (4) Very Poor (2) (8) (9) Subfactor weight EP EV EP EV EP EV EP EV EP EV Total EV Subfactor evaluation Product superiority 1.0 0.1 1.0 0.2 1.6 0.5 3.0 0.2 0.8 — — 6.4 6.4 Unique features for users 1.0 0.1 1.0 0.2 1.6 0.4 2.4 0.2 0.8 0.1 0.2 6.0 6.0 Reduce customers’ costs 3.0 0.3 3.0 0.4 3.2 0.2 1.2 0.1 0.4 — — 7.8 23.4 Higher quality than competitors 1.0 0.1 1.0 0.2 1.6 0.5 3.0 0.2 0.8 — — 6.4 6.4 Does unique task for user 2.0 0.5 5.0 0.4 3.2 0.1 0.6 — — — — 8.8 17.6 Priced lower than competing products 2.0 — — 0.2 1.6 0.5 3.0 0.3 1.2 — — 5.8 11.6 Subfactor 10.0 Total value of factor 71.4 Note: EP = estimated probability as judged by management. EV = expected value, computed by multiplying the rating’s numerical value by the estimated probability. Source: Reprinted from Robert G. Cooper, “Selecting Winning New Product Projects: Using the NewProd System,” Journal of Product Innovation, March 1985, p. 39. Copyright 1985 with permission of Elsevier. Gate 3: Decisions on the Business Case If an idea successfully passes the tests at Gate 2, a more detailed investigation, the subject of Stage 2, is made into the market potential for the proposed product. Such an investigation includes a comprehensive customer, market, and competitive analysis using the tools and analytical frameworks provided in Chapters 3 through 6. Primary research is customarily done at this stage. Thus, some resources are now invested in research, and development of product prototypes is sometimes done to support these research efforts. For many technology-based products, development before this point has likely been limited to basic research, and actual development of a truly functional product has awaited confirmation of the business case. Decisions at Gate 3, while based on similar criteria as those at Gate 2, are based on greater depth of information and are the last chance to stop before proceeding with full-scale development of the product and of the marketing plan for introducing it. Gate 4: Postdevelopment Review Decisions During Stage 3, the technological development of the actual product design proceeds, and a marketing plan, including a total product/service offering (as we noted earlier in this chapter), is developed. A critical decision here is to settle on the product’s design and its particular features. An analysis of more than 200 new products revealed that product design was the most important single factor in their success for a number of reasons.28 First, it can influence 268 Section Three Developing Strategic Marketing Programs costs by its choice of materials and shapes, which strongly influence the manufacturing processes. Second, it can call favorable attention to the product in a crowded marketplace, as was the case with Swatch watches, which used a number of unusual forms to call attention to its line of watches. Third, it creates impressions concerning other product attributes. For example, the Apple iPhone had a simple compact form designed to emphasize that it was user-friendly. And fourth, product design enhances our lives by the satisfaction we derive from seeing and using beautiful artistic products.29 In addition to product design and specific product features, pricing and channels are determined at this stage, along with brand name, packaging, and a planned marketing communications program. Additional marketing research may be needed to complete this process. These technological and marketing activities proceed in tandem, with considerable communication along the way, so that the “over the wall” problem is avoided. There are two possible causes why a product would fail to pass Gate 4, as many do. The first is that stumbling blocks are encountered with the technology or product design or with the projected costs of the final version of the product, thereby calling into question whether the product will actually work as planned or whether it will provide target customers with good value for the money. The second is the discovery, during marketing planning, that market or competitive conditions that now prevail raise questions about the marketability of the product. The entry of an unforeseen competitor, for example, is often the cause for abandoning or delaying a previously attractive product idea at Gate 4. Thus, gatekeepers at Gate 4 must take a careful look at whether the product is likely to perform, whether the marketing plan is likely to lead to market acceptance for the product, and whether the degree of acceptance is sufficient to merit further development. Making a “no-go” decision at this point is often difficult, however, given the considerable momentum the product already enjoys within the company. Failing to do so, however, in the face of cautionary market or product evidence, is one reason that many new products fail. Gate 5: Precommercialization Business Analysis Decisions Gate 5 is the last hurdle before the product is rolled out. To clear Gate 5, the product must often pass muster in a test market, in companies with budgets large enough to afford this step. Two major kinds of test markets are commonly used by large consumer products firms to prepare for Gate 5: field and laboratory test markets. Smaller firms, whose budgets may not allow for formal market tests, may simply begin marketing the product, assessing early results as they go. With the advent of the internet, some firms now turn the stage-gate process upside down and simply begin selling on the internet or in limited channels as a form of market learning quite different from traditional marketing research. We address a disciplined set of approaches for doing so later in this chapter. In a field test market, the marketing plan for the product is typically implemented in a small geographical area to ensure that it will deliver the expected results. This test seeks to obtain an estimate of the sales that will be achieved once the product is rolled out into the broader market, given the planned marketing strategy and marketing budget. In the past, the big food-, household-, and personal care–products companies typically used a sample composed of a few small cities as the test market—and did so for between 12 and 18 months. The cost of such research was often several million dollars. Increasingly such companies want faster and less-expensive Strategic Issue ways of testing their products, and not only for cost reasons. More Test markets give competitors the importantly, and unfortunately, field test markets give competitors the opportunity to evaluate the results, even to the point of introducing their own new opportunity to evaluate the results, even to the point of introducing their product. own new products. In a classic case, General Mills was sufficiently Chapter Ten Product Decisions 269 impressed by a Procter & Gamble test market to quickly introduce its own version of the test product under the Betty Crocker brand name, which quickly became the best seller.30 These concerns have led to increasing use of laboratory test markets. In laboratory test markets, which are used most commonly for packaged consumer products, the procedure measures the process by which a consumer adopts a new product, consisting of three major steps: awareness, trial, and repeat buying. In the lab procedure, respondents representative of the target audience see commercials about the new product imbedded in a TV program. Then they are given the option of buying such a product in a simulated store also stocked with competing brands. If they choose the test product, then researchers make follow-up interviews to determine the extent of satisfaction (including preference over their regular brand) and repurchase intentions. These tests have the advantage of relatively low costs ($60,000–$80,000) and confidentiality. Their biggest disadvantage is the small range of products that can be accommodated and that they provide little or no information about the difficulty of obtaining and maintaining distribution. Marketing managers working toward Gate 5, or in entrepreneurial companies much earlier in the process, are faced with decisions about whether and how to use scarce resources for market testing, in order to reduce the risk of a possibly unsuccessful market launch. Decisions about whether to conduct a market test, and whether to do so in the field or in a laboratory, must consider the likelihood of competitive interference with a field test, competitors’ ability to benefit themselves from such a test, and the company’s willingness and ability to spend money on test marketing. Stage 5: Commercialization Decisions At this point, the horse is “out of the barn,” but key strategic decisions remain about how to roll out the product in hopes of winning competitive advantage. Commercialization requires considerable coordination between the various functional areas. Large sums may be required even if the new product is a brand extension. Because marketing is responsible for making the new product available, developing awareness of its unique properties, inducing trial, and fostering repeat purchases, its role is critical. There are a number of different commercialization strategies. One is to forgo market testing and move directly to a rollout region by region or nationally from the outset. Such a strategy is used when there is little risk, as is usually the case with brand extensions and when copying a competitor’s product that has experienced successful test marketing. For industrial products, the use of the internet and e-mail to contact large accounts facilitates and accelerates the introduction. Another commercialization strategy involves using a different kind of test market—one that is not necessarily representative of the target audience. Some companies use a rollout test versus a more elaborate market test, provided the results from the market simulation studies are strongly positive. Thus, they launch their product in, say, 10 percent of the country and rely on fast sales results data to check how well the product is doing. As global consumer goods markets become more similar, more companies are testing in a few countries, then following with a global rollout. For example, after Colgate successfully launched a new shampoo in the Philippines, Australia, Mexico, and Hong Kong, it was rolled out in Europe, Asia, Latin America, and Africa.31 Choices among the above strategies are based on the trade-offs between risk, the need to cash-flow the introduction, and the speed with which competitors are likely to react, among other factors. We’ll examine alternative marketing strategies for the commercialization of new products, and the market conditions where each makes most sense, in greater detail in Chapter 15. 270 Section Three Developing Strategic Marketing Programs Limitations of Stage Gate Thinking and Processes Stage-gate thinking is useful in companies of all ages and sizes. Even in new startups or in small or young companies whose resources—both human and Strategic Issue financial—are limited, the simultaneous creativity and discipline The simultaneous creativity and discipline entailed in stage-gate thinking can serve as a foundation for entrepreentailed in stage-gate thinking can serve as a foundation for entrepreneurial neurial initiative while balancing these factors with some measure of initiative while balancing these factors with discipline. Such balance can help mitigate the risk of costly new prodsome measure of discipline. uct failures that could lead a precarious young company to bankruptcy. On the other hand, critics of the overly restrictive role of planning—in both large and nascent companies alike—argue that most of the time, the best-laid plans do not typically predict how success is won (see Exhibit 10.13). More often, what eventually works is a product different than that which was initially proposed, sold to different consumers than originally intended, and used for something that its inventor had not even imagined. Who could possibly have imagined all the different ways in which personal computers, cell phones, the internet, and other technological innovations have changed people’s behavior, even their lives? Thus in their new book Getting to Plan B, John Mullins and Randy Komisar argue that a more open-minded, experimental, and data-driven approach to innovation—one fundamentally different from the more linear, traditional approaches like the stage-gate processes—is needed to maximize innovators’ chances for success.32 Exhibit 10.13 A Can Big Companies Really Innovate? growing chorus of entrepreneuriallyinclined voices argues persuasively that for new products—or new companies—based on ideas where there is considerable uncertainty, the inherent assumption that the new product development process and its outcomes can be planned is dead wrong. Computer scientist Bill Joy, a co-founder of Sun Microsystems and now a venture capital investor, puts it even more bluntly. “Big companies almost never innovate.” Joy argues that the main problem in most big companies is that they simply fail to undertake small, quirky, controversial projects that might fail, but also have the potential to grow. Many entrepreneurs, on the other hand, are putting to use a new set of approaches to the innovation challenge based not on planning (After all, who can really plan how a genuine innovation will pan out?), but on rapid and low-cost experimentation. “Fail early and fail inexpensively” is their mantra. Sometimes dubbed the Lean Startup approach, it relies on a minimum viable product or prototype that’s far less developed than what the innovator probably envisions, validated learning (from customers’ actual feedback and purchases—or not), and rigorous measurement using actionable metrics. As the validated learning arrives from the marketplace through a series of build-measure-learn cycles, the idea is to change course—or “pivot” in the new entrepreneurial vernacular—and quickly adapt to what the market is saying. By rigorously examining the untested assumptions— or “leaps of faith”—in entrepreneurs’ initial plans, this process often mercifully kills the initial concept and results in better products that customers actually want to buy. Planning it is not. But disciplined it is. And effective, too. Source: Bill Joy, “Large Problem: How Big Companies Can Innovate,” Fortune, November 15, 2004, p. 214; John Mullins and Randy Komisar, Getting to Plan B: Breaking Through to a Better Business Model, Harvard Business Press: 2009; and Eric Reis, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, Crown Business: 2011. 271 Chapter Ten Product Decisions Product Decisions over the Product Life Cycle While product decisions are perhaps most visible and dramatic at the time new products are introduced, what happens after the launch—sometimes many years thereafter—has substantial influence on a product’s profitability over its lifetime. The product life cycle offers important insights into how decision making—for the product itself and for other elements of the marketing mix—is likely to evolve. The product life cycle is concerned with the sales history of a product or product class. The concept holds that a product’s sales change over time in a predictable way and that products go through a series of five distinct stages: introduction, growth, Strategic Issue shakeout, maturity, and decline (see Exhibit 10.14). Each of these stages The PLC concept is extremely valuable in provides distinct opportunities and threats, thereby affecting the firm’s helping management look into the future and better anticipate what changes will strategy as well as its marketing programs. Despite the fact that many need to be made in strategic marketing new products do not follow such a prescribed route because of premaprograms. ture failure, the concept is valuable in helping management look into the future and better anticipate what changes will need to be made in marketing programs. At the beginning (the introductory stage), a new product’s purchase is limited because members of the target market are insufficiently aware of its existence; also, the product often lacks easy availability. As more people learn about the product and it becomes more readily available, sales increase at a progressively faster rate (the growth stage). Growth slows as the number of buyers nears the maximum and repeat sales become increasingly more important than trial sales. As the number of both buyers and their purchases stabilizes, growth becomes largely a fu