Mooradian PDF

Strategic Marketing
Mooradian Matzler Ring

First Edition
Strategic Marketing
Todd Mooradian Kurt Matzler Larry Ring
First Edition
ISBN 978-1-29202-056-3
9 781292 020563
Strategic Marketing
Todd Mooradian Kurt Matzler Larry Ring
First Edition
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P E A R S O N C U S T O M L I B R A R Y
Table of Contents
1. Appendix: Basic Financial Math for Marketing Strategy

Todd Mooradian/Kurt Matzler/Lawrence J. Ring 1
2. Appendix: Strategic Marketing Plan Exercise
3. Appendix: The One-Page Memo
4. Appendix: Case Analysis and Action-Oriented Decisions
5. Overview of Marketing Strategy and the Strategic Marketing Process
6. Situation Assessment-- The External Environment
7. Situation Assessment-- The Company
8. Strategy Formation
9. Implementation
10. Planning, Assessment, and Adjustment
11. Market Definition
12. Context-- PEST Analysis
13. Customer Assessment – Trends and Insights
I
14. Consumer and Organizational Buyer Behavior
15. Competitor Analysis – Competitive Intelligence
16. Company Assessment – Missions and Visions
17. Company Assessment – The Value Chain
18. Industry Analysis
19. Product Lifecycle
20. Experience Curve Effects on Cost Reduction
21. Economies and Diseconomies of Scale
22. Economies of Scope/Synergies and Virtuous Circles
23. Market Share Effects
24. Scenario Analysis
25. The Marketing Concept
26. What Is a Marketing Strategy?
27. Generic Strategies – Advantage and Scope
28. Generic Strategies – The Value Map
29. Generic Strategies – Product-Market Growth Strategies
30. Specific Marketing Strategies
31. Market Segmentation
II
32. Loyalty-Based Marketing, Customer Acquisition, and Customer Retention
33. Customer Lifetime Value
34. Competitive Advantages
35. SWOT Analysis
36. Targeting
37. Positioning
38. Customer-Oriented Market Research
39. Brands and Branding
40. Products – New Product Development
41. Products – Innovations
42. Products – Product Portfolios
43. Pricing Strategies
44. Promotion and People – Integrated Marketing Communications
45. Place – Distribution
46. Budgets, Forecasts, and Objectives
47. Assessment and Adjustment
Index 417
III
IV
APPENDIX
Basic Financial Math for Marketing Strategy
PART ONE: COST-VOLUME- cost of each unit sold) multiplied by quantity

PROFIT LOGIC sold (Q):
There are some fundamental relationships among TVC = VC>u * Q

prices, volume, and costs that define the income Variable costs represent the costs of material
statement and drive profitability. These relationships and labor coming into the firm—its “inbound
are logical—you can deduce them by thinking about logistics” in its value chain. Variable costs are
the way a business works and the way its accounts are cost that vary with volume. To return to the
defined and relate to one another. In fact, under- previous example, Perdue Farms’ analysts esti-
standing their interrelationships can illuminate im- mated that the variable costs per unit for
portant aspects of business plans and differentiate chicken hot dogs would be $0.582 per pound
alternatives in strategic planning. These terms and (including processing and packaging), and
their interrelationships are defined below: $0.582 multiplied by 200,000 pounds per week
would yield a total variable cost of $116,400
• Total revenue (R; the total amount of money per week (or $6,052,800 per year).
taken in) equals average price (P; the average
• Total costs (C; the overall total paid out to op-
amount received for each individual unit sold) erate the business) equal total variable costs
multiplied by quantity sold (Q; the number of (TVC) plus total fixed costs (FC or “overhead”;
units sold): costs that don’t vary with production or
R = P *Q change across levels of sales):
“Selling prices” are generally stated for each C = TVC + FC
level of distribution. So there may be a manu- Fixed costs do not vary with volume. As more
facturer’s selling price, a distributor’s selling units are manufactured and sold, fixed costs
price, and a retail selling price. In that respect, remain the same. Fixed costs represent the
the selling prices may be thought to codify value chain “operations” of the firm. In
“outbound logistics” to channel members and Perdue’s case, total fixed costs related to the
customers. For example, when Perdue Farms chicken hot dogs amounted to $1.2 million for
was considering whether to enter the chicken marketing, $60,000 in salaried expenses, and
hot-dog business, their analysts estimated they $22,500 in depreciation, for a total of $1.285
could sell 200,000 pounds of this product each million in total fixed costs. Therefore, the total
week at a manufacturer’s selling price of $0.75 costs were equal to $6,052,800 (TVC) plus
per pound. This level of sales would have re- $1,285 million (FC), for a total of $7,337,800.
sulted in total revenues of 200,000*$0.75, or • Total revenues (R; money in) minus total costs
$150,000 per week (which, when multiplied by (C; money out) equals profit (p ; the money
52, equates to $7.8 million per year in total rev- the firm can keep):
enue). In that same example, the distributor’s
selling price was expected to be $0.80 per R - C = p
pound and the retail selling price was expected In the Perdue example, the profit is therefore
to be $1.23 per pound. equal to $7.8 million (in total revenue) minus
• Total variable costs (TVC; the costs of goods $7,337,800 (in total costs), for a final value of
sold) equals variable costs per unit (VC兾u; the $462,200.
From Appendix A of Strategic Marketing, 1/e. Todd A. Mooradian. Kurt Matzler. Lawrence J. Ring. Copyright © 2012 by
Pearson Education. Published by Prentice Hall. All rights reserved.
1
Appendix: Basic Financial Math for Marketing Strategy
These relationships are fairly straightforward, more products per customer (increase use). For in-
and they make sense if we think about what goes into stance, in the aforementioned example, Perdue de-
each variable or “account” and how revenues and bated whether to market its chicken hot dogs to
costs are incurred. Despite its apparent simplicity, heavy users (who might consume as much as one
this cost-volume-profit logic (presented graphically pound per week) or to light users (who might only
in Figure 1) and its application to marketing strat- use one pound per month). Clearly, selling to a few
egy can be extremely informative. In fact, cost-vol- “heavy users” is worth as much as or more than sell-
ume-profit logic facilitates sensitivity analysis and ing to many “light users”.
underlies breakeven analysis—two basic ways of It is useful here to think about the revenues per
evaluating investments, including capital outlays and pound and per user as well as the total revenues that
marketing expenditures and alternatives. might be expected. In other words, there is valuable
As Figure 1 illustrates, several of the basic information in both aggregate and unit-level analy-
components involved in cost-volume-profit logic ses. Figure 1 shows both. At the aggregate level,
(shown as nodes in the graphic) can be broken out unit-level price is multiplied times quantity sold and
even further. For example, as stated earlier, revenue unit-level variable costs are also multiplied times
equals average price times quantity sold (R = P * Q), quantity sold to arrive at sales (total revenue) and
and quantity sold itself can be broken down to the total variable costs. This allows for dynamic model-
number of customers (C) multiplied by the average ing. For example, if price changes, quantity sold also
purchase quantity (PQ): changes, and, as a result, revenues and costs change
in concert. Typically, as price is increased, quantity
Q = C * PQ
sold decreases. In Purdue’s case, one alternative pos-
This greater detail underscores two basic ways to sibility that was considered was to market to light
grow sales: Either attract more customers or sell users at a much higher price, say $0.90 per pound
Price
(/Unit)
Number of Sales ($)
Customers
Sales (units)
Purchase Rate ⴚ ⴚ Contribution ($)

(Units/Customer
Variable Costs
($/units)
Total Variable
Costs ($)
Sales (units)
Advertising
Expenditures
ⴚ Profits ($)
Sales
Expenditures
Public Relations ⌺ Marketing Mix

Expenditures Activities ($)
Marketing
ⴙ Overhead ($)
Other Marketing
Mix Expenditures Investment
ⴙ Overhead ($)
(R&D, etc) ($)
Administrative
Marketing ⴝ Overhead ($)
Research
Unit Contribution
Margin
FIGURE 1 Cost-Volume-Profit Relationships
2
instead of $0.75. The company expected that at the Of course, some costs are neither perfectly
higher price, demand would be much lower but that variable nor completely fixed; costs can also be
the higher price would compensate with increased mixed, semi-variable, step-function, and so forth.
revenue per pound sold. These variants are not hard to incorporate into cost-
It is also helpful to understand that unit-level volume-profit thinking. For example, if the store can
revenue (price) minus variable costs per unit yields a sell 20 dresses per clerk and it must schedule another
value known as the “contribution margin”—or the clerk when sales are expected to exceed 20 (and yet
contribution of each unit to covering overhead. another clerk on very busy days when sales will ex-
Contribution margin per unit is a key measure; it al- ceed 40, and so forth), then fixed costs become a step
most always varies across the firm’s assortment of function.
products and product bundles, and understanding
which products make more money and which make Sensitivity Analyses
less, and what roles each product plays within the The relationships spelled out in the previous sections
overall assortment and strategy, is invaluable. In the allow us to create dynamic models—models in which
Perdue example, the contribution was equal to the changes in one variable or assumption change the
manufacturer’s selling price ($0.75 per pound) whole system—and also to perform sensitivity analy-
minus the variable costs ($0.582 per pound) for a ses. Sensitivity analyses are “what-if” analyses in which
value of $0.168 per pound. changes in specific variables are modeled out to deter-
mine their impact on other variables and, ultimately,
Cost Structures their effects on profits. In this regard, it is worth not-
Costs or expenses can be thought of as falling into ing that quantity sold (Q, or “Sales” in Figure 1)
two categories: variable and fixed. Variable costs are appears twice in the model: both revenue (R = P * Q)
costs directly associated with a unit of product sold. and total variable costs (TVC = VC * Q) are a
For example, if a store sells a dress, it incurs the cost function of Q. This makes sense, because both rev-
of that dress. If it doesn’t sell the dress, the dress stays enues and costs are direct functions of the number
in inventory and the costs are not incurred (leaving of units that are sold. Also, in the real world, the
out the cash-flow implications of buying and storing quantity sold is typically related to price; in most
the dress to have at the ready). However, the store cases (but not all), if the price is lowered, then the
had to have clerks available as well as the store facility quantity sold will increase. Similarly, there is a rela-
itself, whether or not a customer came in to buy the tionship between another variable—one not ex-
dress, so salaries and rent are fixed costs—in other pressly included in these models—and quantity
words, they do not change with every unit sold. sold. That variable is quality. In general, the higher
Figure 2 illustrates these basic relationships. the quality of a product (at a given price), the
osts Total Costs

ble C
Varia
Fixed Costs
Units Sold
FIGURE 2 Simple Variable-, Fixed- and Total-Cost Structure
3
higher the quantity sold and, most likely, the to estimate or measure as well. For instance, how
higher the variable costs per unit. much do sales (demand) increase given a change in
Thus, these basic formulas allow us to perform advertising? How much do sales drop given a cut in
“what-if ” analyses. What if we lower the price (and personal selling efforts? How much will demand fall
keep quality constant) and assume sales increase by if quality or service is pared back? In each of these
some certain percentage? What if we raise the qual- cases, elasticity is defined by the general formula:
ity 20 percent (and assume variable costs also go up ¢Q ¢Q
exactly 20%), raise the price 10 percent, and assume E = or E = ,
sales increase 8 percent (after all, we’re increasing ¢P ¢I
quality by more than we’re increasing price)? Of where E is elasticity, Δ (“delta”) is change, Q is quan-
course, we often have good marketing research tity demanded, P is price, and I is the more general
data regarding how much sales will increase or de- variable “input”—in other words, the input that the
crease given specific changes in price, quality, and firm changes, whether it be the price, advertising,
marketing expenditures—but sometimes, we must sales, quality, or something else. Drawing on basic al-
live with informed assumptions. If these assump- gebra, this same equation can be reformulated as:
tions are sensible and ranges of possible outcomes
¢Q = E * ¢I
are considered (via sensitivity analyses), then the
possible outcomes are likely well covered. Still, it is by multiplying each side by ΔI. Thus, if a firm has a
important to understand the interrelationships in series of observations about quantities sold at differ-
cost-volume-profit thinking and to “surface” (i.e., ent levels of the input, it can estimate E by running
state clearly) and make an effort test all related un- regressions; here, E is simply the beta (β) for I re-
derlying assumptions. gressed on Q.
Even if the strategic marketer is unfamiliar
with the underlying math of regression, the logic of
Elasticity these relationships remains straightforward: How
Elasticity refers to responsiveness of demand. In does Q change when some input I is changed? For ex-
other words, elasticity is a measure of changes in de- ample, in the chicken hot dog example, the question
mand/sales due to changes in any marketer input, in- might be “How does the quantity purchased change
cluding things like advertising, sales effort, and so as the price per pound of chicken hot dogs is either
forth. In economics, the term “price elasticity of de- raised or lowered?” Estimating these relationships
mand” relates the demand for a commodity, such as and understanding the effects of changes in the vari-
gasoline, to changes in the price of that commodity. ous components of the cost-volume-profit relation-
Gasoline demand, for example, is not terribly elastic ship is fundamental to sensitivity analysis.
because consumption is partly discretionary, partly a
function of long-term decisions (such as the length
of one’s commute), and partly tied to ongoing com- Breakeven Analysis
mercial activities that are not easily adjusted. In con- Earlier in this appendix, we recognized a simple cost
trast, demand for wine is more elastic, because a structure, distinguishing costs as purely variable
large portion of this demand is discretionary and, costs and purely fixed costs. (Again, variable costs
when the price goes up, consumers can quickly ad- change with each unit sold, whereas fixed costs do
just their wine consumption and find substitutes. not change across any level of sales.) Although costs
A firm often must make assumptions about or can behave differently than these two simple classifi-
perform research to determine the elasticity of de- cations, use of these two categories allows us to de-
mand for its particular products (as compared to termine the point in sales at which total revenue is
broad categories of commodities). There are also equal to total costs (variable costs times quantity sold
other change-effect relationships very similar to plus total fixed costs)—that is, the point at which the
price elasticity that the marketing strategist will want firm does not make a profit but also does not take a
4
loss. This is also known as the breakeven point, and it Figure 3 shows breakeven graphically.
can be calculated as follows: Breakeven (in units) is an important sales level to de-
termine. Strategic marketers want to understand
R = C (p = 0) breakeven because it represents the point at which
We know that revenue equals average price times capital investments (such as new plants or equip-
quantity sold, that total cost equals total variable ment) and program investments (such as advertising
costs (TVC) plus total fixed costs (FC), and that total or research and development) are paid back without a
variable costs equals variable costs per unit times profit, but without a loss either. Marketers will also
quantity sold: want to know how changes in price affect payback. An
increase in price will steepen the total revenue line be-
R = P *Q cause each incremental unit of sales brings in more.
C = TVC + FC However, the price increase may also reduce the likeli-
TVC = VC>u * Q hood of achieving a given level of sales in units.
To return to the Perdue Farms example, our
Using basic algebraic principles, we can combine breakeven quantity, Qbe, will be equal to our FC
these equations as follows: ($1.285 million) divided by the value we get when we
subtract our VC ($0.582 per pound) from the manu-
C = VC>u * Q + FC
facturer’s selling price ($0.75 per pound). To simplify,
Therefore, at breakeven, revenue is equal to total this quantity is equal to $1.285 million divided by
variable costs (TVC) plus total fixed costs (FC): $0.168, which gives us a value of £7.686 million per
year (or £147,000 per week).
(P * Q) = (VC>u * Q) + FC
and profit (p ) is zero. We can solve this equation Margins and Mark-ups
for Q (the breakeven quantity in units) by subtract- Above we defined a margin—in particular, the “con-
ing (VC兾u * Q) from both sides and then dividing tribution margin”—as the difference between the
by (P ⫺ VC兾u): price per unit and the total variable costs per unit
(CM ⫽ P ⫺ VC兾u; see Figure 1). In certain cases,
FC the contribution margin is the difference between what
Qbe =
aP - b
VC a reseller, such as a retailer, pays for a product and the
u sales price (e.g., if a store sells a dress for $100 and its
$
ue
en
R ev s
tal rofit
To P
sts
ble Co Total Costs
Varia
Fixed Costs
ses
Los
Units Sold
FIGURE 3 Breakeven Analysis
5
cost for the dress was $50, its contribution margin is using the wrong reference point (denominator)
$50). Still, it is worthwhile to clarify some particular would be dramatic and would cause confusion.
uses of the term “margin” and to distinguish it from the Because gross margin (the total contribution
term “mark-up,” if only because these terms are often of sales toward fixed costs) is equal to average price
confused and do have specific and different meanings. (P) multiplied by quantity sold (Q), gross margins
A margin, as stated, is the difference between and changes in gross margin can be readily graphed
sales price and total variable costs. If margin is ex- in a two-dimensional space defined by average price
pressed as a percentage, it is always the difference di- and quantity sold. Figure 5 shows such a graph
vided by the total selling price. Remember, margin is comparing gross margins for sales of a product with
not the difference divided by the costs. That is, in costs of $100, comparing sales at a price of $200
Figure 4, margin is equal to B divided by A (i.e., AB ), not (where quantity sold is estimated to be 1,000) with
B divided by C (CB ). In comparison, mark-up is the sales at a price of $150 (in which case the contribu-
amount over costs that a firm, usually an entity in the tion margin has been cut from $100 to $50 and
channel of distribution (such as a retailer), adds onto quantity sold is estimated to be 1,500). The graph
what they paid for a product to arrive at the selling highlights the reality that, at the reduced price (and
price. Markup can be attributed to the value created reduced contribution margin), the firm realizes in-
by particular operations. Thus, the retailer’s margin creased sales in units (from 1,000 to 1,500) and in-
and its markup are the same amount of money in creased sales in dollars (from $200,000 to $225,000),
dollars and in percentage terms. Usually, markup is but the gross contribution margin drops from
expressed as a percentage; it is the amount of profit $100,000 to $75,000.
divided by the selling price of the unit sold. This is
often confusing, because it seems logical that
markup would be on the cost as in the cost plus the Part One Summary
markup. It is not. In retailing in particular, markup is As illustrated in the preceding sections, cost-volume-
always expressed as a percent of selling price—and profit logic—the relationships among revenues, costs,
thereby related as a percent of selling price. Because volume (sales), and profits—is fundamental to ana-
both markup on selling price and markup on cost are lyzing marketing programs, comparing alternatives,
conventionally expressed as percentages, the result of and formulating marketing strategies. This logic does
not involve complicated math, but it usually involves
making some well-founded assumptions, surfacing
those assumptions (i.e., articulating the assumptions
and testing them against reality as far as possible),
B and relating known parameters, links, and plans to
these fundamental business relationships. This
process allows marketers to consider a wide variety of
scenarios such as how a drop or raise in price would
affect sales. Or, another scenario might explore the re-
A lationship between spending a particular amount on
a marketing communications program (marketing
overhead), and sales level at a particular price to
C ‘breakeven’ on the investment and thereby to begin
adding to profits?” “If we add a product with a differ-
ent price and contribution margin and it cannibalizes
a certain assumed percentage of existing sales but
adds the remainder as incremental sales, is the firm
better off launching the line extension or not?”
FIGURE 4 Margin and Markup Having a solid, even intuitive understanding of the
6
– –
P P
Gross Margin
$100,000
Gross Margin $75,000
Q Q
FIGURE 5 Graphic Representations of Gross Margins
logical relationships integrated in “cost-volume- essentially exactly what it lent). Thus, a loan’s interest
profit” framework is therefore an invaluable tool to rate over-and-above inflation can be thought of as the
analyzing alternatives and thinking strategically. “price” the lender charges for the loan.
As previously mentioned, money changes
PART TWO: THE TIME VALUE value across time, and, as a rule, it takes more money
in the future (“future value”) to equal a given
OF MONEY
amount of money today (“present value”). It is not
Money changes value across time—in fact, it is almost difficult to understand the basic logic of this “time
always true that any amount today will be worth more value of money” and to translate these ideas into
in the future. For example, if a business takes out a simple formulas. In fact, these formulas are pro-
loan today for some amount of money, say $100,000, grammed into most spreadsheet applications and
it must repay more than $100,000 in the future. If the are easy to apply. The following sections explain the
company were only going to pay back an identical logic of the underlying algorithms, because it is use-
amount ($100,000), there would be no incentive for ful to understand this logic before applying the
the lender to make the loan. In fact, given the reality of spreadsheet tools.
inflation—the fact that things generally become more
expensive across time—the lender would actually lose
money if it gave the borrower money today and only The Basic Logic and Formula
got that same amount back later. Because of these con- If a bank loans a company $100 today and the simple
cerns, lenders must charge some additional interest interest rate is 10 percent, then in one year, the repay-
rate (on top of inflation) that represents the profit on a ment amount will be $110—that is, $100 today
loan. (After all, if a lender only charges the rate of in- equals $110 in one year at 10 percent interest. In this
flation, it will still have no incentive to commit its situation, the present value (PV) is $100; the interest
money and take on the risks of the loan to get back rate (i) is 10 percent; and the future value (C) is $110.
7
If we express this as an equation, the future value our original investment amount plus the amount we
equals the present value itself plus interest (i.e., the earned in period one. So, if we invest $100 and the
present value multiplied times the interest rate): interest rate is 10 percent, after one year we have
$110. Then, after the second year, we earn ten percent
C1 = [(PV]0 * 1) + [(PV]0 * i)
on the entire $110 (and not on the just original
Basic algebra (specifically the distributive property) $100). Our total amount after both years can there-
allows us to reformulate this equation as follows: fore be calculated using the following formula:
C1 = PV0 * (1 + i) C2 = [[PV]0 * (1 + i) * 1] + [[PV]0 * (1 + i) * i]
It is similarly uncomplicated to work out a for- Here, we’re computing the end-of-the-first-year
mula for present value—or the amount some future balance (PV0(1 + i)) times one (which gives us the
payment is worth today—by dividing each side of original amount back) and also multiplying the end-
the future value equation by (1 + i) (i.e., multiplying of-the-first-year balance times the interest rate (i) to
both sides by (1 1+ i) to arrive at the following: get the increase in value. Again, we can use basic alge-
bra to pull out the common term PV0 * (1 + i), which
leaves (1 + i) and we’d get 33PV40 * (1 + i)4 * (1 + i)
C1
PV0 =
(1 + i) which equals 33PV410 * (1 + i)4*24. So:
These straightforward formulas are for future value C2 = PV0 * (1 + i)2
after just one year and for present value of an amount
that will occur in one year. The subscript indicates the and therefore:
point in time or “period.” Here, zero (0) is the present C2
(zero periods have passed so far), so PV0 is actually PV0 =
(1 + i)2
redundant, and C1 indicates future value after one pe-
riod; in this example a period is equal to one year— We can now create a general formula by recog-
but the formula and logic can be applied to analyses nizing that the key to compounding interest is simply
in which the unit of time (i.e., “period”) is something multiplying by (1 + i). Compounding across two pe-
other than a year, such as a month or a day. riods was achieved by multiplying times (1 + i)2; thus,
compounding across three periods would be achieved
by multiplying (1 + i) * (1 + i) * (1 + i) or
Multiple Years (1 + i)2, and compounding across n periods would
Of course, people are frequently interested in be achieved by multiplying times (1 + i)n. So, the
thinking about the value of money received in general forms of the relationship between present
more than one year. What if we wanted to calculate value and future value are:
the present value of money received in two years,
for example? In this situation, we can use C2 to de- Cn = PV0 * (1 + i)n
note the future value after two periods—here, two and:
years because we’re defining each period as equal
Cn
to one year in our analysis. (Note that such analy- PV0 =
ses can also be done with months as the unit of (1 + i)n
time.) Similarly, C3 would denote a lapse of three These equations use the subscript n to indicate some
periods; and so on. indeterminate number of periods, n, so Cn is the
We can figure out how much some amount generic “future value after some number of periods n.”
today would be worth in two periods by remember-
ing that, if we invested an amount today in, say, a
bank, we’d want to have the bank add the interest Annuities
after one period—or “compound” our investment— Often in business and certainly in marketing, the
and then compute the second-period interest using manager is not just analyzing the present value of a
8
single future amount received (or paid) in time If an annuity is going to involve some initial
period n. Instead, the issue is valuing some stream of investment—as annuities usually do—than an ex-
revenues that recur across n periods of time—that is, tension of this logic and formula is to include the ini-
the concern is for valuing a series of payments or tial investment as C0 (value today), which is usually
profitable sales on a recurring basis. For example, negative (i.e., it is a cost, not a revenue):
banks make loans and expect to be paid back with a T Cn
series of regularly recurring loan payments. Similarly, NPV0 = -C0 + a
a marketer who wins a customer’s loyalty—his or 1 (1 + i)n
her repeated patronage across time—has a recur- or
ring stream of margins that have some specific T
Cn
present value. These recurring streams of revenue NPV0 = a - C0
are called annuities, and the present value of an an- 1 (1 + i)n
nuity is referred to as the “net present value” (NPV), because C0 would normally be negative (i.e., an in-
which is simply the sum of the present values of each vestment or cost, not an inflow of cash). For exam-
payment. Thus, if a marketer knows that a customer ple, if the initial investment to achieve a three-period
will buy one unit every year for three years and the annuity of $10 per period at 5 percent interest is $15,
margin or profit on each sale is $10 at a 5 percent the formula would be:
interest rate, the net present value of that three-year
annuity could be computed using the formulas C1 C2 C3
NPV0 = C0 + 1
+ 2
+
above. In fact, the NPV is simply the sum of three (1 + i) (1 + i) (1 + i)3
present value computations: and the calculation would be:
C1 C2 C3 10 10 10
NPV0 = 1
+ 2
+ NPV0 = - $15
(1 + i) (1 + i) (1 + i)3 + +
(1 + .05) (1 + .05)2 (1 + .05)3
which, in our example, yields the following: which equals $12.23.
10 10 10
NPV0 = + +
(1 + .05) (1 + .05)2
(1 + .05)2 Part Two Summary
= $27.23 (not 30!). The relationships above and the corresponding for-
mulas are really all it takes to understand the logic
Thus, the general formula for net present value is and the underlying the concepts of future value,
simply: present value, and net present value (the present
T Cn value of an annuity). This logic and these formulas
NPV0 = a n are the very basis for thinking about “the time value
1 (1 + i)
of money.” As stated previously, money changes
where sigma (g) denotes sum (add these terms all value across time, and the time value of money is an
together) and the whole formula denotes “the sum of essential concept in business—especially for mar-
the values of this formula from n ⫽ 1 to n ⫽ T,” with keters, who must think strategically about pricing,
T representing the number of periods. That is why future prices and future costs, delayed payments
we use C for what’s been labeled “future value”—C (financing), and recurring streams of revenues, such
denotes a future “cash flow.” It is important to re- as rents and customer lifetime value (CLV). Of
member that, if the period for analysis is months in- course, the time value of money is also important
stead of years, then the interest rate (i) should be the when thinking about borrowing for cash flow and
annual interest rate divided by 12. Similarly, if you’re for capital budgeting tasks. This value is easily com-
using quarters, the interest rate is the annual interest puted in any spreadsheet application, but it is still
rate divided by 4, and so on. useful to understand the time value of money con-
ceptually before running those computations.
9
10
APPENDIX
Strategic Marketing Plan Exercise
From Appendix B of Strategic Marketing, 1/e. Todd A. Mooradian. Kurt Matzler. Lawrence J. Ring. Copyright © 2012 by
11
APPENDIX
Strategic Marketing Plan Exercise
A major objective of this text is to provide you with the “Situation Assessment.” Worksheet A-1 asks you
the process, concepts, and tools needed to develop a to provide a business definition describing the busi-
strategic marketing plan. What follows in this note is ness in which your company wants to be involved.
a “paint-by-number” set of worksheets that will assist You should refer to the particular line of business
you in developing, as an exercise, a strategic market- here, not the company as a total organization. Your
ing plan for a specific product or market. business definition should be specific; it is not
All strategic marketing plans are fundamentally enough to simply say the company will “provide so-
similar, varying in the degree of specificity required as lutions.” You must specify the kinds of solutions it
a function of the planner’s predilections and corpo- will provide to different types of people or organiza-
rate policy. The following worksheets provide an tions and the ways in which these will differ from the
overview of planning considerations and tentative competition.
decisions for a particular line of business. Next, you will provide a market profile with
There is no expectation that you will have all of Worksheet A-2. This profile must assess the overall
the specific data and information necessary to make market and define it in terms of the relevant or
your planning precise. You may have to make estimates “served” market. For example, at the broadest level,
and judgments. However, this exercise will reveal the Federal Express serves the “rush” market with its
areas in which you need particular kinds of data or in- overnight delivery services. However, the relevant
formation. For example, you may be able to give only market that Federal Express wishes to serve is the
nominal estimates of your competitive advantages here time- and reliability-sensitive market for small pack-
(using a plus or minus to indicate whether you are in a ages (under seventy pounds) and documents. This
better or worse position than specific competitors), but more precise market definition defines the relevant
you could gather more precise ordinal data via market- market that Federal Express wishes to serve.
ing research in your actual planning process. In the market profile, you must estimate mar-
ket size, share, and growth, and give an indication of
THE STRATEGIC MARKETING the life cycle stage for the product market. You
should also designate your company’s largest com-
PLAN ASSESSMENT
petitor and its share relative to that competitor.
All strategic marketing plans pose and answer three Worksheet A-3 requires you to segment the
fundamental questions: overall market that you have identified. This is often
the most time-consuming task in the exercise, but it
• Where are we now?
is a critical one. The worksheet includes some basic
• Where do we want to go?
instructions to refresh your memory about ap-
• How do we get there?
proaches to market segmentation, and gets you
In fact, these three questions form the basic structure started by asking you to list some differences across
of this exercise. You could use the worksheets to help the total market.
prepare a strategic marketing plan for any business You will then assess differences in the benefits
unit, line of business, product, or market. sought by each market segment with Worksheet A-4.
If there are no differences, then your segmentation
A. Situation Assessment: Where Are We Now? approach is flawed. On the other hand, all segments
The exercise begins by asking you to consider the may benefit the most from a single attribute but vary
question “Where are we now?” This exercise is called in terms of the other attributes. The cell entries on
12
Appendix: Strategic Marketing Plan Exercise
the worksheet are rank orders of the benefits for each Worksheet A-9 continues the assessment of
segment. your company versus its competitors by asking for
Worksheet A-5 continues the “Where are we your overall judgment about the company’s relative
now?” exercise by asking you to describe buyer behav- strength against each competitor in the market seg-
ior and determine what the decision-making process is ments in which you compete. You will use pluses and
in each segment. It may be similar across segments, but minuses in your assessment again, and your judg-
you should still examine the decision-making unit ments may heavily reflect those you made in
(DMU) and the decision-making process (DMP). In Worksheet A-8. Once again, give brief examples to il-
many products or markets, the Chooser (i.e., the per- lustrate your points where you can. Note that market
son or persons responsible for the decision to buy from research could be used to more precisely describe the
you versus another vendor) may be different from the nature and extent of your relative position in this
users (i.e., the individuals who will actually use or con- grid.
sume your services). It is sufficient to indicate job titles Worksheet A-10 continues the situation as-
to characterize the DMUs. You may wish to character- sessment by asking you to construct one or more
ize the DMP in terms of time (long or short term), perceptual maps and indicate your company’s rela-
complexity, or qualitative factors (routine or modified tive position on each map versus its competitors.
rebuy, new task, political, performance, etc.) Each map is, in effect, a cross-section of a customer’s
Worksheet A-6 asks you to assess the individ- brain and should reflect how customers perceive the
ual market segments that you have identified and de- company relative to the competition. This will re-
fine them in terms of the relevant market. This is quire you to choose dimensions; for example, indi-
similar to the work you did in Worksheet A-2, and it vidual customers may perceive various competitive
may be helpful for you to refer to the information options in terms of size (so the dimension might be
about the total served market in that worksheet and “large to small”) and in terms of focus (so the other
break it down by market segment. dimension might be “general purpose to specialized
Next, you will develop an overview of the envi- purpose”). You may have multiple perceptual maps
ronment in Worksheet A-7 based on three analyses: for each segment if you have many significant
dimensions or characteristics.
• Market trends (What are the crucial current Worksheet A-11 completes the Situation
and potential trends in the overall market?) Assessment with a “SWOT” analysis (Strengths,
• Competitive trends (What are the crucial ele- Weaknesses, Opportunities, and Threats) by segment
ments of competitors’ strategies and where are and for the overall market. To a large extent, this ex-
they heading?) ercise will provide a quick summary of the analyses
• Segment/customer trends (What are the cru- you have completed to this point.
cial trends that best describe segment and cus- Worksheet A-12 extends the situation as-
tomer trends that affect your marketing plan- sessment to portfolio analysis and establishes a
ning in the product or market?) transition from “Where are we now?” to “Where
Worksheet A-8 asks you to provide a relative as- do we want to go?” This worksheet consists of five
sessment of how your company stacks up against its pages:
major competitors. First, you will list the competitors
in the product or market. Then, for each competitor, 1. Market Attractiveness/Competitive Position
you will indicate with pluses and minuses whether Portfolio Model Development Process (This
your company is better (+) or worse (⫺) on each ben- page lists the steps involved in the process.)
efit (from Worksheet A-4) and give brief examples 2. Market Attractiveness/Competitive Position
where you can. Note that specific, ordinal data could be Criteria Examples (This page lists ideas for in-
gathered to provide a more precise determination of creasing the attractiveness and strength of your
your relative ranking on each benefit. company.)
13
3. Market Attractiveness/Competitive Position relative position of strategies for improving

Model Input Criteria Evaluation Development market attractiveness and competitive posi-
(This page asks you to establish which of the tion and to complete steps four and five from
criteria from page two you will use to improve page one.)
the market attractiveness and competitive po- 5. Market Attractiveness/Competitive Position
sition of your company and to complete steps Graph Prescriptions (This page provides an
two and three from page one.) example of strategies and their likely positions
4. Market Attractiveness/Competitive Position in each of the nine portfolio matrix boxes.)
Graph (This page asks you to determine the
Worksheet A-1
A. Situation Assessment: Where Are We Now?
1. Business Definition (Product, Line of Business, Industry Segment)
Worksheet A-2
2. Total Market Profile
a. Size (Units and/or $)
b. Share: i. Now:
ii. Sought in Three Years:
c. Growth
Trend
APGR, 3 years
d. Life Cycle Stage
e. Largest Competitor
Your Company’s Relative Share
14
Worksheet A-3
Segmenting the Market
Now that you have described the TOTAL relevant or “served” market, your task is to subdivide the market
into the most appropriate and useful segments. This is a difficult task and demands careful analysis from
all team members. You should start by listing the areas of differences across the total market. For example,
the market may vary by size of firms, nature of business, decision-making units, decision criteria, and so
on. Next, you should evaluate these market differences by the criteria for segmentation, including:
• Are the segments reachable, differentially responsive to some elements(s) of the marketing
mix, and likely to be profitable given different costs that may be associated with starting each
of them with different mixes?
• Are the segments reasonably exclusive, yet mutually exhaustive? Are excluded segments ones
that your company is just as happy to walk away from?
• Which segmentation approach presents the greatest “product-company-market fit?” In other
words, which approach makes the most sense in terms of how your company is set up now,
how well established it is (compared to its competitors) in each segment, and what barriers to
competitive entry are in each segmentation approach?
• Which segmentation approach fits with your company’s LOB mission, goals, and resources?
For example, you might define segments that your company has not traditionally served but
may choose to serve given their growth potential, possibilities for add-on business later, fit
with other corporate business, etc.
Try sequential segmentation: start with broad industry descriptors, proceed through company
characteristics, and try uncovering some differences due to desired benefits of needs. The result may
well be a multidimensional segmentation. Note that you will complete Worksheets A-4 through A-6
using your segmentation approach. You might look at these forms now to help you get started.

3. List Some Differences Across the Total Market:
Worksheet A-4
4. Customer Analysis: Benefits Sought
Customer Benefits Sought Segment A Segment B Segment C Segment D Segment E
NOTE: Rank the order of benefits for each segment.
15
Worksheet A-5
A . Situation Assessment: Where Are We Now?
5. Analysis of Decision Makers in Each Segment
Segment A Segment B Segment C Segment D Segment E
Decision Making Unit (DMU)

(Buyers, Influencers)
Decision Making Process
(DMP)
Worksheet A-6
6. Segment Profiles
Total Segment A Segment B Segment C Segment D Segment E
Size (Units and/or $)
Share
Now
Sought in Three Years
Growth
Trend
APGR, 3 years
Life Cycle Stage
Largest Competitor
Today/Future
Your Relative Share
Worksheet A-7
7. Environment: Our Relative Position Vis-À-Vis Markets, Competitors, Segments, and Customers
• Market Trends
• Competitive Trends
• Segment/Customer Trends
16
Worksheet A-8
8. Competitive Analysis
Major Benefits
Major
Competitors Benefit 1 Benefit 2 Benefit 3 Benefit 4 Benefit 5
Worksheet A-9
9. Strength of Competitors by Segment
Major Competitor Segment A Segment B Segment C Segment D Segment E
⫹ We are BETTER ⫺ We are WORSE
Worksheet A-10
10. Competitive Positioning (Axis relates to benefits by segment)
Map #1 Map #2 Map #3 Map #4 Map #5
17
Worksheet A-11
11. SWOT Analysis: Strengths, Weaknesses, Opportunities, Threats
Strengths Weaknesses Opportunities Threats
Overall Market
Segment A
Segment B
Segment C
Segment D
Segment E
Worksheet A-12
MARKET ATTRACTIVENESS/COMPETITIVE POSITION PORTFOLIO
MODEL DEVELOPMENT PROCESS
STEP 1: Establish the level and units of analysis (business units, segments, or
Situation product-markets).
c
Assessment STEP 2: Identify the factors underlying the market attractiveness and competitive
position dimensions.
STEP 3: Assign weights to factors to reflect their relative importance.
STEP 4: Assess the current position of each business or product on each factor, and
aggregate the factor judgments into an overall score reflecting the
position on the two classification dimensions.
e STEP 5: Project the future position of each unit, based on forecasts of

Strategy
Development environmental trends and a continuation of the present strategy.
STEP 6: Explore possible changes in the position of each of the units, and the
implications of these changes for strategies and resource requirements.
MARKET ATTRACTIVENESS/COMPETITIVE POSITION CRITERIA EXAMPLES
ATTRACTIVENESS OF STRENGTH OF YOUR

YOUR BUSINESS COMPETITIVE POSITION
A. Market Factors A. Market Position
• Size (Dollars, Units) • Relative Share of Market
• Size of Product Market • Rate of Change of Share
• Market Growth Rate • Variability of Share Across Segments
• Stage in Life Cycle • Perceived Differentiation of Quality,
• Diversity of Market (Potential for Price and Service
Differentiation) • Breadth of Product
• Price Elasticity • Company Image
• Bargaining Power of Customers
• Cyclicality/Seasonality of Demand
18
MARKET ATTRACTIVENESS/COMPETITIVE POSITION CRITERIA EXAMPLES
ATTRACTIVENESS OF STRENGTH OF YOUR

YOUR BUSINESS COMPETITIVE POSITION
B. Economic and Technological Factors B. Economic and Technological Position
• Investment Intensity • Relative Cost Position
• Nature of Investment (Facilities, Working • Capacity Utilization
Capital, Leases) • Technological Position
• Ability to Pass Through Effects of Inflation • Patented Technology, Product or Process
• Industry Capacity
• Level and Maturity of Technology
Utilization
• Barriers to Entry/Exit
• Access to Raw Materials
C. Competitive Factors C. Capabilities
• Types of Competitors • Management Strength and Depth
• Structure of Competition • Marketing Strength
• Substitution Threats • Distribution System
• Perceived Differentiation Among • Labor Relations
Competitors • Relationships with Regulators
D. Environmental Factors
• Regulatory Climate
• Degree of Social Acceptance
• Human Factors Such as Unionization
MARKET ATTRACTIVENESS/COMPETITIVE POSITION MODEL

INPUT CRITERIA EVALUATION DEVELOPMENT
MARKET ATTRACTIVENESS
CRITERIA HIGH MEDIUM LOW
Opportunity Size
X AXIS
Opportunity Growth
POSITIONS CAPABILITIES
CRITERIA HIGH MEDIUM LOW
Skills to Support Segment

Y AXIS
(continued)
19
MARKET ATTRACTIVENESS/COMPETITIVE POSITION GRAPH

High
Market Attractiveness
Medium
Low
High Medium Low

Capability/Competitive Position
PRESCRIPTIONS
Exploit Industry
Reinforce Invest to Build
Attractiveness
• Invest to Grow at Maximum • Challenge for Leadership • Specialize Around Limited
Digestible Rate • Build Selectively on Strengths Strengths
• Concentrate Effort on
High
• Reinforce Vulnerable Areas • Seek Ways to Overcome

Maintaining strength Weaknesses
• Withdraw if Indication of
Sustainable Growth are Lacking
Limit Expansion or
Build Selectively Manage Earnings

Harvest
• Invest Heavily in Most Attractive • Protect Existing Program • Look for Ways to Expand Without
Segments • Concentrate Investments in High Risk; Otherwise Minimize
Medium
• Build up Ability to Counter Segments Where Profitability is Investment and Rationalize

Competition Good and Risk is Relatively Low Operations
• Emphasize Profitability by
Raising Productivity
Protect & Refocus Preserve Cash Flow Divest
• Manage for Current • Protect Position in Most • Sell at time That will Maximize
Earnings Profitable Segment Cash Value
• Upgrade Product Line • Cut Fixed Costs and Avoid
Low
• Concentrate on Attractive
Segments • Minimize Investment Investment
• Defend Strengths
High Medium Low

Capability/Competitive Position
20
B. Proposed Strategy: Where Do We Want to Go? ation,” and “control of supply or distribution.” There
Once you have fully assessed your company’s market are many other strategies, too, and it is up to you to ra-
and position in the market, you are ready to propose a tionalize the strategy you choose based on the
strategy (Worksheet B-1). The term “strategy” refers to Situation Assessment to this point. The fourth and
your company’s overall plan of action. It should be dis- fifth pages of Worksheet A-12 should be very helpful
tinguished from “tactics,” which are expedients for car- in determining your company’s strategy.
rying out strategies, and “objectives,” which are near- Once you have clearly stated your company’s
term, measurable, desired end-results. Objectives may strategy, the next step is to make it more explicit by
be qualitative (e.g., increases in customer satisfaction), specifying objectives (also on Worksheet B-1). As
but they should always be measurable (e.g., a 20 % in- discussed earlier, these are near-term (usually one
crease in satisfaction measures). year), measurable, desired end-results, usually ex-
Typically, marketing strategies involve some pressed in terms of market share, some financial
plans regarding products and services and/or mar- measure, and/or additional, qualitative measures
kets. Strategies designed to exploit current markets Note that strategies precede objectives here.
with current products or services are “market pene- Some individuals might believe that objectives
tration” strategies; plans to develop new markets or should be set first and strategies then specified to
focus on particular markets are “market develop- achieve those objectives. This approach is perfectly
ment” or “market segmentation” strategies. Some acceptable—strategies and objectives are derived
other examples of strategies include “new product” hand in hand, in strategic market planning.
or “product development” strategies, and “diversifi- Finally, you will assess risks on Worksheet B-2.
cation” strategies, which involve simultaneous moves To do this, you must ask yourself what types of
into new markets with new products or services. things might happen that would jeopardize the strat-
Still other marketing strategies include “market egy and threaten your company’s ability to achieve its
dominance,” “low cost/lost price,” “product differenti- objectives.
Worksheet B-1
B. Proposed Strategy and Objectives: Where Do We Want to Go?
1. Strategic Statement (Overall and/or by Segment): Remember, “Strategy” refers to the overall
plan of action, e.g., penetration, segmentation, new products, diversification defense, flanker,
etc. “Tactics,” to be specified later, refers to near-term specific actions or maneuvers that you will
employ to carry out your strategy.
2. Objectives (Overall and/or by Segment): Remember, “objectives” are near-term, measurable,

desired end-results. They may be qualitative, but some objectives must be quantitative.
Worksheet B-2
B. Proposed Strategy and Objectives: Where Do We Want to Go?
3. Risk Analysis
Event or Assumption Likelihood of Occurrence Possible Impact Contingency Plan
(continued)
21
RISK ASSESSMENT
• Maintain Awareness Most • Manage to minimize risk
• Low Concern Certain or impact
Least Most
Certain Critical
High Risk
• Reliable data and/or

Least
market research required
Critical
• No impact on strategy • Contingency plans required
C. Marketing Tactics: How Do We Get There? other elements parallel what we have described as the
After your company’s strategy is set, you must turn your marketing mix.
attention to specifying the market program your com- The financial consequences described in
pany will use to carry out its strategy and achieve its ob- Worksheet C-2 require you to give some prelimi-
jectives in the context of the situation you have de- nary thought to the costs of your company’s mar-
scribed and assessed. Worksheet C-1 asks you to keting programs by segment. Again, precision is
consider and describe what will be required in terms of not expected here, but you should have some idea
the “marketing mix” and internal operations support. of costs, margins, and expenses that will enable
Note that “internal operations support” refers you to give reasonable estimates that describe your
to “What will be done when and by whom,” and the expectations.
Worksheet C-1
C. Marketing Tactics: How Do We Get There?
1. Marketing Mix
Current Current Current Current Current

Position Plan Position Plan Position Plan Position Plan Position Plan
Product:
What Is Your
Company Selling?
Service
Maintenance/
Customer Support
Distribution
Communications
22
Current Current Current Current Current

Position Plan Position Plan Position Plan Position Plan Position Plan
Pricing Strategy/
T&C
Internal/Operations
Support
Channel Design
Worksheet C-2
C. Marketing Tactics: How Do We Get There?
2. Financial Consequences (Enter numbers where you can, use the icons below, or invent your own.)
Share of Market
Relative Share
of Market
Sales
Margins (%)
Marketing Expenses
Contribution after
Marketing Expenses
Faster Than Market
Hockey Stick Change

Same as Market (Up or Down) Most Important
Objective for
Staircase Change
Each Segment
Slower Than Market (Up or Down)
GETTING STARTED
for sound strategic marketing planning and get you
Remember, this is a template designed to get you started on your way toward completing a prelimi-
started with building a strategic marketing plan. By nary strategic market plan. You may be somewhat
the time you have completed all of the worksheets in uncomfortable making estimates instead of using
the template, you will have used many of the major “real” data, but you will learn where in the process
concepts and tools from this text and applied them to you need precise data, what kinds of data would be
a specific business. This template should also help most helpful, and how these data are used in strategic
you understand the kinds of information required marketing decision making.
23
24
APPENDIX
The One-Page Memo
From Appendix C of Strategic Marketing, 1/e. Todd A. Mooradian. Kurt Matzler. Lawrence J. Ring. Copyright © 2012 by
25
APPENDIX
The One-Page Memo
Tom Peters and Robert Waterman, in their now-classic in the Appendix, will be lower per-unit margins but
book “In Search of Excellence,” included a section on higher net contribution and profitability”). The one-
the value of a “bias for action,”and highlighted the value page memo should point the readers to the impor-
of the one-page memo as a tool for effective, action- tant information and must tell them what that infor-
oriented communications and for clarifying thinking: mation means. Of course, those appended materials
“John Steinbeck once said that the first step to- should also be relevant, readable, and succinct.
ward writing a novel is to write a one-page
statement of purpose. If you can’t get the one
COMMUNICATING AND
page clear, it isn’t likely you’ll get far with the
novel. . . . It’s little wonder that key assumptions SELLING YOUR IDEA
get lost in a 100-page investment proposal. The The process of writing a one-page memo is interwoven
logic probably is loose. The writing most likely
with the process of making decisions and thinking
is padded. The thinking is almost by definition
shoddy. And, worse, the ensuing debate about
about persuading others to endorse the ideas the
the proposal among senior executives and re- memo conveys. The “others” being persuaded are usu-
viewers is apt to be similarly unfocused.”1 ally busy and are often higher in the organization than
the writer. In fact, thinking about who exactly the
One-page memos are required at Proctor & memo is targeting and exactly what action is being
Gamble, one of the world’s preeminent consumer proposed—Who do you want to do what?—is an im-
marketing companies, and they are invaluable for any portant an important first step in framing the task of
company and any marketing strategist. Distilling the creating a one-page memo. Other initial considera-
essential ideas of an analysis or arguments for a pro- tions should include determining exactly what it is that
posal down to one-page is not easy. It actually takes a is being recommended—What is it the memo wants to
lot longer to create a one-page memo than it does to have happen?—and what the most compelling argu-
write longer reports, but the exercise enhances comments for doing that are. This analysis—who the
munication and persuasion. Additionally, the process intended decision makers are, what it is the memo
almost always leads to better underlying ideas, forcing recommends they do or that they approve, and what
managers to clarify their thinking, surface and exam- the essential arguments are for doing that—leads to
ine their assumptions, and test their own decision- considerations of persuasive strategy: What do those
making criteria and processes. readers care about? That is, what are the readers’ needs
and motivations? What does the reader need to know?
WHAT TO INCLUDE/USE OF What reactions might the reader have—and how can
APPENDICES undesirable reactions be anticipated and cut-off?
Creating a one-page memo does not require that all
the relevant information be included on that one CREATING THE ONE-PAGE MEMO
page. A lot of important data can be appended to the
PREPARATION AND ORGANIZATION. The first
memo. Any data that are attached should be clearly
steps in preparing a one-page memo, steps which
cited and explained in the body of memo. The writer
precede any writing, are to decide:
shouldn’t just point the reader to an appendix (e.g.,
“Financial statements are attached”) but, rather, • Who your reader is/readers are;
should summarize and interpret the attachments • What are the reader’s needs and motivations—
(e.g., “The impact on financial performance, shown what drives this audience to act or not act;
26
Appendix: The One-Page Memo
• What is the objective; what does the memo rec- the intended readers’ perspective or “point of
ommend (specific actions, approvals, etc.); view.” How will they [or he or she] interpret the
• What the reader needs to know; memo? Will they be inclined to agree or predis-
• What will persuade/motivate the reader to take posed to argue against the recommendations?
desired action; and, How do the facts stated in the memo correspond
• Possible reader reactions –questions, concerns, to the reader’s prior understandings?); and,
and reservations; • Rewrite—and rewrite, and rewrite.
Once this context has been fleshed out in some A generic outline of every one-page memo is
detail, then the writer can begin to gather specific el- not really possible, because each memo has a partic-
ements of the memo. The first step is to organize, an- ular purpose and the outline will change depending
alyze, summarize, and prioritize the information. on that purpose, but at least one outline that works
Organizing is part of the preparation for writing— in many strategic business settings includes:
the writer must be confident that he or she has all of
I. The Idea: What are you proposing?
the facts and that those facts supported by data are
II. Background: What facts and events have led
“on hand”—and it is an important step in persuasion
to this being important?
process. It should include sorting facts as supportive
III. Details: How it will work?
or contrary and by importance and power to per-
IV. Motivate the Audience: Who will benefit and
suade the intended audience. This should produce an
how will they benefit?
ordered summary of the key pieces of information—
V. Next Steps. Who has to do what and by when
or “key points” for the memo.
for this to happen?
WRITING THE MEMO. When the information A more detailed version of this generic outline is in-
and key points have been organized, analyzed, sum- cluded as Table 1 below.
marized, and prioritized, the memo writer should
outline the memo in detail. Any good piece of com- Summary
munications has an underlying, organizing outline.
In summary, marketing managers usually influence
This outline may be in the memo writer’s head, but
the broader organization and make things happen
that invites negligence. Explicit outlines are most
not by claiming resources or commanding action—
useful when they are written and available for refer-
in most organizations they do not have that sort of
ence in the next stages, the drafting, and review, and
authority—but rather by persuading the organization
rewriting of the memo itself. Outlines are not “set in
to commit resources and people to support proposals
stone,” but maintaining an explicit outline while
and programs. Learning to communicate persuasively
writing is an important practice for producing clear,
in concise memos can be a powerful tool in that
concise, and persuasive memos.
process. It can also be invaluable in organizing and di-
In summary, during the writing process you
recting the marketing effort; staff and field sales peo-
must:
ple do not have time to read lengthy missives, but they
• Organize, analyze, and summarize informa- must be managed, informed, and motivated—all of
tion—without putting it into a memo or wor- which entails effective communications from the
rying about how it will appear in the memo; marketing manager. This note presents some basic
• Prioritize information—what is more impor- guidelines with regard to creating a one-page
tant and what is less important; memo—a well-tested format made famous Proctor &
• Create a detailed outline of the memo; Gamble, recommended notably in “In Search of
• Draft the memo; Excellence.” The keys to creating an effective memo
• Review the memo—step back and review the are: (1) careful preparation, (2) consideration of the
memo for form and substance. In at least one re- audience and the audience’s motivation to read and
view the writer should very deliberately adopt respond to the memo, and (3) pithy composition.
27
Appendix: The One-Page Memo
TABLE 1: Detailed Outline of a One-Page Memo
1. Opening/‘The Whole Idea’ • Implementation plan;

“I recommend . . .” “This memo recommends . . .” • Financial implications;
• Succinct statement of exactly: • Impact on other functions/brands/businesses; and
• What you’re recommending and when; • Evaluation/measurement—criteria of success.
• Why you’re recommending it—What do 4. Basis for Recommendation/Key Benefits
you expect the recommended action will
Concise statement of most important rationale
accomplish;
for the recommendation.
• Expected impact;
“The most important reasons for this recommen-
• Action/decision expected of the reader, dation are . . .” (typically 2 or 3 justifications, in
assuming agreement (exactly what you priority order).
want the reader to do); and
• Key next step and timing if reader agrees. 5. Discussion
• Concurrences of others; as required Briefly identify, if appropriate, and address:
(1 sentence). • Reasons for not doing the recommendation;
2. Background • Arguments against;
• Major disadvantages—the con’s;
Briefly explain what the issue is all about to get
reader up to understanding speed and put • Major risks/concerns and how plan to manage
recommendation in perspective. those risks;
Include, if appropriate: • Important (and obvious) alternatives to
recommendation—”Alternative options
• Project description;
considered include . . .”
• Past history/experience;
• Implications of rejection of recommendation—
• Current situation; consequences of not doing;
• Define the issue (the problem, the opportu- • Key issues—key factors for success and
nity, or the need and its causes or roots); problems expected;
• Solution requirements: What is required in • All basic assumptions; and
terms of resources or changes, and when will
• Any feasibility issues.
those requirements be needed; and,
• Any pertinent statements of strategy, princi- 6. Next Steps & Timing
ples or objectives. Briefly identify what happens next, when it
3. Recommendation/How it works/How it will should happen, and who is responsible. The
work more specific these steps, schedules, and re-
sponsibilities are, the better.
Briefly outline entire recommendation. Cover all
important elements. Define the solution. Include:
• Objectives;
• Strategic focus;
Endnote
1. Thomas J. Peters and Robert H. Waterman Jr., In
Search of Excellence: Lessons from America’s Best-Run
Companies (New York: Harper & Row, 1982), 151.
28
APPENDIX
Case Analysis and Action-Oriented Decisions
This book presents a paradigm—a way of seeing the particular, with descriptions, evaluations, and plans
world and a framework for addressing strategic mar- to decide:
keting problems—that dovetails with one of the core
Descriptions are simply statements of fact and
teaching methods in business education, the case
organizations of the facts. Some professionals
method. Our strategic-thinking/problem-solving
create value by analyzing, organizing, and stat-
framework, presented in the first section of this
ing facts, but that is not strategic management
book, is about recognizing issues and identifying the
decision making.
appropriate tools, theories, and frameworks to de-
velop strategies, exploit opportunities, avoid threats, Evaluations are assessments of whether some-
solve problems and take action. Those tools, theories, thing is good or bad, to be desired or to be
and frameworks are themselves presented in the avoided. Many people make their living as crit-
thirty-eight short notes that make up the remainder ics, inspectors, or judges by offering evalua-
of this book, Strategic Marketing. tions of what others have done, but that is not
This appendix focuses specifically on ways to management.
approach and analyze challenges, opportunities, Plans to decide are about delaying decision
threats, and problems that are presented in written making; for instance, a person might say, “I
cases. Therefore, the appendix will be especially use- think we should meet another time to look at
ful to students who are required to analyze written this again” or “I think we should do more re-
cases and come up with action-oriented recommen- search.” Sometimes, decisions must be delayed
dations to the challenges therein. It also will be useful and research can be invaluable, but delays and
to students who are participating in marketing-strategy further research are not strategic management
simulations involving a sequence of analyses, deci- decision making.
sions, and simulated actions. Like the case method it-
self, this note is really about making action-oriented Thus, managers don’t just issue descriptions
decisions in general; therefore, it will also be valuable and evaluations or make plans to decide. Rather,
to practicing marketing strategists. After all, the whole managers direct and take action—which means that
point of studying a case in the “business-school strategic marketing managers direct strategic mar-
world” is as practice for addressing similar challenges keting actions. For managers, the more specific an
in the “real world.” Thus, marketing strategy students action recommendation is the better it is; ambiguous
and managers alike will find this note and this ap- decisions and indefinite strategies are unsound and
proach to decision making invaluable in addressing ineffective. In the framework that organizes this
the opportunities, threats, and problems of market- book, broad strategies synthesize and align specific
ing strategy. actions or tactics. Either without the other is insuffi-
cient: Actions that are not organized and aligned
within a cohesive strategy are ineffectual, and strat-
ACTION-ORIENTED DECISION egy that isn’t translated into specific, structured ac-
tions is no strategy at all. Thus, strategic marketing
MAKING
management is about making action-oriented deci-
Action-oriented decisions are decisions that specify sions, which, in the framework of this textbook, in-
something that should be done. In other words, these clude both clarification of an organizing strategy and
decisions identify one or more actions that should be specification of the tactical details (in as much as is
taken. Action-oriented decisions can be compared, in possible). Like strategic marketing management in
From Appendix D of Strategic Marketing, 1/e. Todd A. Mooradian. Kurt Matzler. Lawrence J. Ring. Copyright © 2012 by
29
Appendix: Case Analysis and Action-Oriented Decisions
practice, case analysis in marketing strategy educa- The Role of the Professor
tion requires action-oriented decisions and should Still, with both golf and management, it is not
avoid being satisfied with description, evaluation, or enough to merely practice—practice alone is inade-
planning. quate. A golfer needs to practice doing things right—
applying certain techniques and seeing the results of
THE CASE METHOD those applications. When a person practices doing
things poorly, he or she only ingrains bad habits. As
“If you hold a cat by the tail, you learn things you professional golfer Henry Longhurst observed,
cannot learn any other way.” “They say ‘practice makes perfect.’ Of course, it
Mark Twain doesn’t. For the vast majority of golfers it merely
consolidates imperfection.”1
Some knowledge can’t be “told”; instead, it must be Based on that same logic, the case method
learned by experience. Thus, one of the core pedago- must be informed by theory and guided by skillful
gies in business education is the case method. The discussion leadership in order to be effective.
choice to teach management via cases is motivated by Analyzing cases without guidance would be frustrat-
the recognition that management is about problem ing and would only ingrain bad habits. Case-learning
solving, and problem solving is better learned by leadership is the responsibility of the professor. In
doing than by listening. That is, problem solving is the case method, the professor is usually reluctant to
both a process and a skill and, and as such, it can only over-control a case discussion—too much direction
be mastered by practice and feedback. Theory will weakens the effect of having students gain experience
inform that practice, but it can’t replace it. Another attacking the challenges and problems themselves—
reason to teach with cases is that doing so not only but he or she does know at least two important
incorporates an “answer”—a theory or framework things going in that the student may not. First, the
that is appropriate to the situation—but it also neces- professor knows the problem-solving process and
sitates first coming up with the question. This is ap- has experience guiding students through it. Second,
propriate, because before real-world managers can the professor knows at least a subset of the theories,
address challenges and opportunities and solve prob- tools, and frameworks that might be productively
lems, they must first identify the question(s); that is, applied to the case. Thus, the case method and mar-
they must recognize opportunities, threats, and prob- keting simulations are experiential, but they are safe
lems and choose the appropriate tools (theories and and directed experiences, done without real invest-
frameworks) to bring to bear on those issues. ment or real risk (because there is rarely any real
Learning golf is a good metaphor for learning money at stake) and under the supervision of some-
managerial decision making. Golf can be described one who has an idea of how the process could be
in terms of physics and biomechanics: Striking the done well.
golf ball with a club at a certain angle and certain ve-
locity leads to the ball traveling in a certain direction
at a certain speed and rolling or stopping in a certain Inefficiency in the Case Method
way. One can learn about golf by reading or attending Most of the frameworks and lessons conveyed
a lecture, and that lecture would be interesting and through a case discussion could be summarized in
informative, but no one ever learned to golf in the much shorter lectures—so why use the case
classroom or laboratory. Rather, one learns to golf by method? In short, the case method is valuable be-
golfing, even if it is on the practice range. This ex- cause it both teaches those frameworks and pro-
ample reflects a core tenet of the philosophy behind vides experience applying those frameworks to
the case method: As a process and a skill, manage- messy, ambiguous situations that mirror the reali-
ment is best learned by applying theory to practice, ties faced by managers. In doing so, the case method
and the case method gives students experience in provides students with experience making and de-
action-oriented decision making. fending action-oriented decisions. Furthermore,
30
there is rarely a definite “right answer” to a case. are also rare in marketing strategy. Rather, the most
Instead, as with any real-world administrative situ- common type of marketing strategy case will pres-
ation, there are likely to be many possible good and ent a situation and a challenge (an opportunity, a
defensible answers. In fact, there may be several threat, or a problem of some sort) and then chal-
ways to define the problem or problems in a case, lenge students to analyze the path that led to the
and, needless to say, several possible answers or so- current situation and to identify solutions in the
lutions once a problem is defined. This ambiguity form of forward-looking action recommendations.
can be frustrating to students, but it mirrors the real Thus, there are at least three types of cases—tools-
world of strategic management. oriented, illustrations, and problem cases. Most
This absence of a single right answer leads to cases used in teaching marketing strategy present
another quality of case teaching that most students problems and call for rigorous analysis and action-
will notice and some will find frustrating: It is often oriented decision making.
difficult to come out of a particular case discussion
with a clear understanding of what “the lesson of
the day” was. Taking notes and summarizing a case LEARNING VIA THE CASE
discussion can be frustrating. Nevertheless, these METHOD
aspects—the absence of a right answer or even a single Because of its discussion format and its other differ-
correct view of the problem; ambiguous and incom- ences from lectures and traditional pedagogies, the
plete information; and the presence of distracting case method relies on the preparation, analysis, and
information—are all aspects of the real world. contributions of students to advance the learning
Insofar as management education is intended to pre- process. If the professor or discussion facilitator
pare students to manage in the real world, with all of does the work—summarizing the issues, working
its ambiguity and misinformation, the case method, through the analysis, or offering a solution—then
even with its accompanying frustrations, is an appro- the case is reduced to little more than an elaborate
priate and effective pedagogy. example. Therefore, the advantages of the case
method are diluted or lost if students do not thor-
oughly prepare in advance and then vigorously par-
Cases
ticipate in case discussions.
A case can be described as a verbal photograph of a
particular decision-making situation, real or in-
vented (but nevertheless realistic), at a particular Preparation
moment in time. The case presents the reader with A detailed plan for analyzing cases in preparation
more or less the same information that was avail- for class discussions is presented later in this appen-
able to the decision maker at the time. Some cases dix. This plan involves two elements: things to ac-
can be “tools-oriented,” meaning they present data complish (outcomes), and a process (steps) to move
meant to support specific analyses and lead toward through the case analysis to accomplish those
“correct answers,” but these sorts of cases are un- things. Things to be accomplished include becoming
usual and especially rare in marketing strategy. familiar with the situation, identifying the issues
Instead, most cases are descriptions of credible, (opportunities, threats, problems, and challenges),
complex situations that a strategist has faced or evaluating alternative courses of action, and recom-
might face. Some data in a case may not be particu- mending a specific course of action. The specific
larly relevant—like real management, part of learning course of action should include appropriate tactical
via cases is dealing with distractions, messy informa- detail, including acknowledgment of trade-offs and
tion, and potential misdirection—but most cases uncertainties and consideration of ensuing assess-
will not present false information. Some cases may ment and measurement. At the same time, it is
stop there, with the description of good or bad possible to identify a series of steps for working
management, but these sorts of “illustration” cases through the case and producing the outcomes just
31
discussed. The steps to producing these outcomes 4. Synthesis of the analyses which includes mak-
include: ing and supporting recommendations fleshed
out into specifics as much as possible and as far
1. An initial reading of the case;
as is appropriate, and elaborating trade-offs,
2. A subsequent, much more thorough reading,
uncertainties, and measurement.
including taking notes and identifying things
to come back to for subsequent analysis; These outcomes and steps are organized in Table
3. The analyses themselves including digging 1. Of course, these are only guidelines—some cases
deeply into and reformulating the facts and as- will not require each step or each outcome,
sumptions, performing computations, and and some steps may be done in a different order and
creating summaries; and can certainly be repeated—but in general, these
TABLE 1 Making Decisions and Analyzing Cases
Outcomes
Issue/Problem
Identification Analysis Recommendation(s)
Assumptions and Missing Data
Evaluation and Measurement

Trade-offs and Uncertainties
Situation Assessment
Recommendation(s)
Major/Surface
Details/Tactics
Alternatives
Minor/Root
Objectives
Analyses
Facts
First Read/
Skim
Document X X
Scrutinizing
Read/
Scrutinize
Steps
Document X X X X X X X
Analyze/
Deep Dig
Document X X X X X X
Review/
Synthesis
Document X X X X
32
objectives and this process will be part of any thor- Finally, it is also important to recognize that, in
ough case analysis. almost all instances, the lesson of the case is not to
point out what previous management did wrong (or
right); instead, it is to figure out “Where do we go from
Things to Avoid here?” Previous management was rarely “dumb”—and
There are also a few things not to do when analyzing saying “the old boss was dumb” is unbecoming and
a case and preparing for discussion. For one, the stu- unproductive in both the business world and the
dent should not research additional information or classroom. In actuality, previous managers likely made
more recent data on the case facts, and the student decisions based on the best information they could
should not, in as much as is possible, assume the role gather and within their understanding of the situation
of a critic reviewing prior management or past deci- and their knowledge of sound strategic business prac-
sions described in the case. The case is meant to be tices and theories. Instead of judging past decisions,
complete on its own, so getting on the Internet or students should build on the best information they
going to the library and augmenting case facts (or, can gather (specifically from the written case) and
especially, finding out what has happened to the pro- apply their understanding of the situation and their
tagonist, the company, or the industry since the case growing knowledge of business practice and theory to
was written) is “out of bounds.” Stick to the case facts! create a forward-looking plan for success.
(Of course, the professor may abrogate this rule in Thus, when analyzing a case and preparing for
certain, deliberate instances.) Generally, it is assumed case discussion, the student is expected to come to
that the case facts are adequate to support the discus- class well prepared, having thoroughly analyzed the
sion and the learning objectives, so digging up addi- case and gone beyond the facts to analysis, action-
tional information can make the class discussion un- oriented recommendations, and considerations of
even, because other students will not have the new implementation and control. The student should
data, or may have their own “new information”. The stick with the case facts and suspend disbelief. The
idea is for all students to be playing with the same student also should view him or herself as taking on
deck of cards or to have the same information. the role of the protagonist in a forward-looking,
Beyond not researching information outside of proactive way, and he or she should avoid simply
the case unless instructed to, students should also criticizing or critiquing past decisions.
avoid being unduly skeptical and thereby missing out
on the experience. In the arts, theater, and literature
there is an expression—the “willing suspension of Case Discussion and Class Participation
disbelief ”2 that gets at the fact that, in order to enjoy With regard to classroom discussion of a business
a work of art such as a play or a piece of literature the case, there are a few simple rules that will lead to suc-
members of the audience must be inclined to put cess. Of these rules, two are particularly important.
aside their skepticism and to believe the story no The first critical rule is “Come prepared,” as de-
matter how seemingly far-fetched or unrealistic. For scribed earlier in this appendix. The second critical
example, if the audience looks for the guide wire, rule is “Offer your ideas to the class discussion.” After
they will not enjoy Peter Pan’s flight. Similarly, in all, the professor doesn’t want to hear about your
case discussions, sticking with the case facts and sus- shyness, nor does he or she want you to approach
pending disbelief are important to learning and to after class with an insight that everyone would have
enjoying the process. The student should not say, benefited from in class—this will only highlight the
“Well, if this were the ‘real world,’ I’d get on the lost opportunity. Remember, every student brings a
phone and find out this, that, and the other.” Rather, unique perspective and can present valuable under-
students should assume they have all the information standings to every case discussion. One way or an-
they can get, and they should see what they can learn other, timidly or boldly, all students must enter the
from making action-oriented decisions based on discussion and offer their inputs, otherwise the class
these facts. will suffer for the lost insights and the individual
33
students will lose an opportunity to test their ideas and tracking evaluations of student contributions
(and almost certainly suffer lowered grades as a result). while ceding control of the discussion to the class
Of course, there are good and bad ways to par- require a lot of skill and a thorough understanding of
ticipate in class. For one, students should remember the topic, the case, and the participants. Be sure to re-
that professors can distinguish contributions that are spect everyone in the room and work with the in-
meant to gain “air time” from thoughtful input that structor to move the process ahead while keeping the
moves the discussion forward. As much as case pro- discussion professional and pleasant.
fessors don’t like to have a student come in after class
and talk about their introversion, they also hate to
CASE ANALYSIS
learn about someone’s extraversion in the middle of
the case discussion. Don’t talk just to talk! Class par- As described above and summarized in Table 1,
ticipation isn’t about quantity; it’s about quality. the process of understanding and analyzing a case
Offer well-thought-through ideas concisely and at can be broken out as iterative readings, reviews, and
the appropriate time. Build on what’s been said— analyses leading toward an action-oriented decision
don’t take the discussion back to what you wanted to and plan. These steps may be slightly different or
say at an earlier juncture. If you didn’t get called on, progress in a somewhat different order for different
then you missed that chance, so simply move for- cases, but this is a reliable, general approach.
ward with the discussion. Also, don’t move to a new Recall that the first step in the systematic ap-
issue unless the current topic is at, or at least moving proach to case analysis is reading through a case at least
toward, resolution. If you believe it’s time to move once just to get the “lay of the land,” or the so-called
on, then it’s a good idea to preface your comment “view from 30,000 feet.” Doing so gives the reader an
with a motion to change to a new topic (“Can we overview of the firm, the protagonist, the industry, and
shift to considering X?” or “I think we need to talk the broad issues at play in the case. Then the student
about Z before we can decide Y”). This helps every- should read the case again, digging into the details,
one track the discussion and gives the discussion confirming or refuting first impressions, taking notes,
leader (and your classmates) a chance to delay the and identifying analyses that may be feasible and rele-
shift if they think it should be put off. vant (but not yet stopping to perform those analyses).
It is a good idea, in going through these initial iterative
Professionalism and Respect reviews of the case, to take notes and document the is-
All of the aforementioned classroom skills (moving sues, facts, and assumptions of the case on paper.
discussions ahead, refraining from moving discus- Having skimmed the case and then studied it
sions backward, and shifting topics appropriately) carefully, it’s now time for the student to go back to
require listening and respect. Respect for your class- specific data and facts in the case to perform the analy-
mates and for the instructor is of utmost impor- ses and organize information and assumptions. Once
tance in a discussion-based learning environment. the analyses have been performed, the student must
Remember, discussion is about ideas and analyses. make a decision, and that decision should be fleshed
You can criticize someone’s idea, offer alternatives to out into appropriate details, depending on the case,
their analysis, or even question their understanding the amount of detail included, the purpose of the case
of the facts, but no student should ever criticize an- analysis, and its place in the course. As with any plan,
other student as a person or participant. There is no the uncertainties in the case should be elaborated and
room for personal attacks or disparagement in the the contingency plans articulated. This series of re-
classroom! Any such characterization of a person and lated steps will produce a set of structured outcomes
certainly any effort to stifle contribution are out of or “deliverables,” as described in subsequent sections.
bounds. This level of respect should extend to the in-
structor as well. Leading a case discussion is a tricky Situation Assessment
undertaking. Tracking contributions, managing the The first thing to be achieved in reviewing a case is
discussion, keeping the learning objectives in sight, an understanding of the situation. This text has
34
presented a framework for organizing situation offering and the customers’ needs and wants. Given
assessment: specifically, the situation includes the gen- these sorts of situations, it is important to flesh out
eral context (divisible into the political/regulatory/ an understanding not only of the immediate, surface
legal environment, the economic environment, the problems, but also of these problems’ underlying
social/cultural environment, and the technical/phys- root causes.
ical/natural environment); the competitive situation; A useful framework for identifying issues is to
the company itself (including its missions and goals, organize those issues into a “gap analysis.” Gap analy-
competitive advantages, and strengths and weak- sis identifies the difference (or “gap”) between where
nesses); the industry the company competes in or we are and where we want to be. A strategic gap or
could compete in; and the customers the company planning gap is the gap between actual and desired re-
serves or might serve. Although a case is a “snapshot” sults along any strategic objective or marker of strate-
of a situation, the situation is never actually static, so gic success, such as sales, market share, profitability, or
one important aspect of marketing strategy is to rec- returns. Gap analysis can also be applied to a process
ognize the changes in the environment and the ef- or logical chain connecting managerial objectives to
fects of those changes on strategy. Hence, a crucial set actual outcomes and customer responses.
of related questions in developing and maintaining A well-known example of a process-based gap
effective marketing strategy—and in analyzing a analysis comes from services marketing. Professors
marketing strategy case—is as follows: Valarie A. Zeithaml, Leonard L. Berry, and A.
Parasuraman have presented a logical framework
• What is the situation (context, industry, com-
linking management’s perceptions of customer ex-
petition, customers, and the company itself)?
pectations, management’s specifications of service
• What has changed or is changing in the situa-
quality, delivered service quality, customer percep-
tion? Where are those changes and trends
tions of delivered service quality, and customer ex-
headed?
pectations, shown in Figure 2.3 A “service-quality
• How have those changes impacted the firm’s
gap” can occur at any of the five major linkages
customers, its strategy, and its competition?
shown in this model, and any gap can contribute to
lowered customer satisfaction. This framework illus-
Problem Identification trates gap analysis applied to a system of relation-
As noted above, there are often multiple reasonable ships and linkages involved in delivering value and
ways to interpret and define “the problem” in a case executing strategy.
analysis or in the real world of applied strategic man- It is also important to prioritize issues and
agement. Identifying the problem and organizing problems in both case analyses and strategic man-
multiple problems in a logical order by importance is agement. One especially useful way to organize and
often more than half the battle. Frequently, if the prioritize issues is Pareto analysis, which can be pre-
problem has been clearly and correctly specified, the sented as a Pareto chart and is built on the Pareto
analyses may become “workmanlike” and relatively principle. Also referred to as the “80/20 rule,” the
straightforward. Pareto principle states that, for most phenomena,
In identifying the problem or problems, it is roughly 80 percent of the effects or outcomes are
useful to distinguish high-level or surface problems attributable to roughly 20 percent of the causes or
from underlying root problems, as well as to differ- inputs. In marketing, the Pareto principle leads to
entiate causes from symptoms. Symptoms may at the rule of thumb that 20 percent of your customers
first appear to be “the problem.” For example, a first account for 80 percent of your sales (and also that
read of many marketing strategy cases will reveal that 20 percent of your customers generate 80% of your
sales are failing to meet expectations, and in some complaints).Therefore, Pareto principle implies that
cases, they may even be declining. Falling sales are al- 20 percent of the issues in a particular situation are
most always a problem, but they’re also likely to be the related to 80 percent of the problems—which also
outcome of some other problem, such as an unsound means solving 20 percent of the problems will ac-
strategy, poor product quality, or a bad fit between the count for 80 percent of the solution. This principle
35
Word-of-Mouth Personal Past

Communications Needs Experience
Expected
Service
Gap 5
Perceived
Service
Customer
Company
Gap 4
Service External communi-
Delivery cations to Customers
Gap 3
Service Quality
Gap 1
Specifications
Gap 2
Management Perceptions
of
Customer Expectations
FIGURE 1 Zeithaml, Berry, and Parasuraman’s Service Quality Gap Framework4

In this example, Gap1 is between managements perceptions of customer expectations and their actual expectations, Gap 3 is the
difference between specified service quality and delivered service quality, and so forth.
does not always hold true in specific terms, but in 80 percent of the problems. As shown in the figure, if
nearly all situations, some small amount of the total the manager can focus on only one issue, focusing
causes and issues almost always accounts for a dis- on root cause 1 in the hypothetical scenario will re-
proportionate amount of the effects or outcomes. solve almost 30 percent of the problem, whereas solv-
Figure 2 shows a simple hypothetical Pareto ing root cause 13 will only address one percent of the
analysis and highlights its utility; here, solving the problem. Thus, Pareto analysis facilitates the prioriti-
first and second issue solves half the problems, while zation of underlying problems and the maximization
solving the first four issues (of 20 total issues) solves of return on problem-solving effort.
100.00
90.00
80.00
Ind. Issue
70.00
Cumulative
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
FIGURE 2 A Hypothetic Pareto Chart.

The first several issues (the horizontal axis) alleviate more a disproportionate percentage of the problems (the vertical axis)
36
Another useful tool that serves to organize her analyses in a presentation or discussion and re-
and summarize these first two steps, situation as- turn to these assumptions and challenge them after
sessment and problem identification, is SWOT any initial analyses are complete.
analysis. In any SWOT analysis, the “strengths” and
“weaknesses” are aspects of the situation that are
internal to the company. Still, identifying strengths Clarify the Objectives
and weaknesses does require reference to the com- What is the protagonist or the firm trying to accom-
petition, because it is not enough just to be good at plish? When considering a case, these sorts of objec-
something—rather, the firm must be better than tives may seem obvious—but if they are obvious,
the competition or the competency is not really an then it should be easy enough to make them explicit.
exploitable strength. In contrast, “opportunities” Frequently, however, trying to clarify a simple state-
and “threats” in SWOT are external aspects of the ment of the objectives leads one to the recognition
situation. Opportunities and threats may arise that the objectives at play in a particular situation are
from the context (i.e., “PEST” analysis) or from the more complex than first thought. Some objectives
competition, but their effects on the firm are usu- may conflict or be mutually exclusive. For example,
ally felt via customers and their behaviors. For ex- raising margins and raising unit sales/market share
ample, even if an opportunity arises because a are common objectives in marketing strategy, but
competitor withdraws from the market, that com- they are not compatible objectives; one is generally
petitive change actually connects to the firm and its counter to the other. It may also be true that the ob-
strategy as an opportunity (that is, as newly unmet jectives can be organized in a means-end hierarchy.
demand). Increasing margins or increasing market share are,
for example, usually seen as “means” to the “end” or
ultimate objective of increasing profits and returns.
Identification of Facts, Assumptions, Organizing objectives in a hierarchy helps prioritize
and Opinions the objectives and make it easier to decide between
As shown in Table 1 and described earlier, analyzing conflicting objectives. Thus, clarifying objectives is
a case involves multiple, iterative readings moving worthwhile, even if the objectives might seem obvi-
from familiarization toward deep understanding and ous, and it often helps in the process of sorting
analysis, accompanied by increasingly detailed note through case facts and tying these facts to relevant el-
taking or “documentation.” The core of that process ements of a decision.
involves identifying and organizing the case facts,
surfacing assumptions, and distinguishing fact from
assumption. Assumptions and opinions are some- Specify Alternatives
times presented in the case, or they may be necessi- What are the possible courses of action? It is useful to
tated by the issues in the case. In either situation, deliberately delay settling on a decision or choosing
documenting the assumptions facilitates going back an alternative course of action until after thoroughly
to those assumptions to consider their impact on re- and creatively cataloging the full range of alterna-
sulting decisions. Assumptions put forward in a case tives. Once a manager or an analyst has chosen his or
text are generally stated equivocally or as personal her preferred direction or alternative, he or she is
beliefs—for example, “Fran [the protagonist] be- likely to focus on facts and arguments that support
lieved that . . .” or “The market was thought to . . .” the decision and to see confirming evidence more
Another source of assumptions is the student’s own keenly than counter evidence. In fact, he or she may
analysis of the issues. There will be many situations not recognize or integrate contrary evidence at all;
in which the student has to make assumptions or that is human nature. Thus, in making any decision,
“educated guesses” in order to proceed with an analy- it is valuable to first flesh out as wide a range of alter-
sis of the case—and documenting these necessary as- native actions as is possible before analyzing each for
sumptions ensures that the student can support his or viability and merit.
37
xt
te
on
C
n
Company
io
tit
pe
om
C
Internal
Strengths Weaknesses
Opportunities
External
Customer
Threats
FIGURE 3 SWOT Analysis

Strengths and weaknesses arise in the context of comparing one’s company with the competition, while threats and opportunities
arise in the context the externalities of competition and customer and the external environment.
Evaluation and Analyses essential to arriving at good decisions and forging

This textbook consists of a planning model that ties di- effective strategic marketing plans.
rectly to specific analytic tools and frameworks. These
tools range from quantitative formulas for things Make the Decision
like breakeven volume and net present value (NPV) What is the best course of action? When the objectives
of a stream of revenues, to taxonomies, organizing in a situation are clear, the problem or problems have
schemes, and definitions such as SWOT analysis, been stated, and the analyses have been performed,
five-forces industry analysis, and the like. Although then the decision may be relatively clear. It is impor-
these may not be all of the tools and frameworks of tant to emphasize, yet again, that the decision should
strategic marketing, they are among the most impor- be action oriented. Action-oriented decisions are deci-
tant ones. Similarly, the word “analysis” has several sions that specify something that should be done and
meanings but, at its core, it involves separating a are not satisfied with mere descriptions, evaluations,
whole into its component parts and then examining or plans to decide. The more specific an action recom-
those parts of the whole and their relationships. In mendation is, the better it is, and the framework that
strategic marketing, analysis may include separating organizes this book specifies that broad strategies syn-
the situation, facts, and assumptions using a concep- thesize and align specific actions or tactics. Therefore,
tual framework or it may involve computing figures when analyzing a strategic marketing case, the “deci-
and ratios using formulas and relationships among sion” should actually be a plan, complete with an or-
variables. This textbook includes thirty-eight notes ganizing strategy and specification of tactical details.
on various frameworks, theories, and tools that em- How does that strategy translate into specific tactics?
body the core knowledge in strategic marketing. Not all cases will involve all tactics—some may be fo-
Applying these tools to the facts and data in a case is cused on a particular area of strategic marketing man-
38
agement—but all cases should include opportunities Summary

to learn and to add value to the discussion by fleshing The case method is used in management education
out general plans into as detailed and specific a single to give students experience applying neat, orderly
plan as possible within the learning context and the theories and frameworks to messy, disorganized in-
place of the case in the course. formation and data. Learning through case analysis
can be inefficient and frustrating, but it can also be
Consider Contingencies tremendously rewarding. This note has presented a
What might go wrong? What should be measured to short description of the case method and the philos-
monitor progress and warn of problems? How would ophy that underlies its use, and most importantly, it
changing earlier assumptions change a decision? It is has advanced a concise “plan of attack” for address-
at this stage in the process that the importance of doc- ing problems and opportunities in written cases that
umenting assumptions is revealed. At this step, by will also be useful for managers who are addressing
going over earlier assumptions and connecting them “real-world” strategic marketing challenges.
to the analyses (with an understanding of which Legendary American football coach Pop
analyses were most influential in driving the decision), Warner once said, “You play the way you practice.”5
it is possible to perform “sensitivity analysis” in which In football and other sports, it turns out that players
the relationship between the assumption and the out- who loaf in practice also underperform on game day
come are tested. For example, suppose a case analysis (i.e., in actual competition). Similarly, if a student
included the computation of customer lifetime value looks for the easy way through a case, fails to pre-
(CLV) with an assumption that customers would stay pare, or “sits out” during a class discussion, that stu-
with the brand for an average of five years. Suppose dent is likely to continue ducking responsibility in
further that the computation was critical in deciding his or her career as well. The case method is about
how much to invest in acquiring new customers in the practicing a managerial perspective; the student
current strategy. Then, a good way to test the resulting must become an active learner and should tackle the
decision against changes in the assumption would be case in the same manner that he or she hopes to at-
to create a spreadsheet with the duration of the cus- tack his or her imminent role as a manager, strate-
tomer’s relationship with the brand as a variable pa- gist, and leader in the business world. In the case
rameter. By changing the assumption (e.g., testing method, the student’s personal gain and the entire
CLV with three-year and seven-year time frames), the class’s learning depend on each individual preparing
analyst can test the effects of the assumption, and of rigorously and contributing unhesitatingly to the
violations of that assumption, on the decision. discussion.
Endnotes
1. Leon Z. Seltzer, Golf: The Science and the Art Model of Service Quality and Its Implications for
(Mustang, OK: Tate Publishing & Enterprises, Future Research,” Journal of Marketing 49, 4 (Fall
2007), 22. 1985): 41–50 and Valarie A. Zeithaml, A.
2. Nineteenth-century English poet and literary critic Parasuraman, Leonard L. Berry, Delivering Quality
Samuel Taylor Coleridge coined this term in de- Service: Balancing Customer Perceptions and
scribing “that willing suspension of disbelief for the Expectations (New York: The Free Press, 1990).
moment, which constitutes poetic faith.” See 4. Parasuraman, Zeithaml, and Berry, “A Conceptual
Biographia Literaria (Middlesex, England, UK: The Model of Service Quality,” figure is from page 44.
Echo Library, 1817/2007), 118. 5. Quoted by Michael Benson, Winning Words: Classic
3. See, for example, A. Parasuraman, Valarie A. Quotes from the World of Sports (Lanham, MD:
Zeithaml, and Leonard L. Berry, “A Conceptual Taylor Trade /Rowman & Littlefield, 2008), 146.
39
40
Overview of Marketing
Strategy and the
Strategic Marketing
Process
Before examining the strategic marketing problem-solving framework that is the core
of this text, it is useful to understand the role of marketing strategy in the firm and to
specify exactly what a marketing strategy is. In this note we specify what a strategy
should include—that is, what elements make up a complete and effective marketing
strategy—and we define the range or universe of all possible marketing strategies. It is
also important to understand why a customer-orientation is beneficial and why align-
ing the strategic activities of the firm around the customers’ needs is both efficient and
effective—that is, it is important to understand the “marketing concept”—so this chap-
ter will begin by clarifying the marketing concept and its value.
Marketing strategy is about the “big picture”—“the view from 30,000 feet.” It is
about whether the firm (or product or business unit) is:
• Moving in the right direction;
• Setting appropriate objectives;
• Competing for the right customers (and avoiding those it should avoid); and
• Developing the right skills, resources, and capabilities for success.
If specific marketing tactics are the “trees,” so to speak, then marketing strategy is the
“forest.” It is easy for busy managers to “lose sight of the forest for the trees,” to get
caught up in the details, and to forget that those details are worthwhile only if they are
part of a coherent, overarching strategy.
From Chapter 1 of Strategic Marketing, 1/e. Todd A. Mooradian. Kurt Matzler. Lawrence J. Ring. Copyright © 2012 by
41
The Strategic Marketing Process
WHAT IS A MARKETING STRATEGY? their needs better than the competition, and
why the firm does that (the business model or
“Marketing strategy” may refer to a process or to its profit logic), are all really about what competi-
outcome. This text addresses both. The majority of tive advantages (resources or capabilities) the
the first section of the text deals with the process of firm has or will build. Where’s the magic?
formulating, implementing, and maintaining a mar-
keting strategy. Before digging into that process,
• Singularity. The idea that a strategy must
specify how the firm meets some set of cus-
however, we should know where it leads. What tomer needs better than the competition does-
should the outcome of the process be? What is a n’t mean that the firm has to be better than the
“marketing strategy”? competition on all elements of the offering.
A comprehensive marketing strategy specifies Rather, the firm’s offering must, in the end, be
the who, what, when, where, why, and how of the different from the competition’s in some way that
business: some segment of customers will value. The strat-
1. Who the firm will serve—the customers and egy must be unique or singular and not in an
segments the business will serve; inconsequential way. It does no good to be
2. When the firm will serve those customers and “just like” the competition—copycats may or
those needs—that is, what “occasion(s)” the may not survive, but they won’t triumph. It
firm will target; also does no good to be better than the compe-
3. Where the firm will do business—the geo- tition on attributes customers don’t value.
graphic markets the firm will serve; Michael Porter, the renowned strategy expert,
4. What needs the firm will meet; summarized this requirement: “Competitive
5. How the firm will serve those customers and strategy is about being different. It means
needs—the means (resources and distinctive deliberately choosing a different set of activities
competencies) the firm will bring to bear to to deliver a unique mix of value.”1
serve those customers and their needs better
than the competition; and
6. Why the firm will do these things—the com- THE MARKETING CONCEPT
pelling business model that specifies how long- AND A CUSTOMER FOCUS
term revenues will exceed costs by a reasonable
rate of return on the capital employed. At its core, strategic marketing involves crucial deci-
sions about which customers and what needs the firm
A complete marketing strategy will stipulate each of will serve and what means the firm will employ to
these essential aspects of the way the company goes to serve those needs. In other words, strategic market-
market. A sound strategy must, eventually, reduce to ing is the creation and maintenance of a market-
meeting some specific needs of some specific customers oriented strategy, focusing the organization on the
better than the competition within profitable relation- customers it serves and the needs it meets. This is
ships. That is, the six questions above define a the essence of the “marketing concept.” Peter
customer-driven strategy and can be summarized as Drucker famously summarized this idea: “There is
three high-level decisions: only one valid definition of business purpose: to
• Target Segments. Questions about who the create a customer [emphasis added]. . . . It is the cus-
firm serves, when the firm meets those needs tomer who determines what a business is. . . . He
(i.e., on what occasions), where it does these alone gives employment.”2 This simple statement is
things (i.e., geographic markets) and, espe- sometimes misunderstood; it does not mean that a
cially, what needs the firm meets are all essen- company should try to meet the needs of all cus-
tially about what segments the business serves. tomers or try to meet all of the needs of any customer.
Where’s the pain? It doesn’t mean that “the customer is always right,”
• Competitive Advantages. Questions about or that serving a customer is disconnected from gen-
how the firm serves those target segments and erating profits. Drucker”s advice and “the marketing
42
concept” it summarizes are best understood as value—things like performance (which can mean
focusing the business on meeting some specific needs many different things across product categories and
of some specific customers better than the competition even within a product category), conformance
within profitable relationships. The crux of this (invariability across units), image, service, reliability,
message is incontrovertible: the customer and the convenience, or unique combinations of these differ-
customer’s needs should be primary in defining the entiating attributes. Because differentiating charac-
purpose and strategy of the business. Customer teristics almost always cost money to deliver, it is
needs come first. generally true that a firm can’t pursue both differen-
That is not some abstract theory or altruistic tiation and cost leadership simultaneously. Cost
philosophy—companies should be driven by the leadership—which is “price leadership” from the
customers they serve and the needs they meet be- customers’ perspectives—means developing the low-
cause that is the most effective approach. The market- est cost structure in order to offer the lowest price or
ing concept suggests that if we take good care of our garner higher margins (or both).
customer, everything else, such as sales and profits, Competitive scope includes segment scope
will follow. Extensive research has linked a market (the breadth of customers and customer needs
orientation to higher long-term profits but, while served) and the extent to which value-creating activ-
this is certainly true, it is true in the long term. ities are performed by the firm itself versus being
Unfortunately, most firms and most managers are outsourced (that is, the degree of forward and back-
measured in the short term, and therein lies a con- ward integration). In general, competitive scope can
flict. Balancing the short term with the long term is range from mass marketing (targeting very large
one of the tough parts of being a strategic marketing markets or market segments or even treating the
manager. whole world as a target market in a “global” strategy)
to niche or focused strategies that identify relatively
small segments of customers and serve their needs
“GENERIC” FRAMEWORKS
very specifically (a “customer intimacy” strategy).
OF MARKETING STRATEGIES Because scale is so closely associated with cost advan-
Answers to the these basic questions that drive a tage, a focused or niche cost-leadership strategy may
marketing strategy—what customers and customer be the most difficult to implement and sustain, but
needs to serve, and how to profitably serve those there are instances of firms serving niches that re-
needs better and differently than the competition— spond to an absolute low cost/low price in markets
can result in countless, almost literally infinite where the large-scale entrants, the entrants that
specific strategies across products, companies, and could pursue a lowest-cost strategy, do not offer a
industries. There are, however, a few universal char- “barebones” lowest-possible-cost alternative.
acteristics and distinctions that serve to describe all These two dimensions—competitive advan-
possible strategies, creating general taxonomies. tage and competitive scope—correspond with the
These taxonomies organize the infinite specific two components of a marketing strategy specified
strategies that could possibly come out of the basic above: “target segments” and “competitive advan-
strategic questions into a summary set of “strategy tages” (see Table 1). By simplifying the two attributes
types.” of generic strategies, competitive advantage and
One fundamental way to distinguish and or- competitive scope, to two broad alternatives each
ganize generic marketing strategies is by competitive (differentiation versus cost and narrow versus broad,
advantage and competitive scope.3 Competitive ad- respectively), it is easy to organize the resulting pos-
vantages or “bases of competition” can be broadly sibilities as shown in Figure 1. A firm can
categorized as either some form of differentiation or differentiate its offerings or compete on price (over-
as cost leadership. Differentiation means that the all cost), and it can do that at a broad or “mass” scope
product or brand offers some characteristic, quality, or at a narrow or “niche” scope. It is unusual for a
or attribute that alternatives cannot or do not offer, price strategy to succeed at a narrow/niche scope
the characteristics which some segment of customers because competing on costs usually necessitates
43
TABLE 1 What Is a “Marketing Strategy”?
Basic Elements “5Ws and 1H” Porter, 1985

Target Segments Who? The customers and Strategic Target or
Where’s the pain? segments the business Competitive Scope
will serve
Where? The geographic
markets the firm will serve
When? The occasions the
firm will serve
What? The needs that the
firm will meet.
Competitive Advantages How? The means (resources Strategic Advantage or
Where’s the magic? and distinctive competencies) Competitive Advantage
the firm will use
Why? The compelling
business model that specifies
how long-term revenues will
exceed costs by a reasonable
rate of return on the capital
employed
Product/Brand
Mass
Leadership
Product
Differentiation
Niche/
Narrow
Customer intimacy
Basis of
Competition
Mass Cost
Leadership
Price
Narrow Cost
Focus
FIGURE 1 Generic Strategies—Competitive Advantage and Competitive Scope
44
achieving high scale in production, but it is feasible changes in price. People are willing to pay more for
in certain circumstances.4 higher performance (better quality) but the market
Another general framework organizing all pos- will punish firms charging more or offering less for
sible strategies is the “value map” or “value frontier.” the same price. This two dimensional space highlights
“Value” is defined as what the customer gets (per- three potentially effective strategies—premium (high
formance or quality) adjusted for what the customer price/high performance), high-customer-value
gives (price): (lower prices/high performance), and economy (low
prices/low performance)—and one unsustainable
Relative Performance
Value = strategy: inferior customer value (higher prices/lower
Relative Price quality). Within this framework, successful innova-
The value-map framework plots performance tions can be viewed as the creation of ways either to
and price as the axes of the two-dimensional space as offer the same performance for a lower price or to
shown in Figure 2. These are customer perceptions offer more performance for the same price. In fact,
of performance and price, making this one type of innovation, shown as arrows in Figure 2, is constantly
“perceptual map,” and these are relative dimensions; shifting the value frontier and its underlying equilib-
price and performance are perceived as high or low rium toward the right.
relative to other offerings in the marketplace (“offering” A third framework organizes “growth strate-
refers to a specific bundle of performance or “give” gies”—strategies specifically seen as expanding
and price or “get”). Products in a market will tend to sales—based on their relationship with existing com-
form a frontier within this space along which there is pany offerings and existing markets. At any given
equilibrium between changes in performance and time a firm is selling its existing products to its existing
High
Relative Price
Low
Low High
Relative Performance (Relative Quality)
FIGURE 2 Value Frontier
45
development, offering a new product to existing cus-

tomers. Still later, they followed with Babies- R -Us.
Market
New
Diversification
Development
RECOGNIZING A STRATEGIC DECISION
Markets
As important as it is to know what constitutes a

“marketing strategy” and what a strategic “marketing
orientation” entails, it is just as important to under-
stand what a “strategic decision” is—and how to rec-
Existing
Market Product ognize a strategic decision when faced with one. A

Penetration Development
strategic decision is a decision you make today that
impacts your ability to compete at some point in the
future. It is not a future decision. There are two kinds
Existing New of strategic decisions—those we know are strategic
Products when we make them and those which are ad hoc and
only recognized as strategic later in the game.
FIGURE 3 Product-Market Growth Strategies6 Perhaps the most famous example of the latter was
IBM’s entry into personal computers. IBM intro-
duced the original IBM PC, legitimizing the PC as a
markets. Logically, growth can come from selling real business tool, in 1982. The company did two
more of the firm’s existing products to its existing things differently with the PC than it had done with
markets (market penetration), selling existing prod- any product before it. First, IBM effectively “out-
ucts to new markets (market development), selling sourced” the operating system to a small company
new products to existing markets (product develop- (at that time) called Microsoft, ceding ownership of
ment), or selling new products to new markets (diver- DOS (disk operating system) to Bill Gates’ young
sification; Figure 3). This logic was first spelled out by firm. Never before had IBM done that—all previous
Professor Igor Ansoff.5 The product-market growth products had operating systems proprietary to IBM.
framework suggests the concept of “adjacencies” and Second, IBM also outsourced the “brains” of the
core competencies—the idea that strategic growth is PC—the “central processing unit” or CPU—to a
best found by identifying new markets or new prod- struggling spin-off of the Fairchild Camera
ucts for which the firm can parlay existing core Company which had some microprocessor expertise.
strengths into growth. Thus, an important question is That company was Intel. Once again, this was a first
how portable or transferable are the firm’s strengths, for IBM, as all previous products had proprietary
and where are they transferable to? CPUs.
For example, at one time, Toys- R -Us achieved Today, the IBM PC platform has become the
nearly a 25 percent share of the US retail toy market. dominant standard for personal computers world-
Further gains (market penetration) seemed likely to wide. However, that standard isn’t really IBM’s; it’s
cannibalize existing outlets, so the company turned to Microsoft’s and Intel’s—sometimes referred to as
market development. It took its product—a 35,000 “Wintel” (Windows-and-Intel). In the end, IBM it-
square foot toy supermarket with 15,000 SKUs self sold the last remnants of its PC business
(“stock-keeping units” or individual items) of toys and (ThinkPad) to the Chinese company Lenovo in 2004.
games to a new market—Canada, and subsequently to Apparently, IBM did not view the PC as a strategic
Europe and eventually to Asia. Later, it developed a product at the time—looking at it more through
new product, Kids- R -Us, a category killer retail con- “mainframe goggles.” Many have wondered what
cept for kids clothing, and it located the Kids- R -Us IBM would do differently if it had those decisions
stores next to its Toys- R -Us outlets. This was product back to do over again.
46
OVERVIEW OF THE STRATEGIC An assessment of the various strategic plan-

MARKETING PROCESS ning and management practices at firms that do
these tasks well suggests that there are certain things
Effective marketing strategy is all about the marketer that all effective approaches have in common. The
maintaining a high-level strategic perspective while framework we present integrates and organizes
at the same time dealing with the never ending ur- those shared elements. This model is not revolution-
gencies of day-to-day management. Making that per- ary or complicated. It can be applied easily and often,
spective more difficult is the fact that strategic ques- and it should become second nature to successful mar-
tions don’t arrive neatly labeled—”this is a product keters. There are four essential stages to this process
development opportunity,” “this is a distribution (diagramed in Figure 4):
problem,” or “this is a competitive threat”—market-
ing managers must first figure out what the question 1. Situation Assessment;
is before they can analyze it, address it, exploit it, or 2. Strategy Formation;
fix it. We have now established a general definition of 3. Implementation (Positioning and the
a marketing strategy, reviewed the marketing con- Marketing Mix); and,
cept, and considered some universal frameworks of 4. Documentation, Assessment, and Adjustment.
possible strategies. Later we introduce a general
framework for gaining a high-level perspective, fig-
uring out what the important questions are, and
then formulating, implementing, and assessing a
marketing strategy.
Context
Industry
Situation
Assessment Customers Competitors Company
Competitive
Advantage(s)
Strategy
Formation
Segmentation Targeting
Positioning
Implementation:
Marketing Plan(s)
Positioning and Promotion
the Marketing Mix Branding
Risks & Products &
Forecasts People
Marketing
Documentation,
Research
Assessment and
Adjustment
Price Place
Profits
Budgets
Assessment and Adjustment
FIGURE 4 The Strategic Marketing Analysis and Planning Process
47
Endnotes
1. Michael E. Porter “What is Strategy,” Harvard dominate your market (New York: Perseus
Business Review (November–December, 1996): Publishing, 1995).
61–78: 64. 4. Ibid.
2. Peter Drucker, Management (New York: Harper & 5. H. Igor Ansoff, “Strategies for Diversification,”
Row, 1973), 61. Emphasis original. Harvard Business Review 35, no. 5 (September–
3. See Michael E. Porter, Competitive Strategy: October, 1957): 113–124.
Techniques for Analyzing Industries and Competitors 6. Figure is from H. Igor Ansoff, “Strategies for
(New York: Free Press, 1980); and Michael Treacy Diversification,” Harvard Business Review 35, no. 5
and Fred Wiersema, The Discipline of Market (September–October, 1957): 113–124; figure is at
Leaders: Choose your customers, narrow your focus, page 114.
48
Situation Assessment:
The External Environment
“A good hockey player plays where the puck is. A great
hockey player plays where the puck is going to be.”
WAYNE GRETZKY1
Situation assessment involves monitoring the environment (external forces) while also
scrutinizing the company itself (internal factors), including its core competencies,
resources, and strategic directions. Understanding external and internal factors at a given
time and, importantly, anticipating future events, trends, and conditions is critical to creat-
ing and advancing effective strategies. Situation assessment can be divided into these two
basic categories, external and internal, and can be further organized into the four Cs
(Customers; Competition; Context, and the Company; Figure 1). External assessment
also includes the analysis of the dynamics of the specific industry within which the firm
operates and the understanding of some prominent and powerful regularities or “laws of
marketing”; by laws of marketing we refer to to fixed patterns that are observed across sit-
uations and across time in the marketplace, such as changes in the market as it evolves, the
cost benefits of economies of scale, or the profitability advantages of market share.
Before any situation analysis can be done effectively, it is crucial to carefully and
strategically define the market the firm competes in or may choose to compete in—that
is, to define what situation should be assessed. This chapter first explains that crucial step
of market definition and then focuses on external situation assessment and those laws
of marketing strategy.
Context
Industry
Customers Competitors Company
FIGURE 1 Situation Assessment
49
Situation Assessment: The External Environment
MARKET DEFINITION Managers usually have a routine answer to the

question “In what market does your business com-
Before assessing “the situation” it is necessary to first pete?” Unfortunately, the familiar answer is often
specify exactly what situation should be assessed. In what narrow, reflecting the target of the latest marketing
market does the firm participate? Who are its competi- mix rather than a strategic perspective. Often, it is
tors? Who are its customers? How the market or the backward looking—describing where the firm has
submarket as defined is critical to all marketing activi- been, not where it is headed. Irrespective of whether
ties? If we define the market too broadly, our market- that answer is accurate or inaccurate, it is useful to
ing activities lose focus. If we define the market too periodically reexamine the boundaries of the firm’s
narrowly, we risk missing opportunities. Market defi- markets and to consider the ways those boundaries
nition is the basis upon which we measure our partici- influence strategy. The market definition becomes
pation, or market share. Even the labeling of the mar- the optics with which the firm determines who its
ket tends to define the boundaries of the firm’s efforts customers are, who the competitors are, and a lot
and its vision. Because all markets are constantly evolv- about the company itself. Thus, thorough and accu-
ing, market definition is also important to understand rate market definition is a critical precondition to
the dynamics in the market. Is the market growing or strategic thinking and strategic planning.
declining, and how do these dynamics relate to cus- Markets can be thought of as having concentric
tomer needs, wants, expectations, and requirements? boundaries (Figure 2), beginning at the core with
Product Form
(Mid-size Sedans)
Product Category
(Automobiles)
Generic Competition
(Transportation)
Budget Competition
(Large asset expenditures)
FIGURE 2 Concentric Markets
50
product form (small sedans, for example) and mov- strengths and weaknesses along the value chain;
ing outward to product category (cars), generic com- current tactics; and the directions those missions,
petition (transportation), and finally, at the broadest strategies, and tactics might take. Finally, one should
level, to budget competition (money spent on a car also try to understand how competitors act and
could be spent on a number of other things, from a react, for example, will they grimly defend their
vacation to home improvements). Traditional position, will they aggressively attack, or will they
approaches to market definition have been “supply inconspicuously capture market share? Table 1 out-
side” perspectives, often based on the industry or lines these areas of inquiry, emphasizing the need to
product (e.g., “railroads,” “automobiles”, “airlines”). anticipate future strategies and tactics.
These definitions are limiting; while they may help The marketing strategist, in a real sense,
identify traditional competitors, they may obscure “chooses” the competition, deciding where to direct
opportunities, potential competitors, and substi- strategic energies and scarce marketing resources.
tutes. A second, complimentary approach is to define Early in the product lifecycle, you may choose to
markets from the customers’ perspectives—that is, target alternative products or technologies; in a
the “demand side” perspective: Which consumers mature market, competition often comes in direct,
(segments and/or occasions) does the product serve? same-product forms. For example, satellite television
What needs does the product meet? Who else and what providers such as Sky in Europe and DirecTV in
else (competitors; alternative products) could meet America focus a large share of their strategic efforts
those same needs? against alternative technologies (cable television, and
The scope of a market definition should be terrestrial services). Later in the lifecycle, as satellite
flexible, adjusting to the purpose at hand. For some television matures, it is likely that these firms will
purposes, a relatively narrow market definition is compete more directly and more intensely against
appropriate: Who are our customers and competitors other satellite television services (such as UPC in
today? Other tasks require a broader view and may Europe and Dish Network in the US).
include nearby and potential customers or competi-
tors: Who is likely to buy our existing offerings but is
not currently buying them? For long-term planning TABLE 1 Questions in Competitive
Assessment
and growth, the broadest outlook is appropriate:
Where can we find long-term growth and profitability? Strategic Questions
What needs do (or could) our strengths meet? What
needs could they meet? What technologies might • Who are the competitors?
supplant our strengths? • What are their corporate missions, goals, and
strategies?
• What are their marketing strategies and
COMPETITIVE INTELLIGENCE objectives?
“Rommel, you magnificent bastard! I read your book!” • What are their objectives (at each business
level)?
George S. Patton2
• What are the firm’s operational strengths and
weaknesses?
Knowing the plans, intentions, and capabilities of
existing and potential competitors is essential to • How badly do they want to play this game?
understanding your own organization and to antici- Tactical Questions
pating the future of the market. Understanding your
• What does their marketing plan look like?
competitors is necessarily imperfect. Even the most
• What are their attribute-level product strengths
transparent firm with the most inept security has
and weaknesses? What are their product line
activities and plans that the competition cannot strengths and weaknesses?
detect. There are several areas that are important to
• Can they execute? Do they have (or can they
understand about competitors: corporate level mis- acquire) the skills?
sions and objectives; current marketing strategies;
51
TABLE 2 Elements of the Context: PEST
Political/Regulatory Context
Marketers operate in powerful, complex regulatory and legal environments that are shaped by political
processes. These include tax codes, liability structures, operating rules, product-labeling regulations, purity and
conformance requirements as well as government subsidies, and government procurement itself. Some firms
also operate under nongovernment regulations and even informal guidelines (equipment rules in golf and
informal bans on television advertising in the liquor industry).
Economic Context
Economic variables such as interest rates, unemployment rates, currency exchange rates, and inflation impact
marketing strategies in substantial and complex ways.
Social/Cultural Context
Social and cultural values, attitudes, norms, manners, and tastes all affect customer needs and thereby must be
considered in developing marketing strategies and tactics. Demographics and lifestyles of the population (for
example, age, education, and social class) are important components of the social/cultural context that change
across time.
Technological/Physical Context
Technology, innovation, and technological progress impact strategies in many ways. New technologies can
replace or become direct or indirect substitutes for a product form or product category. Technological changes
can alter the way a product is distributed and/or consumed. The physical environment includes the natural
environment, population density, physical infrastructure, and commercial infrastructure.
CONTEXT CUSTOMER ASSESSMENT

The general “context” or environment within which The tasks and considerations associated with
a firm, product, or brand operates has pervasive and customer assessment as well as segmentation (within
complex effects on strategy and results. It is useful to strategy formulation), marketing research (at the cen-
begin with a succinct classification of the environ- ter of positioning with the marketing mix) and,
mental factors that influence strategy. This classifica- finally, strategic assessment (within assessment and
tion imposes discipline on the assessment, stimulates adjustment) all emphasize keen attention to and
brainstorming, and assures completeness. The deep understandings of customers and their
mnemonic “PEST,” for Political/Regulatory, Economic, responses to marketing actions (differentiated in
Social/Cultural, and Technical/Physical (see Table 2) is Table 3 and highlighted in Figure 3). The pervasive
a good, comprehensive partitioning of the “big pic- role of customer understandings and research in our
ture,” macro-level business environment. Changes in strategic marketing framework is no accident. As we
the general context are often the fundamental cause have argued, effective and efficient strategies begin
of problems and also the root of important opportu- with and are continuously aligned with a customer
nities. Failure to relate symptoms such as sales focus or “market orientation.”
declines to underlying causes can blur strategic
decision making. For example, declining sales due to
Organizing Customer-Focused Research
an economic recession can be expected to rebound;
declining sales tied to deep-seated changes in social Throughout this text we use “customers” to refer to
values or fundamental technological changes related both direct customer—that is, business-to-business
to demand may not rebound so quickly or so surely. customers, distributors, or retailers—and the ultimate
52
TABLE 3 Organizing Customer-Focused Research
Situation Customer The broad, exploratory, and inductive study of

Assessment Assessment customers in general to identify (a) trends in needs and
demand, and (b) customer insights.
Customer-Oriented Marketing Research
Strategy Segmentation Focused research indentifying meaningful differences

Formation and across customers/consumers with regard to needs and
Implementation descriptive characteristics.
Marketing Mix Focused research to pretest and hone tactics, including

Development and price, promotions, advertising, new products or
Testing product modifications, and merchandising programs.
Customer Ongoing data collections tied to specific accounts,

Relationship customers, or consumers that serves to tailor offerings
Management (CRM) (personalize or customize offerings) and direct
investments and efforts toward the “right” customers
and segments.
Assessment & Customer- and Focused and ongoing research collecting information
Adjustment Market-Oriented on customer responses to the marketing mix, including
Metrics measures of satisfaction, loyalty, profitability, and
revenues.
customer or consumer of a product. The term “con- tial customers). It draws on both secondary and pri-
sumers” is reserved for the ultimate user of a final mary data to: identify emerging trends in the market,
product. We use customer assessment to refer to understand how products deliver value and how
broad exploration for macro trends and customer customers consume the products, and, especially,
insights. We reserve “marketing research” for issue- anticipate future patterns of customer needs and
focused research that is directly and deliberately consumption.
linked with specific marketing decisions and prob-
lems. The ongoing collection of customer-related IDENTIFYING CUSTOMER TRENDS. Trends are
data for targeting and for assessment (Customer broad-based changes in the marketplace that occur
Relationship Management [CRM] systems) falls over time. Trends represent significant marketing
under marketing research. Others may use these opportunities that are grounded on substantive
labels differently—all of these activities do require transformations such as changes in values, lifestyles,
gathering and processing information about cus- or technology, and are accessible to the “mainstream”
tomers—but customer assessment and marketing or the majority of the market.3 Monitoring the envi-
research have different priorities, each requires dif- ronment for trends can be highly quantitative and
ferent types of information, and each relies on differ- can include traditional, statistical methods for
ent methods. Customer assessment, which is part of econometric forecasting as well as emerging methods
situation assessment, is the broadest consideration of of “data mining.”4 Data mining involves the analysis
the firm’s current customers, the competitors’ cus- of large databases using diverse analytic methods to
tomers, and customers not yet in the market (poten- identify patterns, associations, and emerging trends.
53
Context
Industry
Competitive
Advantage(s)
Positioning
Branding Promotion
Products &
People
Marketing
Research
Price Place
Profits
FIGURE 3 Customer Knowledge throughout Strategic Marketing Management
Research firms such as ACNeilsen, Information must also have the imagination to envision markets
Resources Inc. (IRI), and Catalina Marketing and that do not yet exist and the ability to stake them out
mega-retailers like Wal-Mart collect multi-terabytes ahead of the completion.” The realization of excep-
of data across billions of transactions. These data tional returns often means disregarding mature,
create new opportunities for insights but also ever- competitive markets for truly new ones. Finding
increase the possibility that strategic marketers will markets that do “not yet exist” often begins with a
be swamped by them. Searching for trends also en- “customer insight.” A customer insight is a penetrat-
tails scanning across media and across settings. That ing, discerning understanding of customer needs, the
broad and subjective search for trends is sometimes ways that customers derive value from products, and
called “trendspotting” or “coolhunting”;5 it should the ways customers might derive value from prod-
be wide ranging, inclusive, and unstructured. ucts; it is an insight that unlocks an opportunity.6
Uncertain trends and indefinite patterns of future Customer insights should be fresh, relevant, endur-
customer needs can be included in the factors that ing, and inspiring.7
define “possible futures” in scenario planning (dis- “If I had asked people what they wanted, they
cussed in more detail below). would have said faster horses,” Henry Ford once
said.8
DISCOVERING CUSTOMER INSIGHTS. Gary Hamel Identifying customer insights requires more
and C. K. Prahalad have argued that “to realize the than painstakingly asking customers what they
potential that core competencies create, a company know or think they want—insights often necessitate
54
customer intimacy with an eye toward discovering LAWS OF STRATEGIC MARKETING

solutions customers could not have envisioned or
articulated. Customer assessment includes “deep Physicists know that an object will stay at rest or con-
dives” required to understand the customers’ per- tinue at a constant velocity unless acted upon by an
spective and to identify unmet and even unrecog- external, unbalanced force and that the total energy
nized customer needs. Toward that end, customer in a system remains constant over time. These ob-
assessment draws on qualitative methods, including served regularities are the “laws of physics” (Newton’s
depth interviews, anthropological methods such as First Law of Motion and the Law of Conservation of
ethnographies, and “total immersion sessions.”9 Energy, respectively); they’re “truths” that describe
These are inductive research methods—they let underlying realities that do not change.10 In strategic
observations shape conclusions, rather than impos- marketing there are similar “truths”—the “laws of
ing preconceived structure on the research or the marketing strategy,” so to speak—that describe es-
findings. These methods also produce rich but not sential regularities in the way things work and the
very generalizable findings—the results are specific way things relate. These generalizations include: the
to the customers observed. product lifecycle (product-market evolution), scale
effects (cost leverage), and market share effects
(share leverage). Managers may choose a strategy
that builds directly on one of these generalizations,
INDUSTRY ANALYSIS
or they may choose a strategy that is less directly tied
An analysis of the industry or industries within to a given generalization, but they can’t change the re-
which the firm operates is a more specific “micro” ality. For example, Toyota builds its strategy on the
perspective embedded within the broader, “macro” benefits of scale effects; they produce more cars than
setting of situation assessment and the four Cs. anyone else in the world based on a set of common
There are five forces that drive industry analysis core processes. Although another car company, such
(Figure 4): the bargaining power of suppliers and the as Porsche, may choose to forego scale to compete on
bargaining power of customers, the threat of substi- high performance using small-scale production, it
tute products, and the threat of new entrants. The can’t change the reality of scale effects.
fifth force that influences industry competitiveness is
the intensity of the rivalry among existing competitors
in the industry. The five forces together influence Product Lifecycle
industry profitability. All products and all markets are in a constant state of
evolution. Some evolve in fairly smooth and ex-
pected patterns while others evolve less predictably,
such as when “disruptive technologies” cause unex-
Bargaining
Power of pected, sharp declines. Nevertheless, the biological
Suppliers analogy of birth, growth, maturity, and decline is
generally reliable. The S-shape of the product
lifecycle (see Figure 5) describes this market
Threat
Threatof
of Competitive Threat of evolution—the vertical axis is the percent of the total
New
NewEntrants
Entrants Rivalry Substitute market and the horizontal axis is time; but distinct
lifecycles exist for industries, products, and product
forms.
Bargaining
Markets behave differently at different stages:
Power of competitors compete differently, sales are more prof-
Buyers itable or less profitable, customers buy differently, and
different customers buy. Different strategies and tac-
FIGURE 4 Five Forces Industry Analysis tics work better than others at various stages in the
55
Sales
Sales
Profits
Time/Market Evolution
FIGURE 5 The Product Lifecycle
product lifecycle. Most major strategic gains and bling of units produced (i.e., moving from 1 to 2, 2 to
losses occur in the growth phase of a market. Share 4, 4 to 8 . . . 1.6 million to 3.2 million, etc.); that re-
gains while all competitors are growing can fre- lationship between unit costs and volume produced
quently be achieved without significant competitive forms the experience effects curve, shown in Figure 6.
reaction. Share building in mature markets is tougher This percentage decline varies from industry to in-
and frequently results in rapid competitive reaction, dustry, but, regardless of the industry, significant cost
often in the form of price competition. Those who advantage can be achieved by the competitor who
have achieved lower costs have an advantage at this moves down the experience curve faster. We can visu-
stage. Thus, understanding where a product and an alize that advantage as the “distance” between one
industry are in the lifecycle facilitates better predic- competitor’s position on the experience curve and
tion of competitor actions, of customer responses, another’s.
and of sales trends and will inform considerations Too often, any reduction in cost as units-pro-
about what strategies are typically effective. duced increases is mislabeled as an “economy of
Recognizing when the market is evolving from one scale.” In fact, at least four distinct sets of forces with
“stage” to another—that is, anticipating “inflection” differing implications for strategy can drive scale ef-
points—can create a significant advantage; missing
such a shift can be a substantial disadvantage.
Scale Effects/Cost Leverage

Cost leverage can be achieved by both scale and
Cost per Unit
experience. Scale is related to volume and time. It is

axiomatic that as volume in a given time period in-
creases, fixed expenses as a percentage of sales de-
cline. This effect is referred to as economies of scale.
Similarly, the more units a company produces of
anything, the lower per-unit costs will be. With each
doubling of accumulated volume, costs decline by a
Cumulative Production (units)
determinable percentage. That is, experience effects
are generally expressed as a percentage (e.g., 10%,
15%, 17%) decline in costs realized with every dou- FIGURE 6 Experience Curve
56
TABLE 4 Sources of Scale Effects
Learning Curve Effects or The effects of the organization, its suppliers, and its employees literally learning—
Experience Curve Effects becoming more knowledgeable and more skilled and thereby doing things more
efficiently.
Economies The lowering of per-unit costs as the number of units produced increases via the
spreading of fixed costs across units.
Diseconomies of Scale Diseconomies of scale are the realization of inefficiencies, that is, of increases in
unit costs as production increases.
Economies of Scope The lowering of unit costs realized when producing more than one product lowers
the cost of production of all products.
Synergies Synergies are two (or more) inputs or activities (“factors”) coming together or
acting together to result in output that is greater than the sum of the two factors
taken separately (i.e., (1⫹1) ⬎ 2).
Network Effects When a product provides more value to each customer when more overall
customers own it or use it.
Virtuous Circles Systems of factors that provide feedback on themselves. For example, the more
people buy a product, the more retailers will want to stock the product, leading to
higher sales. A “vicious circle” is the opposite—the feedback of negative factors
exacerbating problems.
fects: learning- or experience-curve effects, tend to be more profitable. This share-profitability

economies and diseconomies of scale, economies of association is real; it has been replicated empirically
scope and synergies, and network effects and virtu- many times in well known pooled-business data, such
ous circles (these distinct sources of benefits from as the “PIMS” data (the Profit Impact of Marketing
scale are clarified in Table 4). These different sources Strategy database11 ). The share-profitability asso-
of scale effects are important in that they have differ- ciation is also logical; market share will correlate
ent bases. They respond differently to managerial ac- with advantages of scale, discussed above. Scale
tions, and they are more or less enduring. For exam- generally leads to lower unit costs, and lower unit
ple, learning curve effects can contribute to both costs should lead to higher profits (firms with
lower unit costs and higher quality (especially relia- lower unit costs can lower price and gain sales vol-
bility and conformance quality). They endure across ume or maintain price and realize higher per unit
time, and can be increased by enhancing institu- margins). Nevertheless, shaping strategy around
tional learning and knowledge retention. Economies market share ignores the ambiguity in the share-
of scale, on the other hand, lower costs but do not re- ROI findings: The causal direction of the relation-
late to quality, are less enduring, and are increased by ship is unclear and the relationship is undoubtedly
one thing: higher units of production in a given time complex. For example, many other factors such as
period. product quality and managerial skill should lead to
both market share and profitability, rendering mar-
ket share a dubious starting point for strategy. Still,
Market Share Effects/Share Leverage
share building activities in the market growth
One of the best known observations in the strategy phase do pay off in superior competitive position
literature is that firms with higher market share during maturity.
57
Summary
Marketing strategy involves developing an effective market- advance of those future realities (which underscores
ing mix for a given marketplace reality and then adapting Wayne Gretzky’s notion of skating to “where the puck is
that mix to changes in those environmental forces. going to be”). This chapter has organized and explained
Therefore, marketing strategy demands a thorough analysis tools and frameworks for analyzing the environment—the
of the context, the competition, and the customers. If mar- external situation—and anticipating where it may be
keting strategy is marketing mix evolution in response to the headed.
environment, really good marketing strategy is marketing
mix evolution in anticipation of changes in those forces—
that is, anticipating future configurations of the forces in the
environment and developing effective marketing mixes in
Endnotes
1. Wess Moss, Make More, Worry Less (Upper Saddle 6. David Taylor, “Drilling for Nuggets: How to use in-
River, NJ: FT Press 2008), 160. sight to inspire innovation,” Brand Strategy (March
2. As portrayed by George C. Scott in Franklin J. 24, 2000),
Schaffner (Producer), Francis Ford Coppola and 7. Ibid.
Edmund H. North (screenplay), Patton [Motion 8. Quoted in James G. Barnes, Build Your Customer
Picture], USA, 20th Century Fox, 1970. Strategy (New York: John Wiley and Sons, 2006), 106
3. Irma Zandl, “How to Separate Trends from Fads,” 9. See, for example, Research, “Total Immersion:
Brandweek 41, no. 41 (23 October, 2000): 30–35. Researchers can be wary of them, but businesses seem
4. Jiawei Han and Micheline Kamber have defined to love them. Essential Research’s Stuart Knapman
data mining as “uncovering interesting data patterns investigates customer immersion sessions and clients
hidden in large data sets” (page 1) and have noted tell us how they have made them work,” June, 2008,
that, in the past several years, available data have www.research-live.com/features/total-immersion/
grown “from terabytes to petabytes,” in Data 2002001.article. Last accessed June 19, 2010
Mining: Concepts and Techniques, 2nd ed. (San 10. See, for example, Steven Holzner, Physics for
Francisco: Morgan Kaufmann Publishers, 2006). Dummies (Hoboken, NJ: Wiley Publishing, 2006).
5. Peter A. Gloor and Scott M. Cooper, Coolhunting: 11. See Paul Farris, Michael J. Moore, and Robert Dow
Chasing Down the Next Big Thing (AMACOM, a di- Buzzell, The Profit Impact of Marketing Strategy
vision of American Management Association, Project: Retrospect and Prospects (New York:
2007); Malcolm Gladwell, “The Coolhunt,” The New Cambridge University Press, 2004).
Yorker (March 17, 1997): 78–88.
58
Situation Assessment:
The Company
“Knowing others is intelligence;
knowing yourself is true wisdom.
Mastering others is strength;
mastering yourself is true power”
LAO TZU, CIRCA SIXTH CENTURY BCE1
In the simplest terms, marketing strategy is about matching external opportunities with
internal strengths and competitive advantages. The obvious complement to that exter-
nal analysis is the development of a thorough and honest understanding of the firm it-
self. Strategies and tactics must be developed within an understanding of the overarch-
ing organizational context and, eventually, should contribute to the overall mission and
goals. Company assessment includes four related considerations:
• Using Guidance Statements: Missions and Values;
• Assessing Past Performance and Current Strategy;
• Establishing Preliminary Objectives and Targets; and
• Identifying Strategic Gap(s) or Planning Gaps.
USING GUIDANCE STATEMENTS: MISSIONS AND VISIONS

Corporations have unique values and cultures, as well as distinctive resources and
competitive advantages; any marketing strategy is supported by and constrained by
those parameters. Most firms and business units begin their strategy formulation
process with some sort of guidance statement—sometimes called a mission or a vision
statement. Some organizations have both. Most corporations have a mission that es-
tablishes purpose and values that shape their vision. Vision statements, which are
sometimes included within mission statements, are the forward-looking part of the
59
Situation Assessment: The Company
mission—“the desired future state of the organiza- USING GUIDANCE STATEMENTS:

tion.”2 Mission/vision statements clarify the firm’s CORPORATE SOCIAL RESPONSIBILITY
identity and purpose and should include at least
four elements: As noted, marketing strategies should be anchored in
overarching corporate strategies which themselves are
• The core purpose of the company; tied to and are intended to advance corporate-level
• The core values of the company; missions and visions. Corporate missions and visions
• The visionary goal (as noted, vision is some- may or may not embrace purposes and goals beyond
times pulled out on its own); and shareholder value and means to that end, but it is
• A vivid description of the envisioned future nevertheless important that marketing strategists at
(specification of goals).3 least consider the broader issues of corporate social
Mission and vision statements, therefore, should be responsibility (CSR). Even if the executive and the
important documentation of the higher-level corpo- firm reject broader obligations, that rejection should
rate context within which the product and business be deliberate and explicit, especially, given contem-
unit operate and to which they should contribute. porary social and regulatory scrutiny of corporate
Unfortunately, mission statements often fail to clar- behavior. Corporate social responsibility has been
ify much at all, as one critic observed: defined broadly as involving a firm taking “actions
that appear to further some social good, beyond the
“The idea—of boiling down a com- interests of the firm and that which is required by
pany’s essential purpose and character law”5 or as concerns about how businesses should
into a short paragraph which can be in- deal with social and public policy matters.6 Corporate
stantly understood by shareholders, Social Responsibility subsumes concerns for social
workers and customers—sounds like a and environmental outcomes. The term sustainabil-
useful one. . . . But what emerges on to ity—“meeting the needs of the present without com-
page one of the annual statement is all promising the ability of future generations to meet
too often the worst kind of committee their own needs”7—also applies to both social and
drafting, topped and tailed by syntacti- environmental matters but is generally understood
cally-challenged PR copywriters. . . . The to focus on sustainable treatment of the natural envi-
typical British mission statement crams ronment (or the “planet”).
so many power-words into one sentence Attitudes about the appropriate role of busi-
as to be at best inelegant, at worst virtu- ness in pursuing social and environmental goals have
ally unreadable.”4 changed across time, but some broad frameworks
Nevertheless, despite common poor execution, mis- may be valuable across trends in framing how firms,
sion and vision statements should be the primary marketing strategies, and marketing strategists inte-
stipulations and records of what the organization is, grate broader social and public policy concerns into
why it exists, what its values are, how it does business, strategy formation and day-to-day decision making.
and what it intends to become. It is in the mission and Those include “doing well by doing good,” the idea
vision that the company clarifies its goals. The words that acting in a socially and environmentally respon-
goal and objective are synonyms in the English lan- sible way may also enhance profitability, stakeholder
guage, but in the strategic management literature they theory, the triple bottom line, or the three pillars
are used to distinguish desired results and conditions framework.
that are longer-term and general (goals) from desired
results or conditions that are short-term and specific CHANGING SENTIMENT TOWARD CORPORATE
(objectives). Goals are specified in mission and vision SOCIAL RESPONSIBILITY. Henry Ford, the indus-
statements; objectives, discussed below, are related to trialist and founder of Ford Motor Company, was
marketing plans, to specified time periods, and to once sued by his shareholders for putting expansive
specific marketing mixes. employment ahead of dividends to shareholders.
60
Ford was an advocate of and even created, within the doing “well,” of a broad perspective on corporate re-
Ford Motor Company, a “Sociology Department.” He sponsibility or doing “good.” There is evidence that
had justified foregoing a dividend payment in order fair treatment of workers, attention to the commu-
“to employ still more men; to spread the benefits of nity and society, and producing “green” products all
this individual system to the greatest number, to help contribute to increased profitability.9 Bob Willard
them build up their lives and their homes.” The and John Elkington have organized the various pos-
Michigan Supreme Court ruled that “A business or- sible benefits of social and environmental responsi-
ganization is organized and carried on primarily for bility into seven categories:
the profit of the shareholders. Directors cannot
shape and conduct the affairs of a corporation for 1. Easier hiring of the best talent;
the mere incidental benefit of shareholders and for 2. Higher retention of top talent;
the primary purpose of benefiting others.” 3. Increasing employee productivity;
Later in the twentieth century, Henry Ford II, 4. Reduced expenses in manufacturing;
the founder’s grandson and Ford chairman at the 5. Reduced expenses at commercial sites;
time, in apparent appreciation of the Court’s ruling 6. Increased revenue/market share; and
against his grandfather, asserted that “The corpora- 7. Reduced risk, easier financing.10
tion is not an all purpose mechanism. It is a sophisti-
cated instrument designed to serve the economic STAKEHOLDER THEORY. Milton Freedman fa-
needs of society and is not well equipped to serve so- mously said “there is one and only one social responsi-
cial needs unrelated to its business operations.” More bility of business—to use its resources and engage in
recently, Henry II’s own grandson, William Ford Jr. activities designed to increase its profits so long as it
argued “I believe very strongly that corporations can stays within the rules of the game, which is to say, en-
and should be major forces for resolving social and gages in open and free competition without deception
environmental concerns in the twenty-first century. or fraud”—he later restated that sentiment in a New
Not only do I think this is the right thing to do, I be- York Times article titled “The Social Responsibility of
lieve it is the best thing to do to achieve profitable, Business Is to Increase Its Profits.”11 Freedman’s words
sustainable growth.”8 have become emblematic of the extreme position that
Clearly, attitudes toward corporate social re- businesses need consider no consequences of their ac-
sponsibility and the scope of “legitimate” commer- tions beyond maximizing shareholder value, although
cial interests have evolved and continue to evolve. his book and essay are more nuanced, asserting that
The Ford family’s changing views parallel broader return maximization is moral because profits and the
sentiments, including the notion widely held today accompanying jobs and well-suited products are
that the best approach to corporate social and envi- valuable contributions to society in themselves and be-
ronmental responsibility may be to recognize that cause maximizing returns on assets is itself a moral
doing good—acting in socially responsible and envi- obligation (to the equity holders).
ronmentally sustainable ways—can also lead to In contrast to Freedman’s narrow “shareholder”
doing well (realizing profits and sustainable growth). centered view of the firm’s obligations and legitimate
concerns, “stakeholder theory” broadens the under-
DOING WELL BY DOING GOOD. This means standing of the firm’s legitimate audiences and re-
searching for opportunities to do business in socially sponsibilities. It asks two questions: What is the firm’s
and environmentally responsible ways that also en- purpose? And what is the firm’s obligations to its stake-
hance profitability and shareholder value. An impor- holders?12 Stakeholders are various groups of people
tant point is that shareholder value may not be a or organizations that have an interest (a “stake”) in the
short-term outcome, although equity markets may actions and the success of the firm. Stakeholders can
act as if it were. A longer-term perspective on share- be internal (employees, managers, debt holders, and
holder value is more likely to recognize the merit, in shareholders) or external (including the community
tangible terms of shareholder value and profits or and society, regulators, customers, vendors and
61
suppliers). Stakeholders vary in their interest in the outcomes—social and environmental impact met-
outcomes of the firm’s operations and in its success as rics—as well as the question of how performance
well as in their power or influence over the firms ac- against those diverse metrics will be motivated and
tions. The fundamental premise of stakeholder analy- regulated. That is, how will social and environmental
sis is not a proposal, but, rather, a recognition that performance be measured, and what will happen if the
firms have always had broader groups of interested firm performs well or poorly on those measures?
parties than just shareholders, and that those stake-
holders have varying degrees of legitimate claims on ASSESSING PAST PERFORMANCE
the capabilities and resources of the firm and legiti-
AND CURRENT STRATEGY
mate power to influence the firm’s missions, visions,
strategies, and actions. Stakeholder theory also asserts The strategy formulation process must be grounded
that firms will benefit—do well—by taking into ac- in a thorough analysis of past performance. Which ob-
count the interests of a broader array of stakeholders. jectives over the most recent period have been met?
Which ones have been missed? Why? What are the
THE TRIPLE BOTTOM LINE. Profits, people, and firm’s current strengths and weaknesses? Challenge
the planet (the “three pillars”) or economic, social, and the present strategy, assessing its current competitive-
environmental concerns have been integrated into ness, and looking for areas of leverage are essential in
“the triple bottom line” (“3BL” or “TBL;” Figure 1). developing the next strategies. Several factors are inte-
This framework highlights three clusters of legitimate grated into assessment of past performance. One is re-
concerns for any business, and it is certainly useful for view of ongoing financial and operating performance;
sorting out and clarifying otherwise disorganized con- another is the review of data from marketing informa-
siderations and stakeholders. As originally proposed, tion systems; a third category of factors involves the
the triple bottom line was proposed as literally imply- understanding of the firm’s existing competitive ad-
ing multiple reports: Just as firms generate financial vantages (and disadvantages) vis-à-vis the competi-
statements, the triple bottom line asserted that they tion. Financial and operating results include firm,
should also produce environmental and social impact business-unit, product-level and account-level data on
“statements.” Challenges with this framework include prices realized and revenues, margins, and profitabil-
the development of valid metrics for nonfinancial ity as well as operating results such as units shipped,
Profits
Equitable Bearable
Sustainable
People Viable Planet
FIGURE 1 The Triple Bottom Line13
62
costs, inventory, and defects/reworks. Marketing in- whether it ever reaches its destination. Having clear
formation systems collect data on an ongoing basis re- marketing objectives enables a company to: (1) focus
garding such customer-level measures as customer and organize its efforts; (2) direct day-to-day activities
satisfaction, customer profitability, complaints, and and achieve consistency in decisions; (3) motivate
customer loyalty. Satisfaction, profitability, and loyalty people to strive for excellence; and, most impor-
are essential markers of quality from the customers’ tantly, (4) provide a basis for assessment and control.
perspective and have been shown to mediate the effects A simple mnemonic for weighing effective and useful
of quality—of both goods and services—on corporate marketing objectives is “SMART,” which denotes
outcomes such as profitability and stock price. that objectives should be: Specific, Measureable,
Marketing information system data address the ques- Achievable, Relevant, and Time-specific. In order to
tion “How well are we doing in our customers’ eyes?” facilitate assessment and adjustment, objectives
and are invaluable in troubleshooting malfunctions should have these five qualities (Table 1).
and failures, gauging the effects of various product at- Two distinct kinds of objectives are useful and
tributes and marketing initiatives, and setting cogent, common in developing marketing strategies, marketing-
motivating objectives for the organization. related objectives, and financial objectives. Some typical
Understanding the company’s strengths and marketing objectives, which are often measured both at
weaknesses, or “competitive advantages,” is another the market and the segment level, include
crucial company-related consideration in creating
and maintaining effective strategies. The firm must • Sales volume and market share (in units
and/or dollars);
know the competition. That is, strengths and weak-
nesses are only strengths or weaknesses in compari- • Customer readiness variables (for example,
awareness, interest);
son to the competition, those assessments require
evaluation of competitors’ strengths, too. Identifying • Customer behaviors and attitudes (satisfaction,
brand attitudes, repeat-purchase intention, rec-
the company’s strengths, weaknesses, and competi-
ommendations/word-of-mouth, complaints);
tive advantages and matching them with opportuni-
and
ties is the essence of strategy formation, the next
stage of the planning model described below. • Accounts and distribution (retailers stocking,
SKUs or facings, business-to-business customer
accounts opened, approved-vendor lists).
ESTABLISHING PRELIMINARY
These market-related objectives highlight the need,
OBJECTIVES AND TARGETS
discussed earlier, to first clearly demarcate what mar-
A marketing strategy without specific objectives is ket is being targeted and measured. Metrics like mar-
like a ship without a compass. It can sail, but it can- ket share and customer satisfaction are meaningless
not be sure whether it sails in the right direction or unless the market to be shared and the customers to
TABLE 1 SMART Marketing-Plan Objectives
SMART Description Example

Specific What exactly is to be achieved? Dollar sales to new accounts in Italy
Measureable What quantitative or quantifiable methods Dollars of shipped merchandise as reported to
and metrics will define the objective? management by logistics on report XYZ123
Achievable Is the objective realistic and 20% increase over last year and the firm has
demanding/challenging? an enhanced product offering
Relevant Is the objective under the control of the This sales team for the new enhanced line
people or unit for whom it is established? calls on new accounts in Italy
Timed or When should these objectives be achieved Calendar-year 2010
Time-Specific and when will these objectives be assessed?
63
be satisfied have first been spelled out clearly. Typical noted above, there are two types of performance meas-
financial objectives include ures and objectives that are important to marketing
strategists: market performance and financial perform-
• Profits (overall profits, contribution, margins,
ance. Market performance is often measured as sales or
and contributions by units, products, and
market share. Financial performance usually relates to
lines) and return-on-investment;
profitability or return on something, such as sales, as-
• Costs of Marketing (sales costs; costs of goods
sets, or capital.
sold);
Figure 2 is divided into the past and the future,
• Inventory and logistics (inventory levels and
where past performance is past sales or share or past
turns, fulfillment time, stock-outs).
profitability (return). Going into the future we have our
In setting objectives there is an important ten- marketing and financial objectives (generally heading
sion between investing in long-term strengths—such as in an upward direction). Below the objectives we have a
in innovation and new product development, building momentum forecast of our current strategy; this is
customer loyalty, and the like—and “harvesting” short- where our current course (strategy and programs) will
term profits. Whether or not the strategy is to invest or take us if we just keep doing what we have been doing. If
harvest, that decision must be made deliberately and in there is a difference between the objectives and the mo-
the context of a clear understanding of the business mentum of the present strategy, we have a planning or
model and of consumer responses (for instance, cus- strategic gap. The bigger the gap is, the more strategic
tomer stickiness, customer profitability [customer life- change is needed in order to reach the objectives.
time value], and purchase rates).
Closing the Gap
IDENTIFYING STRATEGIC GAP(S)
Let us think about the situation in which the organ-
OR PLANNING GAPS
ization has a sales gap—that is, the planning gap in
One way to think about strategy is to think about the Figure 2 is between the sales objectives and the mo-
gap that exists between where we are and where we want mentum of the present strategy with respect to sales.
to be. Figure 2 depicts what has often been referred to What are the possible ways to close such a sales gap? One
as the strategic gap or the planning gap. The horizontal way to think about this would be based on the relation-
axis represents time, divided into the past and the ship with existing company offerings and existing mar-
future. The vertical axis represents performance. As kets. As discussed above, there are a limited set of pos-
Objectives
Share, Sales or Profits
Planning Gap
(ROS, ROI)
Momentum of
Present Strategies
2010 Time
Past Future
FIGURE 2 The Planning or Strategic Gap
64
sible “growth strategies.” At any given time, a firm is systems and process efficiencies, or out-and-
selling its existing products to its existing markets. out cost cutting.
Logically, growth (closing the gap) can come from 3. Backward Integration. This implies undertak-
selling more of the firm’s existing products to its existing value-added activities that had been out-
ing markets (market penetration); selling existing sourced to suppliers; that is, making or doing
products to new markets (market development); sell- things “in house” that had been purchased.
ing new products to existing markets (product devel- “Backward” refers to integrating toward the
opment); or selling new products to new markets (di- source in the channels of distribution.
versification). One other possible way to increase sales 4. Reducing Investment Intensity. This can be
would be to forward integrate—an option open to achieved perhaps by reducing inventories, fac-
manufacturers but not to retailers as they are already toring accounts receivable, or the sale and lease
as forward integrated as possible. back of property, plant, and equipment.
If the gap is a profitability gap, that is, if the gap 5. Selectivity and Focus. Abandoning segments
between objectives and momentum in Figure 2 is we can’t win in or rationalizing the product
between profitability objectives and the momentum line or the channels of distribution (“rational-
of profits, then another set of generic strategies is izing” generally refers to narrowing the scope
suggested. These include the following: by concentrating on the most profitable and
effective and cutting inefficient or ineffective
1. Increasing the yield. This can be done, per-
products or channels).
haps, by improving the sales mix, increasing
the price, or reducing distribution margins. Figure 3 shows these generic profitability-
2. Reducing costs. This can be achieved through improvement strategies. There are ten generic strate-
economies of scale, better capacity utilization, gies. In other words, at a high level there is a finite set of
available strategies—some relate to sales or marketing
Improve Sales Mix

Increase
Yield Increase Price
Reduce Distribution Margins
Economies of Scale
Reduce Capacity Utilization
Costs Systems/Process Efficiency
Cost Cutting
Improve Backward
Profitability Integration
Reduce
Investment
Intensity
Segment Rationalization
Selectivity/
Focus Product Line Rationalization
Distribution Rationalization
FIGURE 3 Alternatives for Improving Profitability
65
improvement and some relate to profitability improve- a pervasive “relevance test” that should be applied
ment. A company might employ several of these strate- to all assessments. Second, scenario analysis is an
gies simultaneously. For example, we might be pursu- invaluable tool for integrating situation assessment
ing a market penetration and product development and uncertain possible future trends and events
strategy along with cost reduction at the same time. into strategic planning.
RELEVANCE TEST. It is worthwhile to highlight the

INTEGRATING SITUATION fact that not everything in the environment is mean-
ASSESSMENT ingful, at least not to every decision or strategy. To
Situation assessments should be wide-ranging and avoid “paralysis by analysis,” the first job of the
descriptive in the sense that these assessments seek strategist is to cull through the tremendous amount
to understand what is going on in the environment of noise to focus on substantive and important infor-
and within the firm. But, situation assessments are mation. Because every situation is complex and there
also analytical in the sense that they assess, inte- are overwhelming amounts of data that could be
grate, and organize vast and potentially overwhelm- considered, it is important at the outset to emphasize
ing data into organized information that can be a “relevance test” before assessing the situation. This
used to drive decision making and action. Figure 4 is the “so what?” of strategic marketing analysis. The
emphasizes the need to sort vast amounts of messy manager must constantly ask: “Is this important and
data into organized, useable information which relevant to this firm and to this strategy? In fact, the
then supports decision making and strategic action. first job of a manager is to filter the available data
Situation assessment establishes the foundations down to useable information. Time, energy, and at-
for planning and strategy formulation. There are at tention should be reserved for information that di-
least a couple of straightforward tools for systemati- rectly affects strategy and ties to decisions.
cally managing and integrating situation assessment
and to structure the product of that assessment in SCENARIO ANALYSIS. An effective tool for bring-
ways that facilitate strategic thinking. First, there is ing together situation assessment and for planning
for future uncertainties is “scenario analysis.” When
Coca-Cola introduced “New Coke” in the mid-
1980s, public response was mixed. Contrary to leg-
end, sales actually went up, but there was also a back-
lash from consumers who demanded their old Coke
back. Coca-Cola responded quickly by reintroducing
Action
the old formula as “Coca-Cola Classic” while main-
taining New Coke. In the end, Coca-Cola (across
both products) had more shelf space in grocers and
Decisions
higher overall sales. Donald Keogh, president of
Coca-Cola at the time, said “Some critics will say
Information Coca-Cola made a marketing mistake. Some cynics
will say that we planned the whole thing. The truth is
Data
we are not that dumb, and we are not that smart.”14
He meant that the company was not smart enough to
foresee that introducing New Coke and having cus-
tomers reject it and then having to reintroduce Old
Coke (Classic) was the way to gain market share. He
also meant the company was not so dumb as to
FIGURE 4 From Data to Information to Decisions to launch New Coke without a contingency plan to fall
Action back on in the event it wasn’t accepted. Coca-Cola
66
Market Definition
Context (PEST)
Customer Assessment—
Trends and Insights
Context Consumer and
Industry Organizational
Situation Buyer Behavior
Assessment Customers Competitors Company Competitor Analysis—
Competitive Intelligence
Company Assessment—
Missions, and Visions
The Value Chain
Industry Analysis
Product Lifecycle
Experience Curve Effects
on Cost Reduction
Competitive Economies and
Advantage(s) Diseconomies of Scale
Strategy Economies of Scope/
Formation Synergies and Virtuous
Circles
Segmentation Targeting Market Share Effects
Positioning Scenario Analysis
Implementation:
Marketing Plan(s)
Risks & Products &
Forecasts People
Marketing
Documentation,
Research
Assessment and
Adjustment
Price Place
Profits
Budgets
Linking Situation Assessment to Relevant Tools and Frameworks
had planned for uncertainty by thinking through tool, because it considers multiple factors evolving to
responses to multiple “possible futures” or “scenarios.” shape possible futures or scenarios. It is a powerful
Scenario analysis is essentially an elaborate “if . . . method for formalizing situation assessment, for
then” planning tool—maybe more accurately de- clarifying possible futures, and for preparing the
scribed as an “if . . . and if . . . and if . . ., then . . .” firm’s preferred responses to those possibilities.
Endnotes
1. Lao Tzu, (trans. Stephen Mitchell) Tao Te Ching: Statements Are Hard to Beat,” Management Today
An illustrated journey (London: Frances Lincoln (September 1994): 66–68.
Limited, 1999), 34. 5. Abagail McWilliams and, Donald Siegel, “Corporate
2. Michael E. Raynor, “That vision thing: Do we need Social Responsibility: A Theory of the Firm
it?” Long Range Planning 31, no. 3 (June 1998): Perspective,” Academy of Management Review 26,
368–376 (definition is from page 371). no. 1, (January 2001): 117–127 (definition is from
3. James C. Collins and Jerry I. Porras, “Building your page 117); also see A. McWilliams, D. Siegel, and
company’s vision,” Harvard Business Review P. Wright, “Corporate Social Responsibility: Strategic
(September–October, 1996): 65–77. Implications,” Journal of Management Studies 43, no. 1
4. Martin Vander Weyer, “Mission Improvable: For (January 2006): 1–18.
Cliched Syntactically-Challenged Copy Mission
67
6. Duane Windsor, “Corporate Social Responsibility: and Organizational Performance,” Journal of

Three Key Approaches,” Journal of Management Managerial Psychology 23, no. 2 (2008): 186–203.
Studies 43, no. 1 (January 2006): 93–114. 10. Bob Willard and John Elkington, The Sustainability
7. G. H. Brundtland, Our Common Future (Brussels: Advantage: Seven Business Case Benefits of a Triple
World Commission on Environment and Develop- Bottom Line (Gabriola Island, BC, Canada: New
ment, 1987), 43 (published as annex to General Society Publishers).
Assembly document A/42/427). 11. Milton Friedman, “The Social Responsibility of
8. These quotes, this reasoning, and the juxtaposition- Business is to Increase its Profits,” The New York Times
ing of the latter two quotes (Henry II’s and William Magazine (September 13, 1970): 32–33, 122–126.
Jr.’s), are found in Subhabrata Bobby Banerjee, 12. Freeman, R. Edward, Strategic management : A
Corporate Social Responsibility: The Good, the Bad stakeholder approach (Boston: Pitman 1984); see
and the Ugly (Northampton, MA: Edward Elgar also T. Donaldson and L. Preston, “The Stakeholder
Publishing, 2007), 13, 51. Banerjee cites Henry Ford Theory of the Modern Corporation: Concepts, evi-
(1919) for the first quote, Dodge v. Ford Motor dence and implications,” Academy of Management
Company, 204 Mich. 459, 170 N.W. 668 (Mich. Review 20, no. 1, (January 1995): 65–91; and R.
1919), for the second (to the court), Regan, 1998 for Edward Freeman, Andrew C. Wicks, Bidhan Parmar,
the second and Ford 2000 for the third. “Stakeholder Theory and ‘The Corporate Objective
9. Oliver Falck and Stephan Heblich, “Corporate Social Revisited,’ ” Organization Science 15, no. 3
Responsibility: Doing Well by Doing Good,” Business (May–June, 2004): 364–369.
Horizons 50, no. 3 (May–June, 2007)), 247–254; A. 13. Rodrigo Lozano, “Envisioning sustainability three-
Hillman and G. Keim, “Shareholder Value, dimensionally,” Journal of Cleaner Production 16, no.
Stakeholder Management and Social Issues: What’s 17 (November 2008): 1838–1846 (this figure is
the Bottom Line?” Strategic Management Journal 22, adapted from Figure 1, page 1839).
no. 2 (February 2001): 125–139; and H. Ozcelik, N. 14. Mark Pendergrast, For God, country and Coca-Cola:
Langton, and H. Aldrich, “Doing Well and Doing The definitive history of the great American soft drink
Good: The Relationship between Leadership and the company that makes it, 2nd edition (New
Practices that Facilitate a Positive Emotional Climate York: Basic Books, 2000), 358.
68
Strategy Formation
“And strategy must start with a different value
proposition. A strategy delineates a territory in which
a company seeks to be unique.”
MICHAEL PORTER1
Strategy formation is the heart of the strategic marketing process. The overarching ob-
jective is to meet some specific needs of some specific customers better than the competition
within enduring, profitable relationships. There are four substeps within strategy formu-
lation, organized in Figure 1:
• Identifying competitive advantages. What things does the firm do or could it do
better than the competition and at a profit?
• Segmenting the Market. What are the important differences across customers
with regard to their needs and their responses to the marketing mix? How attractive
are the various segments?
• Targeting. Which specific customers and needs (segments) will be served utiliz-
ing which specific competitive advantages? How well do segments fit or match
with the firm’s competitive advantages?; and
• Positioning. What is the unique position in the marketplace that the firm will
claim? How will the firm claim that position? Positioning is the implementation
of the strategy (targeting) into specific tactics (the marketing mix—price, prod-
uct, place or distribution, people/service, and promotion or “integrated market-
ing communications”).
Competitive
Advantage(s)
Segmentation Targeting Positioning
FIGURE 1 Strategy Formation
69
Strategy Formation
IDENTIFYING COMPETITIVE subgroups (“segments”) of customers that are simi-

ADVANTAGES lar to each other and different from the rest of the
market with regard to needs, wants, and responses
For long-term viability, every firm must be better to the marketing mix. Marketing-mix-response dif-
than the competition at something. Those things the ferences are not just responses to product differ-
firm is best at are its “competitive advantages” ences; customers may respond differently to price,
(sometimes referred to as “core competencies” or service levels, advertisements, and/or distribution
“sustainable competitive advantages”). A company channels. Differences in responses in regard to any of
has a competitive advantage if it possesses resources these marketing mix elements—which correspond to
or capabilities that are: (1) valuable in the market differences in underlying needs or wants—are
(who wants to be best at something no one cares meaningful segmentation differences and an oppor-
about?); (2) rare (competitors don’t have the same tunity to gain advantage through targeted marketing
resources or capabilities); (3) not imitable or substi- mix development.
tutable (competitors cannot easily imitate or work- The primary reason to differentiate customers
around them); and (4) transferable to other markets into segments is to capture the strategic advantage
or products. In a strengths-and-weaknesses frame- of meeting differing needs with tailored mixes. The
work, competitive advantages are the strengths. objective and the key to successful segmentation is
The “value chain” offers a useful framework for to find differing needs that match the firm’s compet-
identifying competitive advantages. McKinsey and itive advantages and thus can be served at a profit
Company developed a generic value chain consisting better than by the competition. If all customers re-
of six distinct activities that need to be carried out to spond to all elements of the marketing mix in the
bring a product onto the market: technology devel- same way, then there is no reason to segment. The
opment, product design, manufacturing, marketing, objective then would be to develop the single opti-
distribution, and service.2 Michael Porter offered a mal marketing mix for all customers, and there
somewhat more detailed but similar version of the would be only one “winner.” Finding substantial dif-
value chain that distinguishes “primary” value- ferences that others have overlooked can constitute a
adding activities the firm performs along the flow of “customer insight.” It can create a significant oppor-
goods from inputs (raw materials) to outputs (prod- tunity for the firm. For example, in the late 1980s
ucts), marketing and sales, and support services as Toyota recognized that the automobile industry was
well as the essential “support” activities such as treating younger luxury sedan buyers as a homoge-
human resource management and research and de- neous segment—whether or not they valued per-
velopment that facilitate those primary activities. formance, reliability, comfort, or service—and
The essential question is: How well does the firm per- BMW was dominating that market. Toyota launched
form the various activities of the value chain vis-à-vis Lexus as a reliable, comfortable luxury sedan with
the competition? terrific service, and BMW was forced to refocus on
the performance luxury sedan buyers.
There are two types of variables to be distin-
“The aim of marketing is to know and understand guished in the segmentation process for both con-
the customer so well the product or service fits him sumer (B2C) and business-to-business (B2B) mar-
and sells itself.” kets: segmentation bases and segment descriptors. The
Peter Drucker3 bases of segmentation—the underlying differences
that warrant targeting with distinctive marketing
Because customers within a broadly defined market programs—should be differing customer needs, dif-
almost never have the same characteristics or the ferences in needs that underlie differences in re-
same needs and requirements, there is, as a rule, an sponses to elements of the product, and marketing
opportunity to subdivide or segment the market. program. Table 1 clarifies what a “customer need” is
The purpose of market segmentation is to identify as well as what the related ideas “customer wants,”
70
Strategy Formation
TABLE 1 Needs, Wants, Benefits, and Demand
Definitions Examples
Needs: The underlying motivation or reason Hunger
driving consumption. Conceptualized as the
difference between customers’ perceived current
state and their desired state. Needs include:
basic physiological needs (food, shelter), safety
(security, property), social needs (belonging,
affection), esteem (self-esteem, respect by others),
and self-actualization (intellectual growth, self-
expression).4
Wants: The specific form that customers may Filet Mignon
desire to address needs, influenced by culture, Kung Pau Chicken
experiences, situations, and marketing actions; Risotto al Gargonzola
wants are shaped by culture, experience,
situations, and individual factors.
Benefit or “Benefit Sought”: An outcome of Nourishment/Nutrition
consuming a product that motivates purchase and Hunger satiation
consumption. Benefits are the consequences of Taste sensations
the consumption of the product and of product
attributes.
Demand: A want combined with the ability Hungry customers who want filet mignon, who can
(including resources such as money and time, afford filet mignon, and who can access filet
and access) to purchase. Demand requires that mignon.
consumers want the product and have the ability
to buy the product
“benefits sought,” and “demand” are. All of these can it is still true that at the root of differences in the
be legitimate segmentation bases. Descriptors of seg- way customers respond to the marketing mix are
ments are observable variables that correlate with the differing customer needs. If a segment is, for exam-
differences in needs/wants/benefits-sought and allow ple, more price conscious than other segments, that
the segment to be identified and targeted. Descriptor is the basis of the segmentation (the need for econ-
variables include things like demographics (age, edu- omy). Such a segment may be described as older,
cation, income, etc.), geographics (the location of retired consumers, or busy single-income parents.
consumers), psychographics (lifestyles), and behav- But age, family status, and employment (retired or
iors (usage rate, stage in buying process or “readi- full-time homemaker) don’t drive the segment dif-
ness,” loyalty, and profitability or “customer lifetime ferences—the need for economy is what differenti-
value”). In business-to-business markets, segments ates the segment from other customers. Age, family
of organizations can be described on “firm demo- status, and employment are all demographic vari-
graphics” (size, ownership, etc.), behaviors (purchas- ables that correlate with the need for economy.
ing histories) and “B2B psychographics,” including They also describe the customers and the segment,
purchasing processes (buy centers, bidding, etc.), and most importantly, allow the segments to be tar-
ownership, and strategies. geted with tailored offerings. The distinction be-
Although it is important to describe segments tween and intersection of segment descriptors and
in observable and actionable ways—ways that allow segmentation bases (underlying customer needs)
the marketer to identify and address the segment— are illustrated in Figure 2.
71
Strategy Formation
Descriptors
Age Income Location Loyalty Profitability

Bases (Needs)
Prestige
Quality
Economy
Performance
Reliability
Conformance
FIGURE 2 Example of Segmentation Bases and Descriptors
Similarly, product-related behaviors, such as meet the segment-specific needs and requirements,
usage rate and loyalty, are important to strategic seg- and it can, therefore, create superior value and de-
mentation but they are, still, only correlates of the mand price premiums. The downside is a higher
underlying needs that drive the segments’ behaviors. complexity of the organization and the product
For example, it makes strategic sense to develop loyal portfolio, lower economies of scale (standardized
customers and to target customers who have higher products and marketing mixes optimize economies
lifetime value. However, loyalty and customer life- of scale, but economies of scope can still be achieved
time value are themselves driven by underlying across products/programs), and, as a consequence,
needs, and efforts to build loyalty or target high- higher unit costs. Differentiated marketing can con-
value customers will be most successful if they in- sist of:
clude efforts to thoroughly understand those needs.
• Selected specialization. The company selects
and focuses on one or a few single segments
SEGMENTATION SCOPE. Segmentation decisions
(Case A in Figure 4).
include not only which segments to target but, simul-
taneously, the scope of the targeted segments; that is, • Segment specialization. A producer decides to
serve several different needs of one segment and
decisions about the number and size of the segments
develops many products and marketing pro-
and the relationship amongst the segments to be tar-
grams for this segment (Case B in Figure 4).
geted. Some firms target very broad segments with
relatively homogeneous offerings; this is based on • Product specialization. Focus on one product
that is tailored to all market segments (Case C
“global” and “mass” marketing strategies. Other
in Figure 4).
firms target adjacent segments with somewhat dif-
ferentiated offerings; this is a form of target market- • Full market coverage. A company decides to
address all market segments and develops all
ing. Finally, some firms target smaller segments of
products the segment wants (Case D in
the market with extremely focused offerings; this is
Figure 4)
niche marketing. Figure 3 graphically presents these
alternatives.
SEGMENTATION DYNAMICS. Segments are dy-
DIFFERENTIATED Differentiated
MARKETING. namic. Segment preferences change—that is, a seg-
marketing means that a company develops individ- ment’s ideal product can shift over time, sometimes
ual marketing programs for different individual tar- quite rapidly. In addition, segments can split or
get segments (Figure 4). As it tailors products and merge. Groups of consumers that were reasonably
marketing programs to the segments, it can better treated as homogenous may develop important dif-
72
Strategy Formation
Mass
Customization/ Adjacent Multi- Small- Narrow/
Global Mass Personalized Segments Segment Segment Niche
Broad
Niche
FIGURE 3 Segmentation Scope
ferences, and consumers who had differing response BMW retained the performance luxury drivers while
profiles may converge around common preferences Lexus carved out a large segment of reliability-com-
and behaviors. For example, the luxury sedan market fort luxury drivers.
treated affluent professional Americans as relatively
homogeneous—and BMW dominated the younger
Targeting
luxury sedan market in the mid-1980s. By the early
1990s, Lexus and other Japanese brands had split the Targeting—matching the firm’s competitive advan-
segment by recognizing and serving differing needs: tages with attractive market opportunities—is the
Differentiated Marketing
A B C D
Company Company Company Company
P1
P2
P3
P4
P5
S1 S2 S3 S4 S5 P = Product
S = Segment
FIGURE 4 Differentiated Marketing Approaches5
73
Strategy Formation
crux of the strategic marketing formulation (shown SWOT ANALYSIS. SWOT analysis—Strengths,
graphically in Figure 1 above). Targeting is the cru- Weaknesses, Opportunities, and Threats analysis
cial junction in formulating strategy and translating (Figure 5)—is a powerful tool for targeting appropri-
strategy into tactics, matching external opportunities ate markets with effective offerings. It summarizes
with internal strengths—strengths the firm has or the juncture of external analyses (situation assess-
strengths the firm can develop or acquire. Situation ment of customers, the context, and competitors)
assessment and environmental scanning, scenario and internal analysis (strengths and weaknesses). We
analysis, segmentation, and analysis of competitive can think of the strengths and weaknesses as a sum-
advantages all feed into targeting. Positioning, the marization of the firm’s or offering’s competitive
construction of the brand and deployment of a position; the opportunities and threats represent the
unique marketing mix, flows from and is determined market’s attractiveness. The SWOT framework is one
by targeting. Targeting is where the strategy is speci- of the most familiar tools of strategic planning. An
fied and becomes concrete. The overarching objec- essential point to emphasize about SWOT analyses is
tive is to identify segments that will value offerings that they are not merely descriptive—they are most
built upon the firm’s strengths; that is, to meet some useful as prescriptive tools. The SWOT framework
specific needs of some specific customers better than the organizes strengths, weaknesses, opportunities, and
competition within enduring, profitable relationships. threats to identify strategic actions to achieve desired
There are several frameworks that help identify at- ends. Table 5 summarizes the strategic implications
tractive markets to target with valuable offerings, the of the range of possible SWOT outcomes.
two most powerful of which are: SWOT analysis and
the application of strength/ attractiveness matrices to STRENGTH/ATTRACTIVENESS MATRICES. A sec-
segments. ond powerful tool for identifying exploitable
xt
te
on
C
Company
io
tit
pe
om
C
INTERNAL
Opportunities
Attack/
Turnaround
Aggressive
EXTERNAL
Customer
Threats
Avoid/
Finesse
Defensive
FIGURE 5 SWOT Analysis
74
Strategy Formation
matches between segments and competitive advan- advantages are a poor fit with some segments’ needs.
tages involves strength/attractiveness matrices, A firm may, for example, have access to channels
such as the Boston Consulting Group’s (BCG) that serve a segment. It may have brands that are
Growth/Share Matrix or the GE/McKinsey Portfolio well liked by customers in a segment. It may have an
Planning Grid.6 These frameworks were originally installed base in the segment, or production capabil-
developed to aid in prioritizing strategic business ities that make the firm’s offering a good fit with
units (SBUs) and products within a company’s the segment’s needs. Figure 6 illustrates the sorting
“portfolio”, but the same strength/attractiveness and prioritizing of segments within a general
concepts are also effective for targeting segments with strengths/attractiveness grid.
strengths. Here, in targeting applications, segments
are assessed with regard to (a) their general attrac- TARGETING DISCIPLINE. In many situations it is
tiveness (How good would it be to succeed in this seg- as important to know who the firm is not targeting as
ment if the firm could?) and (b) the strength of the it is to know which segments it is targeting. No prod-
firm against the segment’s particular needs and dy- uct offering can be right for everybody and a common
namics (How likely or well-suited is the firm to suc- trap is that, in trying to grow sales toward new cus-
ceed in this segment regardless of how attractive it is?). tomers and new segments, marketers lose their focus
Some market segments are more attractive than oth- and their original advantage in their primary seg-
ers. Similarly, a firm’s distinctive competitive advan- ments. This may be termed “target drift,” the loss of
tages will be better suited to meet the needs of some
segments than others—and some firms’ competitive
High
Segment
#1
Segment
#3
Attractiveness
●Size
●Growth Rate Segment
●Resources #2
●Price Insensitivity
●Etc.
Segment
#4
Low
High Strength Low
● Market Share
● Technology-Needs Fit
● Brand Equity
● Channel Access
●
Etc.
FIGURE 6 Strengths/Attractiveness and Segmentation
75
Strategy Formation
focus on the target segment in favor of broader or al- turns out that the marketer who targets two segments
ternative segments. with a single marketing mix doesn’t catch either one.
“If you run after two rabbits, you won’t catch either one.”
Traditional Armenian Proverb7 Positioning
Closely related to target drift is the temptation We define positioning as the deployment of the
to target more than one segment with a single mix; entire marketing mix (products, people, prices,
that is, to “straddle” segments or to squat between seg- place/distribution, and promotion/integrated mar-
ments. That strategy may work in the short run, par- keting communications) to claim a unique, valued,
ticularly in the early stages of the product lifecycle, but and defensible position in the marketplace. Many ex-
it is unlikely to succeed for long and certain to fail in perts have highlighted the fact that a product’s or
the long term. The problem with trying to serve two or brand’s position is really something that resides in
more segments with a single marketing mix is that the the consumers’ minds. That position is driven by the
mix isn’t exactly right for anyone—and a competitor actions of the marketing firm or brander, and those
will, eventually, offer a mix that is exactly right. One actions are encapsulated in the “marketing mix.” The
solution to straddling may be to revisit the segmenta- mix is the totality of tactics and offerings that the
tion scheme looking for multiple segments where the firm can use to influence consumers’ perceptions of
original segmentation solution had identified just one. the offering’s position and to thereby meet customer
Another alternative to straddling is to offer more than needs.
one marketing mix. That is, to focus tailored market-
ing mixes for each segment. In any case, it usually
Context
Industry
Situation
The Marketing Concept

What is a Marketing
Strategy?
Generic Strategies—
Competitive Advantage and Scope
Advantage(s)
The Value Map
Strategy
Formation Product-Market Growth
Strategies Strategies
Segmentation Targeting Specific Marketing
Positioning
Strategies
Market Segmentation
Loyalty-Based Marketing,
Customer Acquisition,
Implementation: and Customer Retention
Marketing Plan(s)
Positioning and Promotion Customer Lifetime Value
the Marketing Mix Branding Competitive Advantages
Risks & Products &
Forecasts SWOT Analysis
People
Targeting
Marketing Positioning
Documentation,
Research
Assessment and
Adjustment
Price Place
Profits
Budgets
Linking Strategy Formation to Relevant Tools and Frameworks
76
Strategy Formation
Endnotes
1. Michael E. Porter, “Toward a Dynamic Theory of 5. Source: Adapted from Derek F. Abell, Defining the
Strategy,” Strategic Management Journal 12, Special Business: The Starting Point for Stragic Planning
Issue: Fundamental Research Issues in Strategy and (Upper Saddle River, New Jersey: Prentice Hall,
Economics (Winter 1991): 95–117, 98. 1980).
2. See J. B. Barney and W. S. Hesterly, Strategic 6. See Arnoldo C. Hax and Nicolas S. Majluf, “The Use
Management and Competitive Advantage (Upper of the Industry Attractiveness-Business Strength
Saddle River, New Jersey: Pearson Education, 2006). Matrix in Strategic Planning,” Interfaces 13, no. 2
3. Peter Drucker, Management (New York: Harper & (1983): 54–71.
Row, 1973), 64. 7. Prentice-Hall Encyclopedia of World Proverbs
4. See Abraham H. Maslow, “A Theory of Human (Englewood Cliffs, New Jersey: Prentice-Hall,
Motivation,” Psychological Review 50, no. 4 (1943): 1986), 399.
370, 396; and Abraham H. Maslow, Motivation and
Personality (New York: Harper & Row, 1954).
77
78
Implementation
79
Implementation
“Some people try to find things in this game that
don’t exist; but football is only two things—blocking
and tackling.”
VINCE LOMBARDI, LEGENDARY AMERICAN FOOTBALL COACH1
“Many companies want to leapfrog past the basic

blocking and tackling of doing the everyday things
right. . . . This just won’t cut it. If a company can’t get
the basics down in the delivery of its products and services,
other effort will fall on the deaf ears of customers.”
JEANNE BLISS, AUTHOR AND FORMER CHIEF CUSTOMER OFFICER
AT LANDS’ END, MICROSOFT, ALLSTATE, COLDWELL BANKER AND MAZDA.2
Blocking and tackling are the basic skills of American football—the “building blocks”
so to speak—all other plays and strategies are created by arranging and integrating
blocking and tackling. Football coaches and fans too often focus on elaborate strategies
and sophisticated techniques, but games are most often won or lost when players exe-
cute the basics well—that is, winning or losing is decided by the unglamorous but crucial
fundamentals of blocking and tackling!
This text is about strategic marketing, and much of it focuses, appropriately, on
the high-profile and “exciting” elements of strategy—but this section focuses on the
implementation. As in football and as emphasized by Jeanne Bliss, the former chief cus-
tomer officer at five iconic brands, if the tactics and day-to-day details of implementa-
tion aren’t done well, all the beautiful strategies in the world can’t save the effort.
Implementation starts with an understanding of the product or brand’s position
in the marketplace—that is, the desired “positioning” in customers’ perceptions is the
strategy at the implementation level. Positioning involves developing a tailored market-
ing mix to target some specific set of customer needs in a unique way—a way that no
competitor matches—and communicating that position to customers effectively.
Positioning is something that, in reality, lives in the customers’ perceptions of the offer-
ing. Customers won’t see a brand manager’s “positioning statement” or care what the
marketing strategist thinks the products position is supposed to be; they’ll rely on their
own perceptions to decide where it’s positioned—and that will be the only product
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Implementation
position that matters. Nevertheless, those percep- mulative sum of all of the marketing tactics and mes-
tions are shaped by the marketing mix and its co- sages across the history of the offering. Brands are
herence. Thus, the objective of positioning is to the company’s and the consumer’s shorthand for the
“own” a valued place in customers’ perceptions. overall offering and its position in the market.
Once the firm has determined which customers and Therefore, this section on implementation begins
which needs it is targeting with which competitive with marketing research and then develops the con-
advantages, it must identify and delineate exactly cept of the brand before considering the various ele-
what “position” those decisions equate to in the ments of the marketing mix and their strategic im-
marketplace: In what territory does the product or plications.
brand seek to be unique? How does the marketing mix
claim that territory?
MARKETING RESEARCH
Segmentation is the tough job—positioning is
the easy job. That is, if you understand the segment’s Marketing research is a very wide umbrella encom-
needs well-enough, the positioning challenge should passing an assortment of activities and objectives,
be, if not easy, at least straightforward. If you believe including broad, inductive, and exploratory “cus-
you have a positioning problem, it is probably be- tomer assessment,” which is part of situation assess-
cause you are not sure which segment you are trying ment, as well as issue- or decision-specific research
to serve or you are serving too many segments. that: (1) describes markets, segments, and customers;
Positioning aligns the myriad tactical decisions (2) guides strategies, programs and tactics; and/or
involved in going to market, as shown in Figure 1. It (3) evaluates strategies, programs and tactics. This
is the implementation of strategy into specific breadth is clarified in Table 1. Although all market-
brand-building marketing mix elements. These are ing research is focused on understanding the cus-
all of the “details” and specific decisions about the tomer and tying the firm’s actions to a customer
firm’s products and services, brands, prices, places orientation, broad customer assessment and issue-
(channels and distribution), and promotions (com- specific market research begin with different objec-
munications with customers). It is important to re- tives, draw on different methods, and result in
member that the fundamental objective of position- different sorts of information and guidance. As or-
ing is not the marketing-mix activities themselves, ganized in Table 1, market research includes a range
but rather the resulting customer perceptions. of activities from exploring the environment for op-
Marketing research should lie at the heart of portunities and insights to project-based research to
the marketing program and guide all of the tactical hone specific elements of the marketing mix as well
elements of the marketing mix. Brands are the cu- as Customer Relationship Management (CRM) sys-
tems, which entail the ongoing collection of market-
ing metrics and customer data for program assess-
ment and customization/targeting.
Positioning Too frequently, managers take a “more is bet-
ter” approach to marketing research and data collec-
tion. They collect reams of ill-defined data and then
Promotion sift through those voluminous data hoping to find
Branding
Products & useable information to support decision making.
People
This is dysfunctional and contributes to “paralysis by
Marketing
Research analysis,” the tendency to over analyze and over re-
search issues and the failure to make decisions and
Price Place
Profits act. To avoid unfocused and ineffective research, the
marketing research process stipulates that the deci-
sion that will be guided by the research or the prob-
FIGURE 1 Positioning Drives Tactics lem to be solved by the research be clearly specified in
81
Implementation
TABLE 1 Organizing Customer-Focused Research

Assessment Assessment customers in general to identify (a) trends in
needs and demand, and (b) customer insights.
Strategy Segmentation, Ongoing as well as focused research
Formation and Targeting, and indentifying differences across
Implementation Positioning customers/consumers with regard to needs
and descriptive characteristics and linking

those differences to existing or achievable
competitive advantages.
Positioning and Focused research to pretest and refine tactics,
the Marketing Mix including price, promotions, and advertising;
new products or product modifications, and
merchandising programs; and to gauge the
effects of those tactics on achieving the
desired positioning.
Customer Ongoing data collections tied to specific
Relationship accounts, customers, or consumers that serves
Management to tailor offerings (personalize or customize
(CRM) offerings) and direct investments and efforts
toward the “right” customers and segments.
Assessment & Customer- and Focused and ongoing research collecting
Adjustment Market-Oriented information on customer responses to the
Metrics marketing mix, including measures of
satisfaction, loyalty, profitability, and revenues.
detail before the research is designed and well before Define the Problem and
any data are collected. Figure 2 shows the basic Research Objective
Marketing Research process,3 which emphasizes the
necessity of early problem and objective specifica-
tion. Some experts have even recommended actually Develop the Research
outlining the “final report” first—before designing Plan
the study or collecting any data—in order to engage
the manager early in the research process and focus
efforts on the right questions and on guiding man- Collect the Information
agerially-controllable outcomes.4
Questions for Marketing Research Analyze the Information
In science there are two well-known types of errors:

Type I errors involve finding confirmatory results for
hypotheses that are, in fact, not true (“false posi- Make the Decision
tives”); Type II errors are rejecting hypotheses that
are, in fact, true (“false negatives”). A less well-
known sort of error has been labeled “Type III FIGURE 2 The Marketing Research Process5
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Implementation
error”: getting the right answers for the wrong ques- launch new products and “test” them in the ac-
tions.6 Careful attention to framing the right ques- tual marketplace. That is, sometimes the best
tions, even going so far as to draft the final report course of action is to “fail fast, fail cheap, and
first to emphasize the value of the research, is vital to move on.”7 This is, of course, a function of the
effective and efficient marketing research. There are cost of the research, the cost and potential con-
three broad categories of questions that marketing sequences of failure, and the firm or manager’s
research can address: level of risk aversion.
• Market Questions: Marketing Research Designs

• Demand forecasting: What is the size of the
market? Marketing research efforts can have several different
• Needs identification and segmentation: types of designs, including exploratory (less unstruc-
What do customers need and care about, tured research intended to discover deeper under-
and how much do they care? How do cus- standings and to generate specific issues for future
tomers differ in regards to those needs and research), descriptive (to characterize markets, seg-
“importance weightings”? ments, and even specific customers with regard to
• Mix/Program Questions: size, attitudes and preferences, behaviors, needs,
• The effect of various mix elements: What is etc.), and causal (intended to link variables, such as
the best product, message, channel, or price? differences in price or advertising, to outcomes such
• Assessment and Adjustment Questions: as sales). We have pulled customer assessment, the
• Market Share: How are we doing vis-à-vis prototypical exploratory research, out and dealt with
the competition? it as a distinct activity with its own objectives, meth-
• Performance: How do our customers feel ods, and outcomes. But, exploratory research is also
about us? How loyal are they? used in more focused marketing research, most often
at the front end of projects, to identify issues and
Once the purpose of the research—the ques- generate hypotheses for further study.
tion or questions to be addressed—has been care-
fully defined and delimited, it is useful to reexamine Marketing Research Approaches
whether or not research is necessary at all. It may be and Data
that no research is necessary or justified. There are at
least two ways to think about whether investments in Many different approaches to marketing research
marketing research are warranted: can address certain questions. Marketing research
approaches range from reference to existing census
1. What are the ranges of actions that are possi- data or analysis of in-house archival sales records to
ble? If additional information won’t change highly structured surveys with forced-choice items
future decisions in meaningful ways, don’t do collected in large, random samples of consumers.
the research. A reality of marketing research is Different methods yield different types of data and
that, too often, managers know what they want different sorts of customer understandings. Data can
to do, what they have to do, what they cannot be categorized in many ways, including “secondary”
do, or what they will never do, but they never- (gathered for some other purpose) and primary
theless conduct research on the decision. That (gathered for the specific project at hand), and quali-
research is a waste of time and resources. tative versus quantitative. There are also many types
2. How much will information help? How much of analyses that can be performed on those different
will the research reduce risk and uncertainty or data, ranging from the subjective interpretation of
improve accuracy in decision making? One open-ended responses to extremely sophisticated
study found, for example, that 92 percent of all statistical analysis of large databases of customer in-
new cereals failed despite rigorous marketing formation. Importantly, each sort of marketing re-
research. It turned out to be cheaper to simply search data collection method, data itself, and data
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Implementation
analysis yields different types of information which statement and hold each action up against the origi-
can clarify different sets of strategic issues. nal intent. Further, documenting the positioning in a
Understanding the appropriate research design and statement facilitates getting people up-to-speed as
method for particular sorts of questions or purposes they join the marketing team and facilitates retention
is a key to managing marketing research and incor- of knowledge when people depart.
porating it into strategic marketing planning. Positioning statements are not strategy state-
ments; they’re statements about how the strategy
should come together in the perceptions of the cus-
BRANDS AND BRANDING
tomers. A complete positioning statement usually
Brands are the company’s customers’“shorthand” for specifies: the brand/product to be positioned, the
its product’s position and its benefits. A collection of market (the “frame of reference”), the target seg-
meanings, brands are represented by symbols such as ment(s) and target needs (the “target”), at least one
names, logos, spokespeople, and other customers/ “point of difference” or “brand promise,” and the
consumers, packaging and colors, and imagery. “reason to believe” that support those points of dif-
Brands can have enormous value to the marketer. ference.8 A positioning statement isn’t intended for
Facilitating choice and reducing search and evalua- customers to see; it is an internal record of what the
tion demands on customers, brands deliver value to brand is meant to be. It serves to keep the various tac-
customers as well. Brands also deliver assurance, tics “on strategy” and it fosters institutional memory
meaning, and self-expressive value to customers and of what the brand is and, often just as importantly,
consumers. Drinking a Coca-Cola is very different what it is not. Positions can change and migrate to fol-
from merely drinking the carbonated water and (se- low customer preferences, but brands that change po-
cret) ingredients that make up the tangible core sition too frequently rarely succeed. In any case, a
product. Drinking a Coca-Cola is an experience and strong, concise, and clear positioning statement re-
has meanings that the substance and ingredients do duces ambiguity, ensures “institutional memory” for
not have on their own. The brand can also have the positioning decisions, and focuses tactics of the
great economic value to the firm. The Coca-Cola marketing effort discussed in the next sections.
brand, for example, was the most valuable brand in
the world in 2007, estimated to be worth $ 65.3 bil-
THE MARKETING MIX
lion. From a strategic perspective the importance of
branding is that the brand embodies the goodwill or Our product, its price, our place (or channels of
“equity” the firm has earned and can retain with its distribution), our promotion (communications),
consumers. and our people and sales force are controllable ac-
tions that marketing managers direct. The best sales
force in the world will have a tough time selling a
POSITIONING STATEMENTS
product that is ill-conceived, ill-designed, or poorly
Most good brand-building organizations require manufactured, or a product with a price that is mis-
some summary documentation of what the brand is aligned with what the customer thinks is good
meant to be, what needs it is meant to serve, and for value, or a product that can’t be found in the places
which specific customers/consumers on what spe- where the customer shop. These decision variables
cific occasions. That is, for positioning strategies to must be “mixed” correctly. We need the right prod-
be clear, actionable, and enduring they should be uct at the right price in the right place, and so forth,
documented in “positioning statements.” Without to serve our target segment in light of all the uncon-
working through the process of documenting the in- trollable forces—the situational factors such as the
tentions of a positioning effort, members of the or- competition, technology, economic conditions, and
ganization and elements of the marketing mix can the political, legal, and regulatory environments.
drift “off strategy” or “off message.” With a position- And then, just when we’ve got the mix right,
ing statement, it is straightforward to go back to the “[stuff] happens”: things change and that mix must
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Implementation
evolve and adapt over time. Indeed, marketing the product, the price, the distribution of the prod-
strategy may be viewed, from this perspective, as uct (place), the promotions or marketing communi-
simply mix evolution. cations associated with the product and brand, and
As emphasized above, the objective of position- the people or personal selling effort of the offering
ing is to establish the offering’s place (position) in cus- (Table 2). These are the well-known “five Ps” of
tomers’ perceptions. The marketer does not directly marketing, meant to memorably summarize the en-
control those customer perceptions, but those percep- tire range of actions that a marketing organization
tions are nevertheless influenced by controllable mar- can direct at customers to fulfill those customers’
keting actions, the “marketing mix.” The marketing needs. The strategic issues related to the mix, includ-
mix includes all of the things that marketers can manage ing changes in effective tactics across the product
and deploy to meet customer needs and to claim a place lifecycle (Table 3), are important to summarize
in customers’ minds. The mix is often summarized as briefly and connect to this strategic planning model.
TABLE 2 The Marketing Mix
Mix Element Definition Strategic Considerations

Product The need satisfying offering of the firm or Product-level considerations:
“customer solution,” includes physical Features and benefits
“goods,” intangible “services,” and myriad Quality
combinations of the tangible and intangible. Versions and alternatives
Level of technology
Packaging
Service
Warranties
Packaging
Branding and image
Assortment considerations:
Product lines
Product portfolios
Price From the firm’s perspective, the money or Objectives and time horizons
other value received for the product in an Business model (Profit and loss
exchange. From the customers’ perspective considerations)
price can include related costs (installation, List price(s)
etc.) and other expenditures such as time, Flexibility
effort, etc. Discounts and allowances
Margins to intermediaries (channels)
Terms and financing
Bundling
Place Distribution of the product or service and the Length of distribution channel(s)
location(s) of that distribution. How does the Number of distribution channels
customer choose and receive the product? Channel members (types of intermediaries,
including ownership and control)
Channel control and channel conflict
Functions (logistics, warranties, etc;
demands of functions and location in
the channel)
Distribution intensity
Support and training
(continued)
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Implementation
TABLE 2 The Marketing Mix (continued )
Mix Element Definition Strategic Considerations

Promotion All communications directed toward Objectives
customers and customers: Targets
Advertising Reach
Media Frequency
Targets Promotion emphasis
Content Media (television, print, etc.)
Public relations Pull;
Electronic/Internet communications Guerilla,
Web sites Events
Viral Messages and meanings (Copy)
Point-of-purchase
Event marketing
Publications, brochures, and materials
Buzz Marketing (word-of-mouth
encouragement)
People Personal selling Objectives
Consultative selling Targets
Trade selling Desired behavior
Missionary selling Promotional emphasis
Technical selling Push
Entrepreneurial selling Managerial activities
Hybrid sales force Coaching
Retail selling Counseling
Evaluating
Administrating
TABLE 3 The Marketing Mix Across the Product Lifecycle
Mix Element Introduction Growth Maturity Decline

Product Initially one; Increased number; Stable number Fewer
Few Increasing available Commoditization
features and alternatives
Price Skimming and Competitive Price competition Deals and
Penetration intensifies price cutting
deepen
Place Limited distribution; Building distribution; Intensive May be
High support Moving toward reduced
required intensive
Communication, Build primary Build selective demand; Reminder; Communication
Including both demand; Information Differentiation budgets reduced
Promotion and People needs high
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Implementation
Products in a product category often leads to price competition

(what else is left to compete on?). Creative marketing
The first “P” in the marketing mix is products.
strategists succeed in avoiding price competition by
Products include physical goods, intangible services,
finding new “Wow!” attributes—exciting new options
and all of the innumerable combinations of tangible
or services that augment the core product—thereby
and intangible value. Strategically, products can be
differentiating their offerings and avoiding the perils
understood in layers, as shown in Figure 3, ranging
of commoditization.
from:
• The core product (the essential need-fulfilling PRODUCT LINES. A “product line” is an assort-
elements); ment of products offered by the same business unit.
• The expected and augmented products (the es- Strategies related to product lines include:
sential need-fulfilling elements augmented by
the peripheral accessories, warranties, service, • Price lining—offering a product for different
etc.); and segments based on preferred price/quality
• The potential product, the factors capable of en- points;
gendering “Wow!” responses from customers— • Line/brand extensions—building on the
the unexpected factors that, nevertheless, de- strength of the existing products to add alter-
light customers and lead to satisfaction, loyalty, natives to the line or brand, including trading-
and positive word-of-mouth—and that com- up or trading-down; and
mand margins. • “Product platforms”—common architectures
or technologies underlying multiple products
When attributes of the product that once were in a product line. Such platforms contribute to
new and unexpected become expected and even ubiq- economies of scope.
uitous, and all products in a market offer those attrib-
utes, it is called “commoditization.” Commoditization
PRODUCT PORTFOLIOS. Product strategies in-
clude not only decisions about specific products but
also decisions about the firm’s overall assortment or
Potential Product “portfolio” of products, how those multiple products
relate to their markets, and how they relate to each
Augmented Product other. Many firms manage multiple business units
Expected Product
and products lines and must make strategic decisions
about which products to invest in, which to harvest,
Basic Product and even whether or not to divest some products or
business units.
Core
Product portfolios array discrete business
Product units (strategic business units or SBUs) or prod-
ucts/lines with regard to (a) their strength or com-
petitive position and (b) the attractiveness of the
markets they serve. The Growth/Share Matrix
(originated by The Boston Consulting Group and
often referred to as the BCG Matrix; shown in
Figure 3) is grounded in the recognition of two
fundamental market forces: one is the product life-
cycle or product/market evolution, and the other is
share leverage (scale effects, including economies
FIGURE 3 A Product Hierarchy of scale and learning curve effects): These are two
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Implementation
of the fundamental regularities or “laws” of strate- • Low share/low growth—the dog, which
gic marketing. The Growth/Share Matrix identifies should eventually die, it’s just a question of
four generic strategies for four product/market po- how fast, because it has neither leverage from
sitions: cost or share nor the advantages of a growth
market.
• High share/high growth—the star, whose
share should at least be maintained and which The Boston Consulting Group Growth/Share
should continue to receive enough investment Matrix captures attractiveness and firm strength with
dollars to maintain or increase its distance just two variables (growth rate and relative market
from competitors. This quadrant is often to be share). Most marketing strategists would recognize
cash-flow neutral, that is, not generating cash that many markets are attractive for reasons other
for investment elsewhere, because the com- than growth rate and that firms may have strengths
pany is reinvesting the profits to maintain po- that go beyond market share. Therefore, various alter-
sition and growth. natives to the BCG Matrix have been proposed. One
• High share/low growth—the cash cow, which of the best known is the GE/McKinsey Portfolio
should get just enough investment to maintain Planning Grid—shown in Figure 5—which general-
share and because of low growth, market ma- izes the two dimensions to “Business Strength” and
turity, and low cost (further down the cost “Industry Attractiveness,” expanding the single vari-
curve) should throw off significant cash to able chosen by The Boston Consulting Group
fund either other stars or problem children. (growth rate and relative market share) to include
• Low share/high growth—the question mark or many more important drivers of strength and attrac-
problem child, which either needs significant tiveness (Table 4). The GE/McKinsey Portfolio
investment to improve position (build share) Planning Grid—sometimes called the “Stoplight
during market growth, or probably should be Grid” due to its adoption of green, yellow, and red to
divested. Often, this quadrant can be viewed as emphasize its strategic implications—breaks the di-
cash flow negative. mensions in finer gradations (three levels each, cre-
ating nine “cells”) and weights the multiple strength
and attractiveness variables to develop scores for
each axes. The strategic implications of strengths/
Relative Market Share
attractiveness analysis relate to investment and re-
source allocation decisions, in particular, and also
High Low
market-scope decisions. These frameworks guide
Stars Question Marks decisions about what SBUs or products to invest in,
and choosing “winnable” races.
High
?
Market Growth Rate
NEW PRODUCT DEVELOPMENT. New product

development requires a keen focus on anticipating
customer needs and even discovering unrecognized
(latent) needs. Because it takes time to bring new
Cash Cows Dogs
products to market, there may be no task in the strate-
gic planning process that requires more foresight. The
Low consulting firm Booz, Allen, Hamilton set out a classic
new product development model, identifying a flow of
seven basic activities required for successful new prod-
uct development, beginning with idea generation and
FIGURE 4 The Boston Consulting Group Growth/Share culminating in commercialization, and involving
Portfolio Matrix9 increasing cumulative investments along the way
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Implementation
Exploit Industry
Reinforce Invest to Build
Attractiveness
• Invest to Grow at Maximum • Challenge for Leadership • Specialize Around Limited
Digestible Rate • Build Selectively on Strengths Strengths
• Concentrate Effort on
High
• Reinforce Vulnerable Areas • Seek Ways to Overcome

Maintaining strength Weaknesses
• Withdraw if Indication of
Sustainable Growth are Lacking
Market/Industry Attractiveness
Limit Expansion or
Build Selectively Manage Earnings
Harvest
• Invest Heavily in Most Attractive • Protect Existing Program • Look for Ways to Expand Without
Segments • Concentrate Investments in High Risk; Otherwise Minimize
Medium
• Build up Ability to Counter Segments Where Profitability is Investment and Rationalize

Competition Good and Risk is Relatively Low Operations
• Emphasize Profitability by
Raising Productivity
Protect & Refocus Preserve Cash Flow Divest
• Manage for Current • Protect Position in Most • Sell at time That will Maximize
Earnings Profitable Segment Cash Value
• Upgrade Product Line • Cut Fixed Costs and Avoid
Low
• Concentrate on Attractive
Segments • Minimize Investment Investment
• Defend Strengths
High Medium Low

Business Strength/Competitive Position
FIGURE 5 GE/McKinsey Portfolio Planning Grid10
TABLE 4 Market Attractiveness and Firm Strength Factors
Market Attractiveness Strength

• Real Market Growth • Market Share/Relative Market Share
• Industry Concentration • Market Share Rank
• Product Lifecycle Stage • Relative Price
• Market Differentiation • Relative Quality
• Percent of Sales Accounted For by New Products • Relative Direct Costs
• Served Market Concentration • Relative Percent Sales of New Products
• Capital Intensity • Patents/Proprietary Products
• Patents/Proprietary Processes
• Shared Production Facilities
• Relative Employee Compensation
• Labor Productivity
BCG Matrix factors are in bold italics.
89
Implementation
Customer Insights
Market
Commercialisation
Testing Launch
Customer
Insights Development
Development
$
Business
Concept Evaluation
Evaluation
and
Ideas Screening Go/Winners
Search
Kill/Losers
Time
FIGURE 6 The Booz, Allen, Hamilton New-Product-Development Process12
(Figure 6). New product development highlights the doing things in favor of new, better ways. Peter
need for cross-functional as well as external (cus- Drucker expanded upon that idea: “Because the pur-
tomers’, vendors’, and collaborators’) input into the pose of business is to create a customer, the business
process. Research shows that firms that build “innova- enterprise has two—and only two—basic functions:
tion cultures”—cultures in which ideas are valued and marketing and innovation. Marketing and innovation
failures tolerated—are more successful than their produce results; all the rest are costs.” Innovations can
more conservative competitors.11 be seen as shifting “the Value Frontier” toward the
A critical strategic task is planning the “product right—that is, toward greater value for the same
pipeline;” anticipating needs and preparing to meet price or the same value for a lower price.
future needs in the marketplace. In many industries, Innovations do not always, or even usually, en-
the lead time required to develop a new product is tail “high technology” or technological break-
substantial. Differences across competitors in lead throughs. Often, innovation involves identifying la-
times required to launch new product can constitute tent customer needs or seeing customer needs
a substantial driver of strategic success. It has been es- differently than they had been understood before
timated, for example, that each single day that a new and drawing together existing technologies to meet
car launch is delayed can cost the firm a million dol- those needs better than current solutions. Such mar-
lars in lost profits.13 Therefore, time-to-market and ket-oriented innovation entails identifying customer
foresight are important considerations in new product insights and understanding how innovations spread
development and anticipatory customer assessment, or “diffuse” through the market. Understanding the
marketing research, and product planning are critical diffusion of innovations includes understanding dif-
to strategic marketing success. ferences across innovations themselves, understand-
ing what aspects of those innovations accelerate or
slow their diffusion, and understanding how differ-
PRODUCT INNOVATION. Economist Joseph
ent consumers respond to innovations:
Schumpeter famously equated innovation with “cre-
ative destruction”; in effect, innovation and entre- • Innovations can be distinguished with regard
preneurship function to “destroy” existing ways of to their degree of newness to the firm and their
90
Implementation
degree of newness to the customer. Innovations proliferation of media and of technologies that allow
range from “discontinuous” (“radical” or consumers to choose what they attend to and what
“truly-new;” changing the way customers con- they bypass or ignore has created challenges and op-
sume and/or meet the target need) through portunities for marketers. On the one hand, it is now
“dynamically continuous” (noticeable but neg- nearly impossible to quickly communicate with mass
ligible changes to consumption behaviors) to audiences. On the other hand, marketers can now
“continuous” (“incremental;” improving on ex- target more defined and refined targets with mes-
isting products with no impact or very low im- sages. An advertiser on the World Fishing Network,
pact on consumption patterns and behaviors). for example, can connect with many consumers in-
• Various characteristics of those innovations terested in fishing, and will not waste the message on
predict the rapidity of their diffusion into the many people who do not.
target markets. Things like relative advantage Changes in paid-for, controlled media and ad-
(How much better is the innovation than exist- vances in understandings of how markets work has led
ing ways to meet the same needs?), “observabil- to an increased emphasis on other communication
ity” (How easily can others see the innovation in tools, from electronic to experiential, and to an increas-
use?), and compatibility with existing lifestyles ing recognition of the importance of inter-consumer
and consumption patterns all accelerate diffu- communications, or “word of mouth.” Some compa-
sion. On the other hand, characteristics like risk nies are organizing networks of unpaid “opinion lead-
(physical risk or the risk of hurting someone, ers” to stimulate word-of-mouth referral networks.
financial risk, and social risk or the risk of em- Proctor & Gamble (P&G) has enrolled more than half-
barrassment) and simple cost will all slow the a-million woman, mostly mothers and homemakers,
diffusion of an innovation into the market. into “Vocalpoint,” and more than a quarter-million
• One well-known typology of segments of cus- teens into Tremor; these are organized panels of similar
tomers based on their propensity to adopt an consumers who receive samples, news, and coupons
innovation: innovators, early adopters, early from the firm. They are encouraged to offer feedback
and late majorities, and laggards. to the marketer and are expected to act as “brand evan-
gelists,” spreading the word about and recommending
P&G’s products and brands. Such organized word-of-
Promotions/Communications Strategies
mouth programs raise some ethical issues (one critic
Promotions or “integrated marketing communica- called them the “commercialization of human rela-
tions” include all of the efforts to communicate to tions”), but they also emphasize the growing emphasis
the customer. Traditionally, advertising and personal on inter-consumer communications in the new con-
selling were the dominant tools in the communica- text of fragmented and cluttered media.14
tions arsenal. Advertising effectively and efficiently
reaches large numbers of consumers and is particu-
People
larly effective at creating awareness and reminding
large audiences about the product or brand. A focus People is the “fifth P” and refers to personal selling
on advertising is a “pull strategy”; it develops de- and service provision. Personal paid-for communi-
mand at the level of the ultimate consumer, and that cation is usually the most effective means of commu-
demand “pulls” sales though the channel. nicating large amounts of information and “closing
One reality of advertising in the new millen- the deal” (moving customers from consideration to
nium is the “death of mass.” Media that used to reach purchase). Nevertheless, the cost-per-contact of per-
truly mass audiences, such as television, radio, and sonal selling is high and its ability to reach mass mar-
magazines have fragmented. There are now literally kets is limited. A communication strategy emphasiz-
hundreds of television channels and almost infinite ing personal selling is a “push” strategy; it develops
alternatives to television, ranging from video games demand at the immediate next level of the distribu-
and personal music players to the Internet. This tion system and, thereby, pushes demand through
91
Implementation
the channel. In practice, most marketing strategies Distribution channels and channel intermedi-
employ a balance of “push” and “pull.” aries can add value for both the consumer and the
Managers make a serious mistake when they marketer by performing at least three types of “chan-
refer to what salespeople do as merely selling, as nel functions:”
though the salesperson’s personality alone brings in • Transactional (buying, selling, holding inven-
the sale. Rather, the modern professional salesperson tory, and assuming inventory risks such as ob-
relies on analytic skills as much as on charm and ag- solescence and spoilage),
gressiveness. Getting the order is only the final stage • Logistical (shipping, breaking bulk, assorting),
of a complex set of activities involving many people and
within our own firm as well as within the customer’s • Facilitating (information gathering and con-
organization. Modern personal selling is consultative veyance, including giving information to cus-
and has become a two-step process: (1) to determine tomers and giving information about customers
and articulate for the customer the real problem he to the marketer, financing).
faces and (2) to present the product or service’s benefits
as a partial or complete solution to that problem. By Understanding these functions and how and by
helping the customer to define his or her own needs, whom they are performed in a particular distribu-
the salesperson enters the sale at the very beginning tion system allows for strategic thinking about how
and, in this way, can often place his or her products at those functions may change. If channel members
a considerable advantage. Consultative selling includes stop adding value or the functions become unneces-
four main types of selling tasks: trade, missionary, sary, they will eventually be bypassed. For example,
technical, and entrepreneurial. as technology changes (including Internet-based de-
livery of product “help” information), it is becoming
possible for manufacturers to deliver information di-
Place/Distribution Strategies rectly to customers, bypassing channel partners who
Place, or the channel(s) of distribution, involves several specialized in facilitating/information functions.
categories of decisions, including selecting, motivating, This will reduce the need for intermediaries to edu-
and controlling channel members. These decisions cate and provide information and perhaps eventually
should be based on some basic market-oriented result in channel reconfiguration.
considerations:
Pricing Strategies
• Where, how, and when do customers shop for
Viable pricing strategies are linked to the product life-
the product?
cycle (see Table 3, row 2, above). Early in the product
• What level of support (service, information
and training, maintenance, etc.) do customers lifecycle, as products are being introduced, demand is
require for the product? driven by the value of the innovation—customers are
attracted to the new benefits or relative advantage of
• What level of control does the distribution re-
the product in the new offerings. Pricing can take ad-
quire to insure quality and to satisfy customer
needs? vantage of that quality-focused demand by “skim-
ming,” charging a relatively high price to profit from
• How do different means of distribution relate,
that newness. A skimming strategy may, however,
and how might they conflict?
dampen overall demand. Alternatively, the firm can
These considerations change across the prod- charge a lower “penetration” price intended to increase
uct lifecycle. Early in the lifecycle, customers volume. Penetration pricing makes the most sense
require more information and training, especially when customers are at least somewhat “sticky” (i.e., can
for technologically-sophisticated products. Later in be expected to stay with their initial brand selection
the product lifecycle, customers may need less due to loyalty or some other source of inertia) and
hand-holding but may respond more to peripheral when some benefits of scale can be expected as produc-
services and almost always become more price tion increases. Later in the product lifecycle, pricing be-
conscious. comes increasingly competitive.
92
Implementation
Profits become loyal, and who will appreciate and benefit

from the firm’s competitive advantages (that is, take
Strategy is not successful unless it is profitable. This
value from the firm’s unique points of differentiation
stipulation seems straightforward except for the ele-
and competitive advantages) are all at least as impor-
ment of timing. Strategies can be developed with an
tant as simple “growth,” and require a keen under-
emphasis on either short-term or long-term prof-
standing of “cost-volume-profit” logic in the particu-
itability. Profitability in the long-term generally re-
lar context of the firm’s business model.
quires investment in the short-term; those invest-
ments do not preclude short-term profitability but
they do rule out maximizing short-term returns. BASIC ECONOMIC LOGIC. Profits are the outcome
Having growth aspirations is important, but it is also of a logical combination of the components of rev-
wise to remember that “growth for growth’s sake is enues and costs. Disaggregating these components
the ideology of the cancer cell.”15 Growth or market helps thinking about strategy and the sources of
share objectives should be set in the context of a profit. For example, distinguishing the components
specific business model with consideration given to of sales (purchase rate times the number of cus-
long-term returns. Top-line growth (revenues) can tomers times price per unit) highlights distinct
come at the expense of the bottom-line (profits) and ways to improve profits: raise prices, increase pur-
can strain the firm’s cash flow and other resources. chase rates, and acquire new customers. Figure 7
Targeting the “right” customers—customers who are presents this cost-volume-profit logic and high-
profitable in the long-run, who are relatively likely to lights the unit-level contribution margin (the
Price
(/Unit)
Number of Sales ($)
*
Customers
Sales (units)
*
Purchase Rate – – Contribution ($)
(Units/Customer
Variable Costs
($/units)
Total Variable
* Costs ($)
Sales (units)
Advertising
Expenditures
– Profits ($)
Sales
Expenditures
Public Relations Marketing Mix

Marketing
+
Other Marketing Overhead ($)
Investment
Mix Expenditures + Overhead ($)
(R&D, etc) ($)
Administrative
Marketing = Overhead ($)
Research
Unit Contribution
Margin
FIGURE 7 Cost-Volume-Profit Logic and Contribution Margins
93
Implementation
contribution of each individual sale toward cover- Therefore, if breakeven is where revenues exactly
ing fixed expenses). equal expenses, we can set the two equations as equal:
Revenue = Expenses
BREAKEVEN ANALYSIS. The “breakeven point” is
the point in sales growth at which revenues equal ex- or
penses. That milestone is an important computation in (Price * Quantity) = (Variable Costs * Quantity)
evaluating the feasibility of an endeavor, a marketing
+ Fixed Costs
plan, or a strategy. Breakeven is defined at the point (in
sales) where the sales revenues exactly cover all the Solving that equation for breakeven quantity (that is,
expenses. Sales revenues are, of course, the unit price setting quantity on one side and all other variables
multiplied times the average price. Total costs can be on the other) yields the formula for the number of
divided into two parts: variable costs (the costs that units that must be sold to exactly cover expenses:
go up with the sale of each unit) and fixed costs (the Fixed Costs
overhead and expenses that the firm commits to across QuantityBreakeven =
(Price-Variable Costs)
a time period and that do not go up with each unit
sold). This can be summarized simply in formulas: For example, if we are going into business sell-
ing something, let’s say ice-cream cones, and the vari-
Revenue = Price * Quantity
able costs (the cost of the scoop of ice cream, the
Total Costs = (Variable Costs * Quantity) cone, and the napkin) is $1, the selling price is $2, and
+ Fixed Costs we have to pay $150 for our ice-cream-cone-vending
Context
Industry
Situation
Competitive
Advantage(s)
Strategy
Formation
Positioning
Implementation: Customer—Oriented
Marketing Plan(s) Market Research
the Marketing Mix Branding Brands and Branding
Risks & Products & Products—New
Forecasts People Product Development
Marketing Products—Innovations
Documentation, Products—Product
Research
Assessment and Portfolios
Adjustment Pricing Strategies
Price Place Promotion and People
Profits —Integrated Marketing
Budgets Communications
Place—Distribution
Linking Implementation to Relevant Tools and Frameworks
94
Implementation
cart, we would be able to figure out pretty quickly ink was used to indicate a loss in ledgers and ac-
that we need to sell 150 ice-cream cones to counting ledgers—so “in the black” means we’re
“breakeven.” That is because we make $1 on each sale profitable). In fact, we’re making $1/cone—but what
(price minus variable costs; $2⫺$1—that is called the bank that lent us the money to buy the cart
the contribution margin). We need to make $150 just would want to know is: “How many cones do they
to pay for the vending cart. Once we’ve paid for the cart need to sell to “breakeven” (and pay us back our
(sold 150 cones), we’re “in the black” (traditionally, red money)?”
Endnotes
1. Vince Lombardi, famous American football coach, 10. See Arnoldo C. Hax and Nicolas S. Majluf, “The Use
describing the role of “blocking and tackling,” the of the Industry Attractiveness-Business Strength
two most fundamental “building blocks” of the Matrix in Strategic Planning,” Interfaces 13, no. 2
sport, quoted by Dan J. Sanders and Galen Walters, (1983): 54–71; S. Robinson, R. Hitch, and D. Wade,
Equipped to Lead: Managing People, Partners, “The Directional Policy Matrix—Tool for Strategic
Processes, and Performance (New York: McGraw Hill, Planning,” Long Range Planning 11, no. 3 (1978):
2008), 90. 8–15; Michael G. Allen, “Diagramming GE’s
2. Jeanne Bliss, Chief Customer Officer: Getting Past Lip Planning for What’s Watt,” Strategy & Planning 5,
Service to Passionate Action (San Francisco, CA: no. 5 (1977): 3–9.
Jossey Bass, 2006), 80 11. See, for example, Kurt Matzler, Franz Bailom, and
3. Philip Kotler and Gary Armstong, Principles of Dieter Tschemernjak, Enduring Success: What Top
Marketing, 11th ed. (Upper Saddle River, NJ: companies do differently (Basingstoke, Hampshire,
Pearson/Prentice Hall, 2009), 106. RG21 6XS, England: Palgrave Macmillan, 2007).
4. Johnny K. Johansson and I. Nonaka, “Market 12. Adapted from Simon Knox, “The Boardroom
Research the Japanese Way,” Harvard Business Agenda: Developing the Innovative Organization,”
Review 65, no. 3 (1987): 16–22. Corporate Governance: International Journal of
5. Kotler and Armstong, Principles of Marketing, 106. Business in Society 2, no. 1 (Emerald Group
6. Allyn W. Kimball, “Errors of the Third Kind in Publishing Limited, 2002): 27–36.
Statistical Consulting,” Journal of the American 13. See K. Clark, “Project Scope and Project Performance:
Statistical Association 52, no. 278 (June 1957): The Effect of Parts Strategy and Supplier Involvement
133–142. on Product Development,” Management Science 35,
7. J. Workman Jr., “The State of Multivariate Thinking no. 5 (1989): 1247–1263.
for Scientists in Industry: 1980–2000,” Chemometrics 14. Robert Berner, “I Sold It through the Grapevine:
and Intelligent Laboratory Systems 60 (Elsevier Not Even Small Talk Is Sacred Anymore. P&G Has
Science B.V., 2002): 13–23. Enlisted a Stealth Army of 600,000 Moms Who Chat
8. See Alice M. Tybout and Brian Sternthal, “Brand up Its Products,” Business Week (May 29, 2006),
Positioning,” in Kellogg on Branding, ed. Alice M. www.businessweek.com/magazine/content/06_22/
Tybout and Tim Calkins (Hoboken, NJ: John Wiley b3986060.htm. Last accessed June 23, 2010.
& Sons, 2005), 11–26. 15. Edward Abbey, Voice Crying in the Wilderness (Vox
9. The BCG Portfolio Matrix from the Product Clamantis in Deserto): Notes from a Secret Journal
Portfolio Matrix, © 1970, The Boston Consulting (New York: St. Martin’s Press, 1990), 98.
Group.
95
96
Planning, Assessment
and Adjustment
97
Planning, Assessment
and Adjustment
Strategic and tactical decisions should be documented in a marketing plan. A solid mar-
keting plan translates the strategy into specific tactics, catalogues the risks, and estab-
lishes forecasts, budgets, and measurable objectives for the marketing effort. Strategic
market plans pose and answer three fundamental questions:
1. Where are we now? (situation assessment)
2. Where do we want to go? and
3. How do we get there?
The marketing plan is essential to realizing all of marketing strategy’s benefits. These
benefits include considering the broad perspective, strengthening a market-orientation,
and aligning the many disparate tactics. The marketing plan compels thorough analysis,
clarifies and documents assumptions, and records decisions. It helps the marketing
manager prioritize issues, goals, and activities.
The marketing plan is also the means by which a marketing manager gains sup-
port for her or his brand or product and claims resources. In larger companies, brand
or product managers do not usually have authority to demand resources—they must
persuade the organization to devote resources to their brands and products. In smaller
companies the marketing planning process is often the only formal planning mecha-
nism and, therefore, plays a central role in setting expectations, steering resources, and
directing activities.
Table 1 presents a generic outline for a marketing plan. Much of the marketing
plan content derives directly from the strategic marketing process (the focus of this sec-
tion and the organizing framework of this text). After an executive summary, the mar-
keting plan should proceed through a situation assessment, marketing strategy, and a
detailed implementation plan. The marketing plan will present the marketing strategy,
including the target segments and target needs (the pain) and competitive advantages
to be relied upon (the magic). It will also specify the positioning and spell out the vari-
ous tactics to be used in time-specific detail. The marketing plan should very clearly es-
tablish the size of the target segments and translate the size of the segments, forecasts of
market share and sales, and the costs of planned activities into detailed budgets. Finally,
the marketing plan should specify the uncertainties and risks inherent to the proposed
strategy—and flesh-out contingencies and hedges to those risks.
Much of the content of any marketing plan (outlined in Table 1) comes directly
out of the strategic marketing process that organizes this text. That is, a good marketing
98
Planning, Assessment and Adjustment
TABLE 1 Generic Marketing Plan Outline

good marketing plan will document these decisions
and plans and will also:
Executive Summary • Catalog and assess the risks and uncertainties
Target need—Where’s the pain? inherent to the plan;
Solution—Where’s the magic?
I. Situation Assessment
• Estimate forecasts of sales and market changes;
a. Market Definition • Establish budgets and pro forma financial state-
b. Context (PEST) ments; and
c. Customers • Specify measurable and motivating objectives.
d. Competition This section reviews these final steps in establishing
i. Strengths
the marketing plan and accomplishing the marketing
ii. Weaknesses
iii. Offerings and Target Segments
strategy.
e. Industry Analysis
II. Company Risks
a. Firm Mission, Vision, and Objectives
b. Value Chain The marketing manager should identify risks and
c. Sustainable Competitive Advantages develop contingency plans while working on the
(i.e., strengths) marketing plan. This application of scenario plan-
d. Weaknesses ning is ongoing and should be a background activity
III. Strategy throughout the strategic marketing process. Managers
a. Segmentation should be cataloging “possible futures,” different
i. Basis
events and changes that could impact the strategy
ii. Description
iii. Sizing and Valuation
both in the environment and within the firm. Risk is
b. Basis of Competition (competitive advantages) not to be avoided at all cost; risk is to be managed.
c. Targeting
d. Positioning(s) “Only those who will risk going too far can possibly
e. Strategy Summary find out how far one can go.”
IV. Marketing Mix(s) T.S. Eliot
a. Product
b. Price Managing risk is not simple risk minimization
c. Place or risk avoidance. Managing risk is evaluating risk
d. Promotions and choosing which risks to accept and which to
V. Projections
avoid. Risk is an important part of learning what will
a. Risks
b. Forecasts
work. For example, Rowland Macy failed four times
c. Budgets in the dry goods business before his Macy’s Store in
d. Financial and Profit Model (pro formas) New York City succeeded. Babe Ruth struck out
e. Objectives 1,330 times, but he also hit 714 home runs. For the
VI. Appendices (detailed support for plan) marketing strategist, success will not come from only
accepting sure choices, but failure will certainly come
from imprudent or ill-considered choices. As the
plan includes a thorough situation assessment (includ- marketing mix is being developed, it is important to
ing the four Cs of context, customer, company, and assess the risks and potential obstacles to its success.
competitors), the stipulation of the specific strategy One important way to examine “possible fu-
including competitive advantages and target segments, tures” or contingencies is to assess the impact that an
the identification of the desired positioning, and event or trend would have on the plan, and the
then the details of the marketing mix—all of which likelihood of that event/trend occurring. Figure 1
are key steps in this strategic planning framework. A shows an Impact/Likelihood Matrix. The marketing
99
Significant
Considerable
Management Extensive
Management
Attention Management
and Monitoring
Required Essential
Required
Considerable
Moderate
Impact
Management Management
Management
Monitoring Attention
and Monitoring
Worthwhile Required
Required
Management
Minor
Accept,
Accept Attention
but Monitor
Required
Low Medium High
Likelihood
FIGURE 1 Impact/Likelihood Matrix
strategist should spell out all of the assumptions about actions the firm will take, and those actions are
the way the world will be during a marketing program contingent on budgeted resources. At the same time,
and the way things might change, and then challenge budgets are based on expectations about their effects.
those assumptions asking: How likely is X to happen? This may seem obvious but it highlights the fact that
And what is the impact if X does/does not occur? no forecast, budget, or marketing mix plan stands
New product development in the cereal indus- alone—each impacts the others and so they must be
try is a good example of the recognition of “accept- developed concurrently and interactively.
able” risks, and of cost-benefit considerations in re- In practice, a number of methods are avail-
gard to reducing uncertainty. The well-known able for estimating future sales, including assess-
research and consulting firm A.D. Little & Company ment of buyer’s intentions, sales force estimates,
found that despite the best consumer research ef- expert opinions, market tests, and time-series
forts, 92 percent of all new cereals introduced failed. analysis. Quantitative methods can be complex but
In response to that failure rate, many companies re- one quantitative tool, regression analysis, and its un-
duced their expenditures on consumer research and derlying logic are invaluable to strategic thinking.
began to simply launch more new products, letting Regression logic is the idea that some outcome or
the market decide what would “stick” and what “dependent” variable can be predicted by multiple
would not.1 inputs or “causes” (“independent” variables). For ex-
ample, most marketing managers understand that
sales are caused by, among other things, sales-force
Forecasts
effort and advertising, as well as by the price of com-
Forecasts, objectives, and budgets are interdependent petitive products, and interest rates. Sales-force effort
but they must be done concurrently and interactively. and advertising are controlled by the firm; the price
The aim is to optimize the budget and the commit- of competitive products is an external factor con-
ment of resources to maximize expected (forecast) trolled by the competition; interest rates are a macro-
and desired outcomes (objectives). Expectations level environmental factor. In this way, the manager
about outcomes are necessarily based in part on what can think logically about the relationships and
100
develop sales forecasts based on multiple causal fac- rate, and so on. These numbers than can also be used
tors in a formula that might look like this: to formulate specific marketing objectives.
Salest + 1 = b($Selling) + b($Advertising) Budgets
- b(Priceus - PriceComp) + b(¢IntRate) + p
One of the crucial functions of the marketing plan is
In this analysis the firm sets its own selling and adver- to convert planned actions and forecasts into planned
tising budget, estimates the price differential based on (“budgeted”) expenditures. A budget specifies the
competitive intelligence and other inputs, and fore- money to be spent by area and allocates scarce finan-
casts changes in interest rates to forecasts sales. cial resources across activities. Depending upon the
The accuracy of a sales forecast as well as the available resources, the strategist can propose a cer-
specificity of objectives can be improved when those tain marketing mix, make assumptions about com-
forecasts and objectives are decomposed into the competitive and other uncontrollable environmental
ponents that influence future sales volume. One useful events, and forecast results. Depending on those
tool is staircase analysis (Figure 2). Staircase analysis forecasts, the objectives and budgets can be reformu-
estimates market potential, actual market, brand lated or the mix can be adjusted. Thus, budgeting is
awareness, brand image, purchase rate, share of wallet, interactive with planning and forecasting; like a hy-
the repurchase rate, and the cross-buying rate. After draulic system, raising levels in one (plans, forecasts,
having accurate estimates of these factors, a company or budgets) will change the constraints and outcomes
can more precisely forecast its future sales by predict- of the others. For this reason, modeling planned ac-
ing the change in market potential, in the actual mar- tions, forecasts, and budgets interdependently in
ket, in the brand awareness, purchase rate, repurchase “sensitivity analyses” is an invaluable exercise.
Potential Actual Brand Brand Positive Purchase Share of Safisfied Repeat Cross
Market Market Awareness Awareness Brand Rate Wallet Customers Customers Selling
(Aided) (Unaided) Image
Recall Recall
FIGURE 2 Example of Staircase Analysis
101
Budgeting has four defining inputs: TABLE 2 Basic Marketing Budget Components
1. Timeframe. To be useful, a budget must have
a specific timeframe. It would not be enough Marketing Communications
to determine how much would be spent with- Advertising
Electronic Marketing
out knowing when it will be spent. Quarter
Direct Marketing
and annual budgets are common, with assess- Public Relations
ment happening more often and budget ad- Events
justment occurring less frequently. Promotions
2. Allocations. Firms allocate financial and Consumer
other resources to marketing organizations. Trade
Sometimes that allocation is as a percentage of Merchandising
past sales/profits, other times as a function of Personal Selling
objectives and aspirations. This allocation sets a Hiring
basic limit on budget expenditures. If allocations Training
are based on objectives, it becomes paramount Firing
Sales Support and Channel Communications
that the marketing organization influences the
Marketing Administration
formation of those objectives with realistic fore- Overhead
casts and well-grounded aspirations. Personnel
3. Forecasts. Sales forecasts are the expected out- Marketing Research
comes of marketing actions and other factors Production
such as market growth, competitor actions, Units Produced (units)
etc. Marketing actions (i.e., the elements of the Variable Costs (per unit)
mix) are based in part on these forecasts. Thus, Cost of Goods Sold
forecasts and budgets are interactive. Specific Inventory Holding Costs
forecasts about the effectiveness of the various Inventory Disposal Costs
marketing mix elements (i.e., estimates of
“Return on Marketing Investment” or ROMI expense categories at a high level but should also in-
by marketing mix tool) are basic inputs to clude specific breakdowns of each high-level category
budgeting. Regression analysis and “regression into as much specific detail as is reasonable. For ex-
thinking” are important tools to determining ample, consumer-goods companies’ budgets are likely
ROMI coefficients. to make a distinction between moneys to be spent on
4. Objectives. Realistic objectives take into ac- selling/push-side efforts (personal selling, trade pro-
count budget constraints, so budgeting and motions, etc.) and consumer-oriented expenditures
objective-setting are also interactive. In the such as advertising, event marketing, and price-based
budgeting process, resources are allocated to promotions. It is also possible to categorize “advertis-
maximize achievement of or progress towards ing” into television, print, and electronic. Budgets
the firm’s objectives. Factors to be considered should be constructed so that strategic planners can
in budgeting include corporate-level (mis- readily understand that hierarchy from major cate-
sions, goals, etc.) and business-unit-level gories of expenditures down to detailed and specific
(profits, sales, growth, etc.) objectives. expenses. Table 2 lists some common components or
Based on forecasts and objectives, budgets are “lines” of marketing budget expenses.
created that assign resources to the specific marketing
Establishing Specific Objectives
mix elements (the five Ps) and support activities,
including marketing research and research and devel- Preliminary objectives are developed based on the cor-
opment (R&D or new product development). To fa- porate mission and vision and on the strategy. More
cilitate assessment and adjustment, budgets should be specific objectives tied to detailed metrics and out-
hierarchical; that is, budgets should summarize comes are developed interactively with forecasts and
102
budgets. Exactly what does the strategy and the market-

ing plan mean to accomplish and how will we know if TABLE 3 Typical Financial and Operating
Metrics
those objectives have been achieved? Objectives should
be “SMART”—Specific, Measureable, Achievable, Operating • Product quality
Relevant, and Time-specific—and should be assessed Metrics • Inventory Turns
on an ongoing basis and within timeframes that guide • Fulfillment time
appropriate behaviors and facilitate timely adjustment • Stock-outs
to performance and changes in the environment. • Process capability
Three distinct sorts of objectives are useful and • Labor productivity
common in developing marketing strategies: sales Financial • Overall Profits
objective, customer objectives, and financial or profit Metrics • Profit Growth
objectives. Sales and profit objectives are pretty • Contribution and Margins
straightforward; sales objectives have to do with • Revenue Growth
units sold, dollar sales, and market share. Customer • Total Operating Cost
objectives include things like customer readiness • Cash-to-Cash cycle
• Return on Investment (ROI)
variables (e.g, awareness, and interest), customer sat-
• Gross-Margin Return on
isfaction and recommendation behaviors, and cus- Investment (GMROI)
tomer loyalty. Financial or profit objectives involve • Residual Income/EVA [Economic
margins, total profits, and returns. Value Added]
ASSESSMENT AND ADJUSTMENT

toward profitable customers and to evaluate and ad-
“However beautiful the strategy, you should just ongoing efforts. In fact, market- and customer-
occasionally look at the results.” related metrics are essential to assessing and adjusting
Winston Churchill marketing strategies. Customer-related metrics in-
clude things like customer satisfaction, profitability,
Throughout the strategic marketing process a constant
loyalty, and intention-to-recommend. They also in-
theme has been specificity in spelling out tactics, budg-
clude gauges such as secret-shopper reports—which
ets, objectives, and forecasts. The specificity, measura-
do not rely on surveying customers.
bility/quantification, and time-specific nature of the
plan facilitate assessment and adjustment. Recognizing
THE VALUE OF MEASURING RECOMMENDATION
variation from forecasts, objectives, and budgets is a
INTENTION. Customer satisfaction, repeat-purchase
crucial input to assessment. The variables that should
intention, and intention-to-recommend are generally
be assessed on an ongoing basis include financial, oper-
considered to be the three essential markers of how
ational, and market- or customer-related outcomes
well customers are responding to their experiences
(these are, by design, the same metrics included in ob-
with the firm and its offerings. Research efforts have
jective setting and gap analysis). These various metrics
focused on reducing those various customer responses
can be considered at the firm, business-unit, product,
to some more parsimonious measures that can be eas-
and account level. Table 3 presents some typical finan-
ily collected and assessed. That is, too many customer-
cial and operating metrics. Different industries and
response metrics can be confusing, and it seems evi-
different firms use some or all of these along with other
dent that all of these things are, at a basic level, tapping
idiosyncratic markers of performance.
into the same underlying customer evaluations.
Frederick Reichheld, an authority on strategy and a
Market-/Customer-Related Metrics
partner with Bain and Company, conducted research
Customer Relationship Management systems collect, that began with roughly 20 items tapping various
on an ongoing basis, data about customers and their post-consumption responses ranging from satisfac-
responses to the firm’s marketing mix. Those data are tion, loyalty (“How strongly to you agree that [com-
used to tailor the firm’s offerings and communications pany X] deserves your loyalty?”), and repeat-purchase
103
intention (“How likely is it that you will continue to a revealing post-consumption marker of customers’
purchase products/services from [company X]?”) The appraisals of the marketing programs.
single item “How likely is it that you would recom-
LOYALTY-BASED MARKETING. Targeting loyal cus-
mend [company X] to a friend or colleague?” on a
tomers—and especially profitable loyal customers can
scale from 1 to 10 (extremely likely) was found to be
lead to dramatic improvements in profitability.
the most predictive of future behaviors (actual recom-
Reichheld also conducted numerous studies across in-
mendations as well as actual repeat purchase) and, at
dustries on the relationship between customer loyalty
the firm level, of future growth and profitability.2 To
and firm profits and growth, and found that firms
compute Reichheld’s “Net Promoter Index,” the firm
with more loyal customers were more profitable. He
sums the number of customers who respond with a
attributed that relationship to the related findings that
nine or a ten on the single question (customers are la-
longer-term customers spread acquisition costs across
beled “Promoters”) and subtracts the number who re-
more purchases and continue to provide base profits
sponded with anything from a zero to a six (those
while increasing their purchases, costing less to serve,
Reichheld labeled “Detractors”; respondents who gave
referring other customers to the products/brands, and
a seven or an eight are termed “passively satisfied”):
even paying a price premium (see Figure 3.4
Net Promoter = a (9, 10) - a (0, 1, 2, 3, 4, 5, 6) Subsequent research has augmented those findings to
propose that it is not just loyalty that matters, but,
Reichheld has argued that this Net Promoter score is rather, loyalty and profitability. The converse to target-
the “ultimate question,”—the “one number you need ing profitable, loyal customers is also true: although
to grow.”3 Although it is a simplification of the com- we generally think of firms as ceaselessly seeking to at-
plex array of customer responses that likely begin tract more customers, “firing” unprofitable and fickle
with some evaluation like “satisfaction,” it is certainly customers can also improve results.
Profit from Price Premium
Profit from Referrals

Company Profit*
Profit from Reduced

Operating Costs
Profit from Increased

Purchases and Higher
Balances
Base Profit
0 1 2 3 4 5 6 7
Year
Customer *This Pattern is Based on
Acquisition our Experience in Many
Cost Industries.
FIGURE 3 Why Loyal Customers Are More Profitable5
104
Thus, the core metrics—customer satisfaction, strategy and to monitor those factors. Forecasts of
customer loyalty, customer profitability, and “cost to economic conditions and market-wide factors used
serve”—are all essential in setting objectives and are as the bases for planning should be specified during
a key basis of assessment and adjustment for strate- the planning and then assessed continuously. In de-
gic marketing planning. Some of these data come veloping the marketing plan, the strategist should
from operational data—sales and shipment records, strive to surface assumptions about expected re-
accounting systems, and the like—and other data sponses by customers, competitors, channel part-
come from surveys of current customers. Customer ners, and other constituents. As strategy is estab-
Relationship Management (CRM) systems track and lished and its implementation begun, those
organize those customer data at the segment and the parameters must be monitored, thus beginning anew
individual customer level for tailoring offerings, tar- the situation assessment and strategy formation
geting communications, and, notably, for assessing stages. Assessment and adjustment feeds back into
and adjusting the strategy and marketing mix. gap analyses of all of the earlier steps in strategic
marketing analysis and planning—situation assess-
MONITORING THE ENVIRONMENT. It is also im- ment, strategy formation, and implementation via
portant to forecast external factors related to the positioning and the marketing mix.
Summary
This text has laid out a concise, high-level roadmap for shown again graphically in Figure 4. This is how you
strategic marketing analysis and planning. This is a powerful attack strategic marketing. This framework identifies and
“way of thinking” that is practical, effective, and complete—
Context
Industry
Situation
Competitive
Advantage(s)
Strategy
Formation
Positioning
Implementation:
Marketing Plan(s)
Risks & Products &
Forecasts People
Marketing
Documentation,
Research
Assessment and
Adjustment
Price Place
Profits
Budgets
FIGURE 4 The Strategic Marketing Process
105
organizes the tools and frameworks required for drilling

down into a particular challenge, and it clearly points the
reader to short notes that elaborate on those tools.
Context
Industry
Situation
Competitive
Advantage(s)
Strategy
Formation
Positioning
Implementation:
Marketing Plan(s)
Risks & Products &
Forecasts People
Budgets, Forecasts,
Marketing
Documentation, and Objectives
Research
Assessment and Assessment and
Adjustment Adjustment
Price Place The Basic Financial
Profits Math for Marketing
Budgets Strategy
Linking Documentation, Assessment and Adjustment to Relevant Tools and Frameworks
Endnotes
1. Willard I. Zangwill, “Manager’s Journal: When Lasting Value (Boston, MA: Harvard Business Press,
Customer Research Is a Lousy Idea,” Wall Street 1996); Frederick F. Reichheld, “Loyalty-based
Journal (March 8, 1993): A12. Management,” Harvard Business Review 71, no. 2
2. Fred Reichheld, “The Ultimate Question: Driving (March 1993): 64–73; and, Frederick F. Reichheld
Good Profits and True Growth” (Boston, MA: Harvard and W. Earl Sasser Jr., “Zero Defections: Quality
Business Press, 2006); and Frederick F. Reichheld,“The Comes to Services,” Harvard Business Review 68, no.
One Number You Need to Grow,” Harvard Business 5 (September–October, 1990): 105–111.
Review 81, no. 12 (December 2003): 46–54. 5. Ibid. This figure is found on page 39 of The Loyalty
3. Ibid. Effect.
4. Frederick F. Reichheld and Thomas Teal, The Loyalty
Effect: The Hidden Force Behind Growth,Profits, and
106
Market Definition
Red Bull, the Austrian company that is credited with creating the energy-drinks market
in the early 1980s, sells more than four billion units per year and, according to some mar-
ket analysts, commands a 60 percent market share.1 However, other sources say that Red
Bull’s market share is just 12 percent,2 and others say it is even less. Which is right? The
answer is: “all of the above.” Gauging Red Bull’s market share depends, of course, on how
you define the market. In the energy drinks market, Red Bull is the clear market leader
with approximately 60 percent of the market. In the “functional drinks” market, which
also includes sports drinks such as Gatorade, Red Bull has a share of about 12 percent.
Ultimately, in the “beverage” market, Red Bull competes with bottled water, colas, and
juices, and it has only a tiny market share.
So what is the correct definition of a market? This question is important, and it
has a number of implications for marketing. For one, this question defines who the
competitors are and what potential substitutes exist for a product. It also defines the
competitive position (relative market share) of a product in the product portfolio. If
the market is defined too narrowly, a product will have a limited number of competi-
tors and a high market share, and a company might overlook threats or possible sub-
stitutes (e.g., sports drinks or functional foods that could serve as a substitute for an
energy drink). It might also miss opportunities to meet related customer needs. On
the other hand, defining the market too broadly can complicate matters instead of
simplifying decision making, by considering too many competitors and substitutes
(some of which may be irrelevant).3
One way to define a market and identify competition is to examine patterns of
substitution.4 This can be done from a demand-side perspective or from a supply-side
perspective. The demand-side perspective analyzes substitutes that are considered by
the customer during the buying decision because they offer similar functions. In con-
trast, the supply-side approach tries to identify all competitors that could serve the
needs of a customer group.
From Note 1 of Strategic Marketing, 1/e. Todd A. Mooradian. Kurt Matzler. Lawrence J. Ring. Copyright © 2012 by
107
Market Definition
CUSTOMER-DEFINED MARKETS segment. One example is the market or seg-

ment of customers who seek an energy drink
When defining a market, two important premises must that is low in calories. Hence, the competitive
be considered.5 First, it’s important to remember that arena for this product would consist of all
customers seek the benefits that products provide, companies that offer low-calorie energy
rather than products per se. Thus, the specific products drinks. To return to an example from earlier in
that customers consider in a buying situation represent this note, Red Bull’s entry in this category is
the benefits they seek. Second, it’s critical to note that Red Bull Sugar-Free.
customers consider different alternatives in a buying 2. The second level of competition is the product
situation, and these alternatives define the market. So, type. This includes all variants of a product that
the market also depends on what customers consider share the same core features but differ in indi-
as alternatives and substitutions for their specific need. vidual attributes. Here, the market would con-
Based on these two premises, a market can be sist of all drinks that address customers who
said to consist of products that both address a cus- seek drinks that give them a boost of energy.
tomer need and are considered by the customer as al- 3. The next higher level is the product category.
ternatives or substitutes. Substitutability, however, is This is a group of products with similar fea-
a measure of degree, and there are several levels in a tures that have certain functional coherence,
hierarchy of products that represent different substi- usually seen as “the industry” by managers. For
tutions. These substitution levels define five levels of instance, energy drinks belong to the category
competition (see Table 1). of functional beverages, because they all serve
1. The lowest level of competition is the product similar needs and have a functional coherence.
variant. Variants are items within a product type On this level, the market would consist of all
distinguishable by individual product attrib- beverages that increase physical and mental
utes (e.g., package size, colors, taste) that serve performance, including colas, juices, and en-
specific needs and pursue the same market ergy drinks.
TABLE 1 Five Levels of Competition
Level of
Competition/
Substitution Description Market Example
Product variant Variants are items within a product Customers who seek an energy Low-calorie
type distinguishable by individual drink with low calories energy drinks
product attributes (e.g., size, price,
taste) that serve specific needs and
pursue the same market segment
Product type Product variants within a product Customers who seek an energy Energy drinks
category that share the same core drink to get a boost of energy
features but differ in individual attributes
Product A group of products with similar features Customers who seek a Functional
category having certain functional coherence, functional drink to increase their beverages
usually seen as the industry by managers physical and mental performance
Generic Product categories that fulfill the same Customers who want to increase Functional
competition generic need their physical and mental nutrition
performance via nutrition
Budget Products or services that compete for Customers who want to improve Health and
competition the same customer dollar their health and wellness wellness
108
Market Definition
4. The fourth level is generic competition, con- benefit sought by customers (e.g., refreshment, in-
sisting of product categories that fulfill the creased energy), different arenas of competition are
same generic need. Here, the generic need is an identified. For example, on the product category
increase in physical and mental performance, level (soft drinks), Red Bull competes with colas,
and this need can be achieved by functional juices, and so forth when customers seek a refresh-
beverages, functional food, dietary supple- ment drink. On the generic competition level, Red
ments, and so forth. Therefore, at this generic Bull also competes with products beyond the cate-
level, the market would consist of all func- gory, such as beer, milkshakes, etc. And on the
tional nutrition products, and it would fea- budget competition level, where Red Bull competes
ture energy drinks like Red Bull competing for the same customer dollar, people might consider
with energy bars and other similar products. spending their money on a candlelight dinner or a
5. Finally, the fifth level is budget competition. trip to the movies instead of on Red Bull. Hence, at
Here the market consists of products or services this level, Red Bull’s competition consists of food
that compete for the same customer dollar. For and entertainment in general. In comparison, when
instance, a customer who has a certain amount the primary benefit sought is a boost of energy
of money at his or her disposal might spend it (rather than refreshment), Red Bull’s competition is
on functional nutrition, sauna and spa, medita- different. Here, it competes with sports drinks on
tion, etc. These products and services that might the product category level, with functional food
not compete on the level of generic need (func- (e.g., Powerbar) on the generic competition level,
tional nutrition), but they do compete on a and with meditation, sauna and spa, etc. on the
higher level—that of health and wellness. Of budget competition level.
course, if customers are unconstrained in their Which market definition is most appropriate
spending, many of these products and services depends on the decisions that have to be made and
might also be complements to one another. on their time horizon.6 For short term, day-to-day
tactical decisions such as short-run budgeting or
Figures 1 and 2 illustrate how the market can
performance evaluation, narrow market definitions
be defined for Red Bull. Depending on the core
Food & Entertainment
5. Budget Competition: Refreshment Cinema Candlelight Dinner …

Food & Entertainment
4. Generic Competition:
Alcoholic Beverages Soft Drinks Milk Shakes …
Refreshment
3. Product Category:
Colas Energy Drinks Juices …
Soft Drinks
2. Product type:
Red Bull Rock Star Monster …
Energy Drinks
1. Product Variants:
Red Bull
Sugar - Free Diet Rock Star …
Sugar-Free
Energy Drinks
FIGURE 1 Market Definition for Energy Drinks (Primary Benefit: Refreshment)
109
Market Definition
Health and Wellness
5. Budget Competition:
Functional Nutrition Sauna and Spa Meditation …
Health and Wellness
4. Generic Competition:
Functional Food Functional Beverages Dietary Supplements …
Functional Nutrition
3. Product Category: Probiotic

Energy Drinks Sports Drinks …
Functional Beverages Diary
2. Product Type:
Red Bull Rock Star Monster …
Energy Drinks
1. Product Variants:
Red Bull
Sugar - Free Diet Rock Star …
Sugar-Free
Energy Drinks
FIGURE 2 Market Definition for Energy Drinks (Primary Benefit: Energy)
based on product variants and product types are customers don’t see military and commercial heli-
most relevant. In such cases, competing products are copters as interchangeable. In the supply-side ap-
those that address exactly the same segment, perform proach, the following questions are addressed:7
the same functions, and are sold through the same
1. Which competitors are serving related product
channels. In contrast, for strategic, long-term deci-
classes with the same technology, the same
sions, broader market definitions are necessary.
manufacturing processes, and the same material
These definitions include market segments that are
sources, sales force, and distribution channels?
not currently served and might offer potential
2. What is the geographical scope of the market
growth opportunities, possible substitutions emerg-
(regional, national, or global)?
ing in other product categories, and potential en-
3. Which competitors are currently serving the
trants from adjacent markets.
market, and who are the potential entrants
with a capacity to compete?
COMPETITOR-DEFINED MARKETS
As previously mentioned, markets can also be de- METHODS TO DEFINE MARKETS
fined using a supply-side approach that considers
When defining markets, you can use predefined cate-
technological similarities between competitors, rela-
gories (e.g., SIC [Standard Industrial Classification]
tive production costs, or distribution coverage. The
codes, categorizations devised by market research
supply-side perspective of market definition in-
companies), or you can develop your own definition8.
cludes all competitors with the capability to serve
In the latter case, you can base your definition upon
the customers (i.e., competitors with the capability
the following types of input:9
to design, produce, and distribute the product or a
substitute). Therefore, a supply-side definition of the • Managerial judgment: With this method, a
helicopter industry would include both military and group of managers judges which product
commercial helicopters, whereas a demand-side def- types, product categories, competitors, etc. are
inition would include only one of the two, because or might become direct competitors, or which
110
Market Definition
technologies might become future substitutes indicate the probability of purchasing Brand A,
for the product in question. given that Brand B was purchased last time10.
• Behavioral data: Among the best known types Here, it is assumed that customers would rather
of behavioral data are cross-elasticities and switch between close substitutes than between
brand-switching data, and both of these directly distant ones, and that these switching probabili-
measure which products customers consider as ties provide a measure for the probability of
substitutes. For example, cross-elasticities based substitution.
on scanner data from store cash registers can in- • Customer judgments: Customer judgments
dicate whether two products are substitutes for have also been proven to give usable insights
each other. This is accomplished by measuring into product-market boundaries. With this
the proportional change in the sales of one method, customers are asked to indicate
product due to a specific increase or decrease of whether each product on a list is an appropri-
sales in the other product (e.g., due to a price ate substitute and acceptable alternative for
reduction). In contrast, brand-switching data satisfying a specific need.
Summary
How a company defines its market is critical to all of its also tends to define the boundaries of its efforts and the
marketing activities. If a company defines the market too horizons of its creative vision. Markets can be defined in
broadly, its marketing activities lose focus. If it defines the customer-oriented (demand-side) terms or in competitor-
market too narrowly, it risks missing opportunities. oriented (supply-side) terms using a variety of methods.
Moreover, market definition is the basis upon which a No matter which method is used, a company’s market def-
company measures its market share, and market share is a inition dictates how it relates to customers’ needs, wants,
common metric of success. How the firm labels its market expectations, and requirements.
Additional Resources
Berry, Ben.“Market update: energy drinks in North America.” fying product-markets.” Journal of Marketing 43 (Fall,
Agriculture and Agri-Food Canada (August 2009). 1979): 8–19.
Day, George. “Assessing Competitive Arenas: Who Are Your Helm, Burt and Ira Sager. “The sport of extreme market-
Competitors?” In Wharton on Dynamic Competitive ing.” Business Week 3924 (March 14, 2005): 14.
Strategy, George Day and David J. Reibstein and Robert E. Lehmann, Donald R. and Russell S. Winer. Analysis for
Gunther, eds. (Hoboken, NJ: John Wiley & Sons, 1997). Marketing Planning. New York: McGraw-Hill, 2008.
Day, George S., Allan D. Shocker, and Rajendra K. Especially: Chapter 2 Defining the Competitive Set and
Srivastava. “Customer-oriented approaches to identi- Chapter 6 Market Potential and Forecasting.
Endnotes
1. Burt Helm and Ira Sager, “The sport of extreme mar- 5. George S. Day, Allan D. Shocker, and Rajendra K.
keting,” Business Week 3924 (March 14, 2005): 14. Srivastava, “Customer-oriented Approaches to
2. Ben Berry, “Market update: energy drinks in North Identifying Product-markets,” Journal of Marketing
America,” Agriculture and Agri-Food Canada (August 43 (Fall 1979): 8–19.
2009). 6. Day, “Assessing Competitive Arenas.”
3. Donald R. Lehmann and Russell S. Winer, Analysis for 7. Day “Assessing Competitive Arenas.”
Marketing Planning (New York: McGraw-Hill, 2008). 8. Lehmann and Winer, Analysis for Marketing Planning.
4. George Day, “Assessing Competitive Arenas: Who 9. Day, “Assessing Competitive Arenas.”
Are Your Competitors?” in Wharton on Dynamic 10. Day, Shocker, and Srivastava, “Customer-oriented
Competitive Strategy, George Day, David J. Reibstein Approaches.”
and Robert E. Gunther, eds. (Hoboken, NJ: John
Wiley & Sons, 1997).
111
112
Context: PEST Analysis
113
The general context or environment within which a firm, product, or brand operates has
pervasive effects on strategy and results. Distinguishing broad categories of environmen-
tal factors that affect strategy is helpful but involves simplification of a complex reality.
Still, the mnemonic PEST (Political/regulatory, Economic, Social/cultural, and
Technical/physical) is one helpful, comprehensive tool for partitioning the general busi-
ness context. The PEST acronym is useful for compartmentalizing and inventorying the
environment – but, of course, it is just a tool. The underlying objective is to methodically,
thoroughly, and continuously monitor the firm’s situation and to probe for connections
to opportunities and threats. Although we know that many factors span these four cate-
gories (e.g., a recession involves not only economic decline, but also shifts in values and
thrift as well as regulatory responses like stimulus spending), beginning with a succinct
classification of the environment emphasizes the breadth of issues, imposes discipline on
the assessment, stimulates and structures brainstorming, and assures completeness.
UNDERSTANDING THE FOUR PEST CATEGORIES

The four categories of environmental factors influence marketing strategy and tactics,
and can pose either opportunities or threats. They also differ between cultures and na-
tions. A marketing strategist, therefore, not only looks at the political/regulatory, eco-
nomic, social/cultural, and technical/physical aspects of the environment in each
country in which the firm operates, but she or he must also try to understand the dif-
ferent factors across nations that shape these forces to predict how they might change in
future. Any of these factors can also impact any of the elements of the marketing mix
and the overarching marketing strategy as emphasized in Figure 1.
Political/Regulatory Context
Marketers operate in powerful, complex regulatory and legal environments that are in-
separable from the political systems that shape them. A wide range of political/regulatory
factors influence marketing strategy, including tax codes, liability structures, operating
rules, product labeling regulations, purity and conformance requirements, govern-
ment subsidies, and government procurement itself. Some firms also operate under
nongovernmental regulations and perhaps even informal guidelines. For example, golf
equipment manufacturers must consider the United States Golf Association’s rules,
and alcohol distillers operated for decades under an informal industry prohibition on
television advertising. Thus, political, regulatory, and legal factors encompass a wide
114
Context
Political/Regulatory/ Place/Channels of
Legal Distribution
Promotion/Integrated
Economic Marketing Communications
Strategy
/People
Social/Cultural Product
Technological/Physical/
Natural Price
FIGURE 1 The Context and Marketing Strategy/Tactics
range of forces that constrain and direct marketing affected disproportionally, whereas others are less
strategies. affected by economic swings. For example, al-
One of the most influential political and regu- though higher interest rates generally dampen
latory changes of the past half-century has been the spending and economic activity, some industries,
liberalization of international trade. Since the end of such as housing and automobiles, are more closely
World War II, trade liberalization treaties and multi- tied to interest rates than others. Still other compa-
national “free trade zones” have substantially lowered nies, such as pharmaceutical manufacturers, are
barriers to foreign trade, and the volume of world virtually “recession proof,” while yet other busi-
trade has, in turn, increased dramatically. These nesses, such as do-it-yourself automobile parts
changes have encouraged organizations to form suppliers, are countercyclical (i.e., their sales go up
global marketing strategies that focus on the central- as the economy falls). Thus, disentangling the rela-
ization of decision making and the standardization tionships between the economy and a particular
of marketing programs. Global strategies are impor- firm or industry’s prospects is important to effec-
tant to large firms for which a global strategy is a vi- tive strategy formation.
able alternative as well as to the smaller firms that
must compete against these larger companies. When Social/Cultural Context
setting international marketing strategies, adaptation
Social and cultural values, attitudes, norms, manners,
versus standardization is a central tension; in other
and tastes all affect customer needs and thereby influ-
words, the firm must adapt sufficiently to local con-
ence marketing strategies and tactics. Cultures vary on
texts, while, at the same time, capturing the benefits
values like achievement orientation as well as on atti-
of scale (e.g., cost reductions, learning) that may be
tudes such as those toward wealth and conspicuous
available from standardization. (International mar-
consumption. Norms and manners include every-
kets and contexts will be revisited later in this note.)
thing from the formality of business relationships to
practices like tipping and gift-giving. The demo-
Economic Context
graphics and lifestyles of a population (things like
Economic variables, such as interest rates, unemploy- age, education, and social class) are also important
ment rates, currency exchange rates, and inflation, components of the social/cultural context.
also impact marketing strategies in substantial and Culture—or “[t]he set of learned values,
complex ways. Some sectors of the economy are norms, and behaviors that are shared by a society
115
and are designed to increase the probability of the and around the world, reached an arrangement with
society’s survival”1—is often associated with nations TomTom, one of the leading producers of stand-alone
(e.g., Chinese culture, Italian culture) or with ethnic GPS systems, to put all their shops into the GPS sys-
subgroups within nations (i.e., subcultures). Culture tem’s “Points of Interest,” and many out-of-the-way
can be a powerful moderator of strategic success or businesses have similarly begun to take advantage of
failure, because it drives important differences in de- GPS to “guide” customers to their stores.
mand. Cultures are dynamic; in other words, values
and aesthetic preferences are constantly changing NATIONAL DIFFERENCES AND
and are different across generations. Given this situa- GLOBALIZATION
tion, it is valuable to understand not only the state of
As previously noted, one major shift in the regulatory
but also trends in cultural factors.
environment over the past fifty years has been the lib-
eralization of trade between nations. This liberaliza-
Technological/Physical Context tion occurred in conjunction with both advances in
communication technologies and the proliferation of
Technology, innovation and technological progress,
affordable travel to increase global trade and better
and the available physical and commercial infra-
connect people across places and cultures. Together,
structure additionally impact strategies in many
these forces underlie the rise of “globalization” and
ways. New technologies can replace or become direct
the associated development of global and multina-
or indirect substitutes for an existing product form
tional marketing strategies. In the words of Theodore
or product category, and technological changes can
Levitt, a professor at Harvard Business School: 2
alter the way a product is distributed and/or con-
sumed. The physical environment is also part of the “A powerful force drives the world toward
strategic context, and it includes climate, population a converging commonality, and that force
density, physical infrastructure, and commercial in- is technology. . . . The result is a new com-
frastructure, all of which interact with social trends mercial reality—the emergence of global
such as changing attitudes toward the environment markets for standardized consumer prod-
and nature. (Commercial infrastructure includes ucts on a previously unimagined scale.”
public infrastructure—such as banking services, e.g., In fact, in 1983, these forces of trade, technology,
the availability of credit and documentation, roads education, and travel led Levitt to predict what he
and water, and mail and shipping services) termed the “globalization of markets”—or the emer-
Technological changes often have “second-order gence of global brands that take advantage of scale to
effects” that are harder to foresee as a technology meet broad consumer needs for low-cost, reliable
emerges. For example, cell-phone technology had ob- goods, and the related convergence of cultures around
vious immediate effects on the world of telecommuni- common values and understandings. Since then, many
cations, creating opportunities in wireless service and of Levitt’s predictions have apparently come true.
threatening the business models of traditional tele- Today, for example, large global producers dominate
phone companies. Then, wireless converged with GPS many industries, and they have afforded consumers the
technology to threaten stand-alone GPS products such access to a variety of goods unimaginable just a half-
as Garmin and TomTom. Other less obvious effects of century ago. (Note that global marketing strategies—
cell-phone technology include changes in the way that i.e., standardized offerings and centralized processes
brick-and-mortar businesses connect with customers. and decision making—can be contrasted with multi-
Cell phones created opportunities for real-time “vot- national strategies, in which offerings are adapted to
ing,” thereby facilitating participative mass media local markets, and processes and decision making is
events (such as American Idol), and widely available distributed.) Nevertheless, globalization has not been
GPS technology changed the manner in which many absolute, and it may not be inevitable. Cultures do not
businesses advertise and reach customers. For instance, seem to be converging to the degree that Levitt and
Dunkin’ Brands, franchisor of Dunkin’ Donuts and others envisioned,3 and some industries, such as retail-
Baskin Robins Ice Cream shops in the United States ing, appear to resist globalization altogether.4
116
In any case, there is an important connection local markets. Thus, costs generally go up with market-
between thinking about international marketing— ing mix adaptation, but distinct markets are clearly
whether it be standardized or adapted—and thinking more responsive to tailored offerings.
about the context (political, economic, social/cul- As previously mentioned, multinational mar-
tural, and technological) of marketing strategy. The keting strategies involve adaption of the marketing
basic trade-off when making decisions about the mix and offerings and distributed decision making.
adaptation of a marketing program is between ac- Therefore, multinational strategies can be understood
commodating differences in context and exploiting as connecting the 5 Ps of the marketing mix to differ-
the benefits of standardization. The chief benefits of ences across nations in the PEST framework—that is
standardization are cost savings—savings realized by adjusting to the differences and adapting the market-
avoiding assembly-line changeovers and via the real- ing mix. In contrast, global strategies can, in one
ization of economies of scale and other efficiencies. sense, be viewed as disregarding those same differ-
However, adaptations to accommodate local tastes ences in favor of the benefits of standardization and
and conditions—including local political/regulatory centralization. Interestingly, almost all global strate-
conditions, economic conditions, social/cultural con- gies make some adaptations for different commercial
ditions, and technical and infrastructure conditions— contexts, yet at the same time, almost all multina-
have costs and hinder the realization of benefits of tional strategies seek to standardize and thereby reap
scale. Still, marketing mixes are more effective when the rewards of scale wherever possible.
they are adapted to the distinct needs and demands of
Summary
Marketing strategy must be built on constant, relentless attentive to the political/regulatory environment, as the
attention to the firm’s industry and sphere of operation, in- federal government undertook efforts toward health care
cluding the political/regulatory context, the economic con- reform. These same environmental factors influence almost
text, the social/cultural context, and the technical/physical all industries, and even if their effects on those industries
context. Certain industries feel the effects of contextual are less obvious, they are just as real and just as forceful.
forces especially keenly at specific times. In 2009, for exam- Therefore, all strategic marketers and brands should con-
ple, the pharmaceutical industry, which has always been tinually monitor their general context, probing for connec-
closely tied to advances in science and technology, was also tions between events and trends and their own strategy,
attentive to the economy, as the world’s industrialized na- operations, and tactics. After all, many opportunities and
tions struggled through a major recession. Within the threats alike emerge from these broad spheres.
United States, pharmaceutical firms were also particularly
Lehmann, Donald R. and Russell S. Winer. Analysis for
Marketing Planning. New York: McGraw-Hill, 2008.
Specifically: Chapter 3 Industry Analysis.
Endnotes
1. American Marketing Association Online Dictionary: no. 12 (December, 2008): 70–77 as well as with S.
www.marketingpower.com/_layouts/Dictionary.aspx? Tamer Cavusgil, Gary Knight, and John R.
dLetter=C. Last accessed June 18, 2010. Reisenberger, International Business: Strategy,
2. Theodore Levitt, “The Globalization of Markets,” Management, and the New Realities, Upper Saddle
Harvard Business Review 61, no. 3 (May–June, River, NJ: Pearson Prentice Hall, 2008), especially
1983): 92–102, 92. page 147.
3. Ibid; cf. Marcus Alexander and Harry Korine “When 4. See, for example, “Global Retailing: Trouble at Till,”
You Shouldn’t Go Global,”Harvard Business Review 86, The Economist 381, no. 8502 (November 4, 2006): 18.
117
118
Trends and Insights
119
Trends and Insights
This text’s pervasive emphasis on the customer and on customers’ needs in the strategic
marketing framework is deliberate: effective and efficient marketing strategies begin with
and are continuously aligned with customer need. As synthesized in Table 1, the first place
at which strategy is informed by and aligned with the customer is customer assessment,
TABLE 1 Customer Consideration in the Strategic Marketing Process
Situation Customer The broad, exploratory, and inductive

Assessment Assessment study of customers in general to
identify (a) trends in needs and
demand, and (b) customer insights.
Segmentation, Ongoing as well as focused research
Targeting, and intended to identify differences across
Positioning customers/consumers with regard to
needs and descriptive characteristics

and linking those differences to existing
or achievable competitive advantages.
Positioning and Focused research to pretest and refine
the Marketing tactics, including price, promotions
Strategy Mix and advertising, new products or
Formation and product modifications, and
Implementation merchandising programs; and to
gauge the effects of those tactics on
achieving the desired positioning.
Customer Ongoing data collections tied to specific
Relationship accounts, customers, or consumers that
Management serve to tailor offerings (personalize or
(CRM) customize offerings) and direct
investments and efforts toward the
‘right’ customers and segments.
Assessment & Customer- and Focused and ongoing research
Adjustment Market-Oriented collecting information on customer
Metrics responses to the marketing mix,
including measures of satisfaction,
loyalty, profitability, and revenues.
120
Customer Assessment—Trends and Insights
defined as the broad, wide-ranging, and exploratory be highly quantitative, and it frequently includes well-
scrutiny of customers and their needs that is a major established trend-extrapolation techniques as well as
part of monitoring the situation. Customer assess- emerging data-mining procedures. Looking for
ment can be distinguished from other market research trends sometimes also involves much more subjective
that is focused on specific customers or on particular “futuring,”2 or wide–ranging, multidisciplinary ex-
issues or decisions. Although all of these activities are ploration of the environment in search of possible
“market research,” customer assessment is different in future events or trends and consideration of the impact
that it is best done without prior hypotheses and of these possibilities on both customers and markets.
should not be focused on addressing specific issues.
Thus, this note focuses on that exploratory customer
Forecasting
assessment, the broadest and most inductive form of
market research; this is the “zoom out,” wide-angle The best known way to look for trends is to perform
view of customers and potential customers. Customer quantitative analysis of data on past marketplace
assessment has two primary objectives: phenomena and search for patterns and relation-
ships that can be extrapolated to the future. Similar
1. Identifying trends in the environment that
econometric and judgment-based forecasting meth-
could impact customers and their needs, and
ods may also be used to explore trends in demo-
“mining” increasingly large internal and exter-
graphics, attitudes and lifestyles, and cultural and
nal databases for a better understanding of
social forces as well as trends in the economy, in
customer behaviors and needs.
competitor actions and strategies, and in the techno-
2. Discovering customer insights by means of
logical and natural environments. Any of these ele-
rich, inductive exploratory approaches.
ments can connect with strategy via some related
(Customer insights are original understand-
change in customer behaviors or demand patterns.
ings of the ways customers consume and take
These quantitative forecasting tools are usually fo-
value from products connected to innovative
cused on projecting one to two years into the future.
ways of meeting those customers’ needs.)
There are several basic categories of forecasting ap-
These two objectives, identifying trends and discov- proaches, which subsume innumerable variations
ering customer insights, are distinct but they are also and can get somewhat complex, including trend ex-
closely related and may overlap. trapolation, causal modeling, and judgment-based
forecasting:
TREND EXTRAPOLATION Statisticians often use

IDENTIFYING TRENDS: FORECASTING,
trend extrapolation or “curve fitting” methods such
DATA MINING, AND FUTURING
as moving averages, exponential smoothing, and the
Identifying marketplace trends and distinguishing like to identify the direction in which customer, eco-
trends that have deep, broad, enduring foundations nomic, and other phenomena are headed. These
from more ephemeral fads is essential to developing analyses are relatively straightforward and require
and sustaining effective marketing strategies. Trends few data points, which make them attractive to
are (1) broad-based changes in the marketplace that managers and forecasters. However, they’re also de-
endure over time; (2) represent significant market pendent on past data and past market realities, which
opportunities; (3) are grounded on substantive inextricably ties them to an assumption that the
transformations (such as changes in demographics, future will be an extension of the past.
values, lifestyles, or technology); and (4) are accessi- Curve fitting frequently involves uncompli-
ble to the mainstream. In contrast, fads are tied to cated straight-line extrapolations, but it can also in-
transient shifts in popular culture, in fashion, in the clude nonlinear extrapolation, such as geometric and
media, or within a subpopulation such as “the trendy exponential curves, parabolic (polynomial) curves,
crowd.”1 Analyzing the environment for trends can and even Gompertz or sigmoid (S-shaped) curves.
121
The latter category consists of S-shaped curves com- houses and the value of customers’ cars will corre-
mon to natural growth patterns. In marketing, these late; when one is high, the other is likely to be high,
sorts of curves are often seen in product lifecyles, dif- and when one is low, the other is likely to be low
fusions of innovations, and other phenomena in (with exceptions and variance, of course). In this sit-
which growth is initially slow, gains momentum uation, if one value is known, the other can reason-
through some rapid growth phase, and then abates as ably be predicted, but neither one causes the other. In
new growth becomes harder to obtain. fact, it’s likely that both values are caused by income
and wealth. Nevertheless, if we know that two things
move together and we also know or can estimate one
of the two things, then we can predict the other—
and this sort of prediction is usually sufficient for
managerial purposes. For example, if a car dealer
would like to know what sort of car (e.g., luxury
sedans versus economy compacts) to present to a
certain customer, knowing the value of that cus-
tomer’s home is good information to have, regardless
of the underlying causality or lack of causality.
JUDGMENT-BASED FORECASTING. Although the

idea that any single person can foresee future patterns
CAUSAL MODELING OR ECONOMETRIC and trends based on “gut feelings” is antithetical to
FORECASTING. Regression analysis, the most the dominant analytic paradigm of contemporary
often used tool of causal modeling and econometric management, it is nevertheless an alternative—one
forecasting, identifies the relationships between vari- that is used more often than generally acknowledged,
ables that cause or at least predict some target vari- and one that may be underappreciated given emerg-
able. That is, regressions predict some phenomenon ing evidence that intuition can be a powerful deci-
of interest, called the “dependent variable” and usu- sion-making tool.3 For instance, a 2002 study found
ally designated as Y. With this method, the predictors that 45 percent of the executives polled relied “more
or “independent variables,” usually designated with on instinct than on facts and figures in running their
Xs, are the things that cause or at least correlate with businesses.”4 These and other findings suggest that
Y. A regression relationship is usually expressed as an intuition can be accurate—more accurate than rigor-
equation of the form shown here. There may be ous analysis in some contexts—and they also empha-
many independent variables, and the relationship size the role of unconscious learning and the validity
between the independent and dependent variable of rapid-processing heuristics.5
can be linear, or it can take on nonlinear forms (e.g., Nevertheless, rather than relying on a single
exponential curves, Gompertz functions). expert’s predictions, formal judgment-based ap-
proaches to forecasting typically draw on panels of
Y = f (b 1X1 + b 2X2 Á b nXn)
diverse participants. Although individual input to
The difference between causation and prediction “consensus methods,” such as surveys and Delphi
is complex. It is usually the topic of an entire course panels, may itself be based on intuition or gut feel-
in doctoral programs, but it is not especially impor- ings, the underlying assumption is that compiling
tant to most marketing managers. Essentially, the input from multiple and diverse perspectives “can-
question of causation addresses whether two things cels out” biases and gleans valid insights from the ag-
are related because one leads to the other, or whether gregated perspectives. In fact, there is voluminous
the two things simply correlate (move together), per- evidence that supports the assumption that panels
haps because of some other factor that is causing (or “crowds”) make better decisions and more accu-
them both. For example, the value of customers’ rate forecasts than individuals.6 One specific sort of
122
judgment-based forecasting is “cool-hunting,” or edge from such extensive data is a challenge, but
monitoring the environment to identify trends in today’s increasingly large databases can hold valu-
popular culture, fashion, design, and contemporary able information about consumption patterns and
lifestyles.7 Cool-hunting looks for trends as they preferences.
emerge; that is, cool-hunters try to recognize rela- Harrah’s Casinos, for example, collected exten-
tively isolated behaviors that will “catch on” and be sive data on its customers over the years, including
widely adopted. Cool-hunting is similar to the search information on their spending and gambling pat-
for customer insights, discussed in depth later in this terns, but it took sophisticated data mining to iden-
note, and it utilizes methods for monitoring culture tify actionable understandings in these data. It
and fashion similar to those used in ethnography. In turned out that Harrah’s most valuable customers—
particular, ethnography studies consumers in depth the 26 percent of the company’s customers who gen-
in their natural habitat, whereas cool-hunting studies erated a whopping 82 percent of revenues—were not
fashion, lifestyles, and contemporary culture on the the “gold cuff-linked, limousine-riding high rollers”
street, in the office, and in the mall. the company might have assumed; instead, they were
One key to identifying trends in popular cul- “former teachers, doctors, bankers, and machinists—
ture is the recruitment of people well-attuned to middle-aged and senior adults with discretionary
emerging tastes. Apparel companies like Nike and time and income who enjoyed playing slot ma-
North Face as well as branders less obviously en- chines.”11 This data-mining “nugget” was readily
trained to popular culture (such as Wendy’s, Coca- linked to managerial actions, including the cus-
Cola, and Nokia), employ “young, bright, culture tomization of offerings and communications to tar-
spies who could roam freely and undetected get these valuable customers.
through the clubs and schoolyards where corpora-
tions weren’t welcome”8 in search of “cool.”
Futuring
Similarly, research firms look for “observers who
“have a taste level that is avant-garde but not so far Although forecasting and data mining may seem
out that it won’t become mainstream.”9 However, straightforward, the assumption that the future will
the notion of “cool” is fickle and fleeting; once a be an extension of the past or that relationships
trend has been spotted and “commercialized” by found in the past will hold into the future is rarely
marketers, it may, unavoidably, be near the point of met, at least not directly. The future, it turns out, is
becoming passé. usually a function of the past modified by unforeseen
factors. In addition, everyone knows about the
past—or could and should know about it. Because
Data Mining
your competition can see the past as well as you can,
Whereas forecasting involves looking at past and forecasts based solely on past data may not yield sub-
current data or behavior to identify trends that can stantial competitive advantages. Therefore, market-
be expected to extend into the future, data mining ing strategists shouldn’t just understand how to ex-
involves searching through available information trapolate patterns—they should also consider what
to detect relationships among behaviors or to iden- things might disrupt those patterns and explore the
tify original descriptions of consumption phenom- implications of those possible discontinuities. The
ena. In particular, data mining is the “extraction of essential marketing question might therefore be re-
interesting (nontrivial, implicit, previously unknown duced to the following: If these uncertain but possible
and potentially useful) patterns or knowledge from things happen at some point in the future, what would
huge amounts of data.”10 Typically, this process in- we want to have done between now and then to be pre-
volves analysis of large databases using sophisti- pared to take advantage of (or to avoid harm from)
cated computational and statistical methods that such an eventuality?
consider internal and/or external data to identify Futuring, or “the act, art, or science of iden-
interesting relationships. Culling actionable knowl- tifying and evaluating possible future events,” 12
123
focuses on the uncertainty of the future and on Discovering Customer Insights

environmental changes or events that might impact
“If I had asked people what they wanted, they would
customers. Futuring begins with traditional extrapo-
have said faster horses.”
lations from past patterns, but it goes well beyond
Henry Ford13
forecasting by looking further into the future and
(especially) by considering what might disrupt those
Gary Hamel and C. K. Prahalad have argued that “to
patterns. Futuring adopts a broader mindset than
realize the potential that core competencies create, a
traditional forecasting, embracing a multidiscipli-
company must also have the imagination to envision
nary set of more qualitative and judgmental ap-
markets that do not yet exist and the ability to stake
proaches and ways of understanding the world.
them out ahead of the competition.”14 The realiza-
Despite some common misperceptions, futuring is
tion of exceptional returns often means disregarding
not mystical prophecy, prescience, or clairvoyance.
mature, competitive markets for truly new ones.
Rather, futuring studies the possibilities of the future—
Finding markets that do not yet exist—that is, identi-
what might happen—using a wide range of tools and
fying and meeting latent needs—begins with the
a variety of perspectives. Futuring also studies ways
search for customer insights. A customer insight is a
organizations and people can prepare for these pos-
penetrating, discerning understanding of customer
sibilities. Thus, futuring is about both anticipation
needs, the ways that customers derive value from
and preparation.
products, and the ways customers might derive value
As noted, futuring extends basic forecasting
from products.15 Good customer insights are fresh,
by considering longer time frames, incorporating a
relevant, enduring, and inspiring.
broader set of tools (including qualitative and
Identifying customer insights requires more
speculative judgment), and looking not only at
than painstakingly asking customers what they think
where trends in past and current data are headed,
they want; rather, it often necessitate deep customer
but also at what might disrupt those trends. For ex-
“intimacy” with an eye toward discovering solutions
ample, a traditional, quantitative forecaster might
customers could not have envisioned or articulated
have forecast that sales of camera film in the early
themselves. In other words, customer assessment re-
twenty-first century would continue at around $7
quires “deep dives” to understand customers and to
million per year, the sales level they’d enjoyed for
identify unmet and even unrecognized needs. (Needs
most of the late twentieth century. Of course, that
that have not yet been recognized by the customers
isn’t what happened. Instead, an external disrup-
themselves are termed latent needs). An important
tion—the emergence and rapid adoption of digital
distinction between the search for genuine customer
photography—changed the existing trend, and
insights and other forms of marketing research is
sales of film plummeted. Similarly, a forecast of
that customer insights come from inductive reason-
foreign student spending in the United States in
ing—exploration that doesn’t start with a theory, a
2001 would likely have predicted continued growth
hypothesis, or a specific issue to be addressed, but in-
in expenditures—at least until the events of
stead attempts to observe in as unbiased and wide-
September 11, 2001, brought about dramatic
ranging a manner as possible, to “let the data speak,”
changes in federal policies regarding visiting
and to identify unexpected insights.
students. Many observers did not foresee digital
photography nor did anyone foresee the terrorist
The Customer Value Chain
attacks of 9/11? Could a futurist have imagined
scenarios in which the film industry faced disrup- A useful frame of reference when probing for cus-
tive technology or in which America faced a terror- tomer insights is the so-called “customer value
ist attack? Almost certainly. Futuring encompasses chain.” The notion of a value chain is well-known in
methods for such imagination or speculation the context of a firm—in particular, it breaks down
about the future as well as ways to prepare and plan the series of activities that add value or support the
by drawing on that uncertain foresight. production and delivery of value for the firm. In
124
Care
Wash
Iron
Dry
Shopping
Purchase
Disposal
Store
Wear
Wear
Wear
Care
Drop Off
Dry Clean
Pick Up
Lend/Borrow
FIGURE 1 A Hypothetical Customer Value Chain for Clothing
comparison, a customer value chain is the series of the consumption itself, but also about the consump-
activities involved in extracting value from the good tion’s context. For example, if a consumer drinks a
or service; it is how the customer meets a need or glass of wine, the meaning and significance of that
needs with the product or by other means. Figure 1 is consumption, the value derived from the wine, and
an example of a customer value chain for clothing. the needs that are satisfied (and that remain unsatis-
As depicted in the figure, the customer may take fied) are dependent on the context, including the so-
value from a marketer’s offerings anywhere along the cial, physical, temporal, and emotional context in
chain, from shopping and purchase through wear which the consumption is situated. Wine consump-
and care to disposal. Understanding customer value tion would, in most cases, be difficult to understand
chains and organizing observations and understand- in a laboratory or simulated setting or via retrospec-
ings of customers within value chains is useful. tive self-reports.17 Therefore, customer assessment
Indeed, customer value chains comprise a helpful or- must draw on a variety of predominantly qualitative
ganizing lens when considering the customer experi- methods, such as total immersion, depth interviews,
ence and searching for customer insights. projective techniques, and observation in the con-
sumers’ “natural setting” or ethnography.
Data Collection Methods
TOTAL IMMERSION. One method for exploring
for Customer Insights
customers’ experiences with a product that, at the
Marketing researchers who seek to identify customer same time, ensures that corporate executives get a
insights have been encouraged to work like deep appreciation for those experiences is “total
“bricoleurs,” a description drawing on the French immersion”; this technique involves executives,
word bricoler,16 which denotes a tradesman who rather than researchers, immersing themselves in the
works with his hands and whatever materials and customers’ experience and point of view.18 Sessions,
tools are available. A bricoleur is crafty, resourceful, which may not be called “total immersion” sessions—
and able to see known things in new ways; similarly, a at the BBC, for example, they’re called “Meet the
marketing researcher who seeks to uncover genuine Audience”19—include deep and rich interactions be-
customer insights must also be creative and re- tween the executives and their customers. Some mar-
sourceful, employing a variety of methods and per- keting research firms, such as the British firm
spectives to home in on important truths. Searching Essential Research,20 specialize in facilitating mean-
for customer insights requires a 360-degree view of ingful immersion projects, whereas other marketing
customers—looking at the way they consume from researchers criticize these projects as scientifically
every possible angle—and a thick description of con- unsound. Nevertheless, Stuart Knapman, a partner at
sumption that includes not only information about Essential Research and an expert in total immersion,
125
has observed that total immersion can be invaluable conclusions drawn from these interviews cannot easily
in generating customer insights: be generalized to larger populations. Nevertheless, depth
interviews offer deep, rich insight into the customer’s
Immersion helps to bring consumer is-
motivations, values, and experiences with a product.
sues into sharp focus and undoubtedly
Laddering can be an especially effective struc-
gets consumer insight into the board-
ture for depth interviews. In laddering interviews,
room. . . . Many researchers and senior
consumers are probed with regard to what makes a
execs alike complain that . . . the company
product different or attractive and why those quali-
is driven by research measures rather than
ties are good. In turn, this probing leads to “ladders”
vice versa, and that business metrics have
or means–end chains (MECCAs) linking product at-
more to do with maintaining the status
tributes to their consequences and these conse-
quo than identifying new and exciting op-
quences to the value systems that they support.22
portunities. . . . Immersion can be the
For example, Professor Thomas Reynolds of
perfect antidote to this insight inertia.21
University of Texas at Dallas explored customers’
perceptions of and motivations related to express-
DEPTH INTERVIEWS AND LADDERING. Depth delivery services and identified the MECCA shown
interviewing is a technique in which one or more rein Figure 2. In this example, the customers were
searchers meets with a single customer and asks that secretaries, because they were key decision makers
individual about his or her needs, buying behaviors, with regard to business express-mail services.
and experiences with a product category. Depth inter- Through his interviews, Reynolds learned that the
views are resource intensive because they take up re- secretaries linked the tangible attribute of drop boxes
searcher time and the qualitative data they generate to the intangible attribute of convenience, which in
are difficult to manage and to interpret; also, any turn created the consequences of saving time, getting
Self-Esteem Peace of Mind
Accomplishment
Personal Satisfaction In Control
Can Do More Make More Money Avoid Taking

Responsibility
(for someone
Save Time Get Promoted else’s error)
Convenient Makes Me Avoid Looking

Look Good Bad (to boss)
Drop Box
Less Worry
Reliable
On-Time Delivery
FIGURE 2 Value Map for Express-Mail Services23
126
more done, and achieving a sense of satisfaction. In For example, Moen, a manufacturer of pre-
turn, the consequences of time, productivity, and sat- mium plumbing fixtures, hired QualiData, a firm spe-
isfaction supported the secretaries’ values, which in- cializing in ethnographic research, to study the way
cluded accomplishment and self-esteem. This sort of consumers use showers. The resulting study involved
structured depth interview and the resulting under- watching people take showers—and yes, in order not
standing of customers’ values can lead to insights via to bias those observations, these people were naked—
the values that are salient. In addition, this technique and then interviewing them about their shower expe-
reveals the connections between attributes and con- riences, the way they felt about the experiences, and
sequences and consequences and values—connec- ways the experiences might be made better. One out-
tions that motivate purchase behavior and that define come of this somewhat voyeuristic study was a
consumer–product relationships. unique, easy-to-use dial that allows people—naked
people who often cannot see well due to low light,
PROJECTIVE TECHNIQUES. Projective techniques, flowing water, and the absence of corrective glasses—
such as word or picture association, sentence com- to adjust water flow and massaging action.26
pletion, and metaphor elicitation, originated in psy- Interestingly, managers and entrepreneurs
chology and psychoanalysis and have been applied to have always used this sort of “participant-observer
understanding consumers since at least the mid- learning,” usually without calling it that or even
twentieth century. Some of the earliest marketing re- knowing that it has parallels in the study of cultures.
searchers, including Ernest Dichter in the well- In fact, Moen itself is a brand born of customer in-
known “motivational research” tradition of the 1940s sight and participant observation. In the 1930s, its
and 1950s, used projective techniques to dig into founder, Al Moen, was scalded by a rush of hot water
consumers’ subconscious or covert motives.24 By from a conventional, two-handled faucet. As the
asking a decision maker (a buyer or a consumer) to Washington Post described it, “Eureka! A flash of ge-
look at a picture, for example, and consider what he nius, a product is born. . . . Al Moen had no research
or she believes is going on or what he or she thinks to go on, just his own intuition and life experi-
someone in that situation would do or want (i.e., by ence.”27 Today, trained ethnographers search for
asking the individual to “project” beliefs or motives these same types of “eureka” moments using deep,
onto the picture), the researcher avoids defensive re- extensive observation of consumers in their natural
actions and may elicit more honest, deep, and even habitats. When applied to the new product develop-
“subconscious” beliefs and motives. ment process, ethnographic research is sometimes
called “empathic research,” emphasizing the fact that
ETHNOGRAPHY.25 Ethnographic research meth- the researchers and the designers try to empathize
ods are drawn from social anthropology—the social with customers using the product.28
science focused on understanding contemporary so- Importantly, all of these methods (total im-
cial interactions and, especially, groups and cultures. mersion, depth interviews and laddering, projective
Ethnography emphasizes depth and context in ob- techniques, and ethnography) intended to identify
servation. Ethnographic observation is done in the customer insights are inductive. They begin with ob-
context of consumers’ “natural habitat”; that is, servations that shape the eventual conclusions,
where the consumers live or consume the product, rather than beginning with preconceived structures
rather than in a simulated consumption context, in a or setting out to confirm or refute a priori proposi-
laboratory, or via self-reports. Ethnography also em- tions and deductive hypotheses. As a result, one stip-
phasizes deep, long-term and all-embracing observa- ulation for the use of these tools is the need to be
tion, as opposed to other market research methods’ cautious in extrapolating insights from observations
narrow, reductionist scopes. Ethnographic studies of convenience samples to broader populations. For
can recognize realities that customers themselves instance, in the research done by Moen and QualiData
may be unaware of, cannot articulate, or are unwill- on showering, the need to observe consumers showing
ing to offer in interviews or surveys. as they normally shower (i.e., in the nude) required
127
the recruitment of nudists as subjects. Nudists are a and needs and become part of the product develop-
unique subpopulation, so generalizing understand- ment process. For instance, in the 1980s, Hilti, a
ings of showering from observations of nudists re- Liechtenstein-based company providing leading-edge
quired an assumption that, although the subjects technology to the global construction industry, began
were from a particular subsegment, their visible con- looking into flexible and easy-to-use fastening sys-
sumption (showering) would nevertheless be like tems. Up until that point, there were no functionally
that of other consumers in important ways. efficient systems, but some customers had developed
their own solutions. Therefore, Hilti tried to integrate
Other Sources of Insights these customers into a development project. Fourteen
Other sources of customer insights can be customers lead users were selected from a group of 150 users. In a
who are lead users of a product or product category; workshop, these lead users then developed an innova-
online collaborators participating in product devel- tive fastening system that formed the basis for a new
opment via communities of enthusiasts and experts; business unit at Hilti31. Another example is Johnson &
and even the company’s own executives, an often un- Johnson Medical, which brought three innovations
derappreciated source of knowledge and insight into into the market—innovations that were not devel-
the product and its customers. oped by the company itself, but by users. In this lead-
user project, the company screened the market for
LEAD USERS. In the 1980s, Professor Eric von lead users, selected them according to well-defined
Hippel of MIT recognized that many innovations criteria, and brought them together in a workshop.
come from sophisticated, creative customers. In the Then, in the two-day lead-user workshop, the users
manufacture of semiconductors and circuit boards, themselves developed a new film for covering robots
for instance, the most important innovations did not used in surgery, an all-in-one solution for preventing
come from the developers of the relevant process particulate matter from becoming airborne during
technologies, but from the semiconductor manufac- operations, and an integrated sterile system for sup-
turers themselves. Indeed, almost 80 percent of inno- porting patients’ legs during hip operations.32
vations in scientific instruments came from cus-
tomers.29 Of course, there are innovative customers in ONLINE COMMUNITIES. Today, you can find on-
all product areas, not just in the business-to-business line communities for virtually every product or
sector. For example, around 20 percent of mountain topic. On the Internet, there are communities for
bikers work on their own mountain bikes and have basketball shoes, coffee drinkers, wine connoisseurs,
ideas for solutions that they realize themselves; this hair loss, outdoor enthusiasts, downhill skiing, and
figure is almost 40 percent for extreme sports enthu- so on and so forth. Consumers gather in these online
siasts and almost 10 percent for users of outdoor communities to exchange ideas, discuss their prob-
consumer goods.30 Von Hippel labeled such innova- lems, and share enthusiasm for their common inter-
tive customers “lead users.” Today, lead users are rec- ests. For example, in Alt.coffee, a virtual café, coffee
ognized as having the following characteristics: connoisseurs discuss how coffee machines and roast-
ers could be improved; in the Outdoorseiten.net on-
• Their needs are months or even years ahead of
line community, hikers and mountain enthusiasts
the mass market;
develop their own equipment (e.g., functional jack-
• They are very demanding and have their own
ets and particularly light tents); and at Chefkoch.de,
ideas for solutions; and
cooking enthusiasts consider how cooking utensils
• They are often opinion leaders, using the product
could be improved.33
they developed themselves with conviction and
Many companies use these sorts of online com-
then making a significant contribution to quickly
munities to get customer insights. Audi, for instance,
establishing the innovation on the market.
involved its customers in the conception phase during
There are many examples that illustrate how the development of a new infotainment system. Via
lead users can give insights into customer problems several Web sites that are regularly visited by car fans,
128
Audi reached over 1,600 auto enthusiasts who worked items, came from a McDonald’s franchisee. As
on the virtual development of the infotainment sys- McDonald’s founder Ray Kroc later wrote, “The ad-
tem. This resulted in 219 service ideas, 261 comments vent of the Egg McMuffin opened up a whole new
on the console, 728 visions of future cars, and the even- area of potential business for McDonald’s, the break-
tual selection of the optimal product configuration.34 fast trade.” Similarly, Subway’s “$5 Foot-Long” pro-
Similarly, during a design competition phase that motion, in which the sandwich chain sells 12-inch
lasted just four weeks, Swarovski—the Austrian manu- sandwiches for an even five dollars, was a franchisee’s
facturer of crystal figurines and jewelry—obtained 263 idea—and this promotion that is credited with more
useable motifs for crystal tattoos that were produced by than $3.8 billion in annual sales.37
Internet users by means of toolkits.35
Sometimes, the company itself may simply ob-
Integrating Trends and Customer
serve online discussion without directly participating
Insights into Strategic Planning
in it. Consider the example of NikeTalk, a commu-
nity of more than 50,000 basketball fans that has no Although following a teenage boy around in his daily
official connection with Nike Inc. Thousands of dis- life or videotaping people while they shower may
cussions between basketball fans take place in this seem impractical, significant strategic advantage goes
virtual community every month. Basketball fanatics to the firm that first recognizes and capitalizes on a
can be found in the community, as can sports equip- true customer insight. Uncertain trends and indefi-
ment retailers, students of industrial design and Nike nite patterns of emerging customer needs can be in-
fans in general. Some of the subjects these commu- puts to scenario analysis. That is, various distinct pos-
nity members discuss include how to customize your sible customer outcomes (e.g., changes in attitudes
basketball shoe, how to distinguish a branded shoe and tastes toward health or thrift) can be included in
from a fake, what basketball shoes might look like in the factors that define “possible futures” (i.e., scenar-
2050, and what they think about Nike’s latest prod- ios), and contingency plans can be constructed to
ucts.36 Observing discussions within these commu- contend with those possible futures. Cross-impact
nities can provide valuable insights into customers’ matrices, for example, are a typical futuring and sce-
interests, opinions, problems, acceptance of new nario planning tool. As its name indicates, a cross-im-
products, and so on. In fact, companies such as pact matrix integrates multiple events to identify
Munich’s Hyve AG specialize in mediating between their joint impacts; in other words, rather than con-
online innovation seekers and innovation providers sidering what might happen if one event occurs or a
in the role of “innomediator.” These companies de- single trend is disrupted, cross-impact matrices con-
velop tools to harness the innovative power of online sider the interaction of factors and their joint impli-
communities, using “netnography”—ethnography cations (or “impacts”). Cross-impact matrices are
adapted to the Internet—to identify communities, similar to scenario analysis; in fact, they are used in
screen them for innovations, and set up a virtual dia- scenario analysis. If, for example, the economy im-
logue with them in order to systematically open up proves dramatically, health concerns shift diets to-
these sources of innovation. ward vegetables and seafood, lifestyles change toward
smaller households, and a disruptive technology
EXECUTIVES AND CHANNEL PARTNERS. Experts, emerges that dramatically lowers the cost of electric-
including managers, salespeople, channel partners, ity, then what would the future look like? What are
and engineers, can also be an invaluable source of cus- the implications of these events on each other and on
tomer insights and creative product ideas. Although other elements of the future? What are the implica-
untested “hunches” can be dangerous, ignoring input tions of these events on the marketing organization,
from managers and collaborators risks missing im- and how would the organization want to be posi-
portant and worthwhile experience-based ideas. In tioned to respond to this future? These possible fu-
the fast-food industry, for example, the idea for the tures don’t need to be likely (or unlikely); if they are
Egg McMuffin,® one of McDonald’s most popular merely possible than they are worth thinking about
129
and planning for. However, cross-impact matrices fa- future reality can be estimated. Thus, cross-impact
cilitate basic stochastic analysis in which, by estimat- matrices are a structured and rigorous examination
ing the probability of each event and its interactions of what might happen tied to consideration of how the
with the others, the joint probability of any specific organization should prepare for those possibilities.
Summary
Trends are important patterns in the past (and up to the Trend spotting is about looking at past and current
present) that indicate or predict changes in the future. phenomena to predict the future; in comparison, searching
Research has shown that the more firms consider and track for customer insights focuses on present (but heretofore un-
trends and changes in the environment, the more success- recognized) customer conditions and needs. Thus, success-
ful they are. ful marketing strategy is about meeting some specific cus-
Customer insights are understandings into customer needs better than the competition at a profit. But of
tomer needs and how customers consume and take value course, those customer needs are changing. Thus, adequate
from products tied to ways to meet those needs and deliver marketing strategy can be viewed as marketing mix evolu-
that value. Robust evidence has also been found that the tion (changing the “P”s) in response to changes in environ-
more firms focus on their markets and their customers, the mental forces, and really good marketing strategy is market-
more successful they are. ing mix evolution in anticipation of changes in those forces.
Gloor, Peter A., and Scott M. Cooper. Cool-hunting: Chasing Solomon, Michael R. Truth About What Customers Want.
Down the Next Big Thing. New York: AMACOM, 2007. Upper Saddle River, NJ: FT Press, 2009.
Larreche, Jean-Claude. The Momentum Effect: How to Vitale, Dona. Consumer Insights 2.0: How Smart Companies
Ignite Exceptional Growth. Upper Saddle River, NJ: Apply Customer Knowledge to the Bottom Line. Ithaca,
Wharton School Publishing, 2008. NY, USA: Paramount Market Publishing, 2006.
Endnotes
1. Irma Zandl, “How to Separate Trends from Fads,” Are Smarter Than the Few and How Collective
Brandweek 41, no. 41 (23 October, 2000): 30–35 Wisdom Shapes Business, Economies, Societies and
2. Peter A. Gloor and Scott M. Cooper, Cool-hunting: Nations (New York: Doubleday/Random House, 2004).
Chasing Down the Next Big Thing (New York: AMA- 7. Gloor and Cooper, “Cool-hunting”; and Gladwell,
COM, 2007); Malcolm Gladwell, “The Cool-hunt,” “The Cool-hunt.”
The New Yorker (17 March, 1997): 78–88. 8. Douglas Rushkoff, “The Pursuit of Cool,”
3. See, for example, William R. Duggan, Strategic Sportswear International (2001), archived at http://
Intuition: The creative spark in human achievement rushkoff.com/articles/articles-and-essays/the-pursuit-
(New York: Columbia University Press, 2007). of-cool/ Last accessed June 18, 2010.
4. Eric Bonabeau, “Don’t Trust Your Gut,” Harvard 9. Roy Furchgott, ‘For Cool Hunters, Tomorrow’s Trend
Business Review 81, no. 5 (May 2003): 116–123. is the Trophy,’ The New York Times (June 28, 1998).
Quote is from page 116. 10. Jiawei Han and Micheline Kamber, Data Mining:
5. Gerd Gigerenzer, Peter M. Todd, and ABC Research Concepts and Techniques, 2nd ed. (San Francisco:
Group, Simple Heuristics that Make us Smart (New Morgan Kaufmann Publishers, 2006).
York: Oxford University Press 1999). 11. Gary Loveman,“Diamonds in the Data Mine,” Harvard
6. Victor J. Cook, Jr. and David Frigstad, “Take It to the Business Review 81, no. 5 (May 2003): 109–113.
Top: Delphi Sampling is Best for Supply Chain 12. Edward Cornish, Futuring: The Exploration of the
Research” Marketing Research 9 (Fall 1997); and James Future (Bethesda, MD: World Future Society,
Surowiecki, The Wisdom of Crowds: Why the Many 2004), 294.
130
13. Quoted in James G. Barnes, Build Your Customer example, Martin Zober, “Some Projective Techniques
Strategy (New York: John Wiley and Sons, 2006), 106. Applied to Marketing Research,” Journal of
14. Gary Hamel and C.K. Prahalad, “Corporate Marketing 20, no. 3 (January 1956): 262–268.
Imagination and Expeditionary Marketing,” Harvard 25. Richard Durante and Michael Feehan, “Watch and
Business Review 69, no. 4 (July–August, 1991): 81–92, Learn: Leveraging Ethnography to Improve
page 81. Strategic Decision Making,” Marketing Research 17,
15. Definition adapted from David Taylor, “Drilling for no. 4 (Winter 2005): 10–15.
Nuggets: How to Use Insight to Inspire Innovation,” 26. Dana ElBoghdady, “Naked Truth Meets Market
Brand Strategy (March 24, 2000); also see Gary Research: Perfecting a New Shower Head? Try
Armstrong and Philip Kotler, Marketing: An Watching People Shower,” The Washington Post,
Introduction, 9th ed. (Upper Saddle River, NJ: February 24, 2002, H1, H4, H5.
Pearson/Prentice Hall, 2009), 97. 27. Ibid; quote is from page H1.
16. The term “bricoleur” was first used to describe 28. Dorothy Leonard and Jeffrey F. Rayport, “Spark
eclectic, make-due qualitative researchers seeking Innovation through Empathic Design,” Harvard
deep insights, by Levi-Straus; see Levi-Strauss, The Business Review 75, no. 6 (November–December
Savage Mind (New York: Free Press, 1966); also see 1997): 102–113.
Joe L. Kincheloe, “Describing the Bricolage: 29. Eric von Hippel, Democratizing Innovation
Conceptualizing a new rigor in qualitative research,” (Cambridge, London: The MIT Press, 2005).
Qualitative Inquiry 7, no. 6 (2001), 679–692. 30. Ibid.
17. Clifford Geertz, “Thick Description: Toward an in- 31. Cornelius Herstatt, Christian Lüthje, and
terpretive theory of culture,” in The Interpretation of Christopfer Lettl, “Wie fortschrittliche Kunden zu
Cultures: Selected Essays (New York: Basic Books, Innovationen stimulieren,” Harvard Business
1973), 3–30. Manager 24, no. 1,(2002): 60–68.
18. Stuart Knapman, “Customer Immersion: Total 32. Ibid.
Immersion,” Research (June 2008), 36–37. 33. Johann Füller, Gregor Jawecki, and Michael Bartl,
19. Ibid. “Produkt- und Serviceentwicklung in Kooperation
20. Essential Research’s website describes their work, in- mit Online Communities,” in vol. 5 of
cluding customer-immersion programs for senior Kundenorientierte Unternehmensführung, eds. Hans
managers (see www.essentialresearch.co.uk/). H. Hinterhuber and Kurt Matzler, (Aufl. Wiesbaden:
21. Knapman,“Customer Immersion”; quote is at page 36. Gabler Verlag, 2006b).
22. For a thorough review and compilation of research ar- 34. Johann Füller and Kurt Matzler, “Virtual Product
ticles, see Thomas J. Reynolds and Jerry C. Olson, eds., Experience and Customer Participation—A Chance
Understanding Consumer Decision Making: The Means- for Customer-centred, Really New Products,”
end Approach to Marketing and Advertising Strategy Technovation 27 (2007): 378–387.
(Mahwah, NJ: Lawrence Erlbaum Associates, 2008). 35. Johann Füller, Michael Bartl, Holger Ernst, and
23. Figure is from Thomas J. Reynolds and Alyce Byrd Hans Mühlbacher, “Community Based Innovation:
Craddock, “The Application of the Meccas Model to How to Integrate Members of Virtual Communities
the Development and Assessment of Advertising into New Product Development,” Electronic
Strategy: A Case Study,” Journal of Advertising Commerce Research 6, (2006a): 57–73.
Research 28, no. 2 (April 1988): 43–54, 45. 36. Johann Füller, Gregor Jawecki, and H. Mühlbacher,
24. Lynne Ames, “The View From/Peekskill; Tending the “Innovation Creation by Online Basketball
Flame of a Motivator,” The New York Times, August Communities,” Journal of Business Research 60, no. 1
2, 1998, 14 WC2, New York edition; Linda Obrec, (January 2007): 60–71.
“Marketing, Motives and Dr. Freud,” Detroiter 37. See Ray Kroc with Robert Anderson, Grinding It
Magazine (December 1999), available at: www. Out: The Making of McDonald’s (Chicago, IL:
mktgsensei.com/AMAE/Consumer%20Behavior/ Contemporary Books, 1977); and Matthew Boyle,
Motivational%20Research.doc. Last accessed June “The Accidental Hero: Subway’s $5 Footlong, the
18, 2010. Ernest Dichter, The Strategy of Desire Brainchild of an Obscure Miami Franchisee, Is the
(New York: Boardman & Company, 1960); and Fast-food Success Story of the Recession,” Business
Ernest Dichter, The Psychology Of Everyday Living Week (November 5, 2009).
(New York: Barnes and Noble, 1947). Also see, for
131
132
Consumer and
Organizational
Buyer Behavior
133
Consumer and
Organizational
Buyer Behavior
Academic researchers have spent decades studying how consumers and organizations
make purchase decisions. Most university-level marketing degrees require a course on
“Buyer Behavior” or “Consumer Behavior” that covers that accumulated knowledge.
Consumer Behavior usually refers specifically to models of how the ultimate consumers
make decisions about and consume products. Buyer Behavior is broader; it considers
organizational buyers (especially businesses, but also not-for-profits and government
entities) as well as consumers. Consumer and buyer behavior models and frameworks
are theoretical, especially in comparison to market research, which studies the firm’s
specific customers and specific issues. Consumer and buyer behavior look at basic
processes that are true for consumers or organizations in general.
Despite the theoretical nature of buyer behavior, understanding this body of
knowledge is a basic foundation of strategic marketing. Understanding how customers
make decisions and the role of customer evaluations and behaviors in determining im-
portant market outcomes is essential to segmenting, targeting, positioning, and to de-
veloping and assessing an effective marketing mix. This note presents a concise
overview of buyer behavior; numerous textbooks1 and academic research papers are
available to drill down into consumer/buyer behavior theory.
CONSUMER BEHAVIOR
Consumers are the ultimate users of a product. (We refer to all buyers—ultimate con-
sumers and/or organizational buyers and distributors as “customers.”) In comparison
to organizational buyers, consumers are more numerous (there are many more con-
sumers in most markets than there are buyers in business-to-business markets) and ge-
ographically dispersed as well as harder to address or “catalog” (i.e, harder to identify
and list with specificity and, therefore, harder to target with personalized communica-
tions or offerings), and consumer markets generally involve many more but usually
smaller transactions (smaller in quantity and in the dollar value of the transaction).
Additionally, consumers use more personal and more emotional purchase criteria in
comparison to organizational buyers. In comparison, business-to-business markets
generally involve fewer customers (who are often easily listed and readily tied to specific
data, such as address, size, and industry) and fewer transactions but transactions of
greater size and value. For instance, Coca-Cola is purchased in relatively small quantities
134
Consumer and Organizational Buyer Behavior
by millions and millions of consumers; it would be “Hierarchy of effects” models in communica-

impossible for Coke to track those customers’ pur- tions and advertising management are similar to the
chases with any degree of specificity. In contrast, the consumer-decision-making process framework.
maker of aluminum cans can quickly purchase a list, However, instead of modeling the flow of a customer
complete with addresses, managers’ names, and op- through a purchase decision—from the recognition of
erating statistics, for all companies producing soft a need through post-purchase processes—“hierarchy
drinks and beer. of effects” models focus on the relationship of the con-
sumer with a specific product or brand, from unaware
through degrees of awareness, liking, and bonding
Consumer Decision-Making Process
toward purchase and adoption or loyalty.4 One of the
Consumer decision making can be viewed as a earliest hierarchy of effects models is “AIDA”—
process moving from the recognition of a need Awareness, Interest, Desire, Action5—although a va-
through the search for information about possible riety of more detailed models have also been pro-
ways to satisfy the need and the evaluation of those posed.6 For example, in the context of the diffusion
alternatives on to the purchase and then post-pur- of innovations, a very similar awareness-interest-
chase processes (Figure 1). Many very similar models evaluation-trial-adoption process is generally ac-
have been proposed, some with much more detail, cepted.7 Customer loyalty, the development of long
but this basic process or flow is commonly ac- term relationships with valuable customers who may
cepted.2,3 Of course, the degree to which customers themselves serve as promoters of the brand, was
engage in effortful thought and search as they move omitted from the brief AIDA summary, but it logi-
through these steps or stages in the decision-making cally follows after “action” or “trial”; it is important
process varies across consumers, across products and to consider that ultimate loyalty in understanding
product categories, and across situations. the flow of relationship intensity.
Hierarchy of Effects
Model (AIDA)
Unaware
Consumer Decision
Making Process
Problem
Awareness
Recognition
Information
Interest
Search
Evaluation of
Desire
Alternatives
Purchase Action
Post-Purchase
Loyalty
Processes
FIGURE 1 Consumer-Decision-Making Process and Hierarchy of Effects Models
135
Obviously, more customers will become PROBLEM RECOGNITION. The consumer-decision-

aware of a product than will become interested in it, making or buying process is initiated by the recogni-
and more customers will be interested in a product tion of a need or want. Needs are fundamental
than will ever buy it (take action), and not all cus- human requirements; everybody experiences needs.
tomers who buy and try a product will adopt the Abraham Maslow organized human needs in a hier-
product or become loyal customers. Therefore, hi- archical structure (Figure 2) in which the most
erarchy of effects models can be viewed as “funnels” basic and compelling needs are physiological—things
into which a large number of customers enter like food, drink, and shelter.8 The next level of needs
whilst a smaller number, usually quite a bit smaller is safety needs—the need for physical safety, eco-
number, come out the “bottom” as the firm’s loyal nomic security, and protection from harm. Social
customer base. needs are the needs to be accepted as part of a family
Understanding where different segments of or group. The top two categories of needs are ego-
customers are in these decision making or hierarchi- driven needs, related to respect and prestige, and
cal flows is invaluable in developing communica- self-actualization. Self-actualization needs involve
tions and distribution strategies. Different tools and learning, spiritual and personal growth, and self ex-
different tactics are more effective at different points pression. The organization of Maslow’s well-known
in this flow of effects. Advertising is effective, for ex- structure indicates prioritization and urgency;
ample, at building awareness but less effective at lower-level needs are more compelling and meeting
moving customers to action (to purchase). On the those needs takes priority over meeting higher-level
other hand, personal selling is effective at “closing the needs.
sale,” that is at moving customers to purchase, but “Needs” can be distinguished from “wants” and
personal selling is less effective at generating aware- other related constructs, including “demands” and
ness. Marketing managers are often focused on cus- “benefits sought.” Needs are basic human require-
tomers at particular stages in the familiarity/liking ments and are universal—all people have needs.
(“customer readiness”) continuum; they may be Wants are needs that have been shaped by the environ-
concerned with building awareness, inducing trial, or ment, including the customer’s culture, personality,
creating loyalty, for example, depending on the strat- and situation as well as by the actions of marketers.
egy and the composition of their markets. For example, everybody gets hungry—it is a proto-
Understanding the consumer-decision-making typical physiological need in Maslow’s framework—
process framework as well as the hierarchy of effects but everybody doesn’t want to meet that need with
framework is essential in organizing consumer-be-
havior theory and is also invaluable to marketing
strategists as they segment markets and develop ef-
fective programs for consumers at different stages in Self-Actualization
the relationship with the product or brand.
Esteem
Stages in the Consumer Decision
Making Process
Social
As noted, when consumers make decisions, they
move through different stages, starting with problem
recognition and information search, evaluating alter- Safety
native, and making the purchase decision. A market-
ing manager is also concerned with understanding Physiological
how customers consume and take value from prod-
ucts as well as in post-purchase processes like cus-
tomer satisfaction, loyalty, or word of mouth. FIGURE 2 Maslow’s Hierarchy of Needs9
136
Kung Pau Chicken. Consumers need food, they want don’t spend much effort on most purchases, and they
Kung Pau Chicken because of their experiences, their spend very little effort on many purchases.
culture, their individual tastes, and the actions of The amount of time a consumer will spend on
marketers (such as advertisements, price promotions, a purchase decision, including information search
service personnel recommendations, menu presenta- and alternative evaluation, is a function of involve-
tion, or even restaurant signage). Demand results ment or motivation and ability. The term “customer
from the combination of wants and the ability of con- involvement” captures the degree of importance and
sumers with those wants to buy the product. Ability is relevance that a consumer places on a product or a
a function of both resources and availability/access; purchase; that is, involvement is the consumer’s
that is, consumer demand isn’t just having the money motivation to pay attention to a product and a pur-
to buy the product, it also requires having the oppor- chase decision. Involvement or motivation is itself a
tunity and access. function of inherent interest (some people are just
Benefits or “benefits sought” are closely related more interested in some products/purchases), risk
to needs and wants. Benefits sought are what the (financial, social, and physical), and practical impor-
consumer desires to get out of or gain from a pur- tance (importance to personal well-being or to a
chase or consumption experience. These are not job). For example, a consumer’s involvement with
product attributes; they’re outcomes of buying and cars might be due to inherent interest in cars, that is,
consuming the product.10 A customer may buy an being a “car enthusiast,” or from an event such as the
electric drill with an 18-volt battery and rubber- birth of a new child and a resulting heightened atten-
cushioned grips, but the benefit he or she seeks is a tion to safety, or from holding a job that requires re-
hole or the ability to drill a hole with ease, conven- liable transportation; any of these motivations would
ience, and/or comfort. Different customers seek dif- lead to greater involvement with cars. A second fac-
ferent benefits from a product category, and “bene- tor, the ability to research and evaluate a purchase,
fits-sought segmentation” is a powerful way to also influences the time and energy spent on it. Some
distinguish groups of customers based on differing consumers, no matter how much they’d like to shop
desires and differing responses to the marketing mix. and deliberate a decision, don’t have the time or the
Problem recognition is generally understood expertise to devote to the decision.
as a form of “gap analysis” related to needs, wants, A few products almost never rise to a high-
and the benefits of the product. Customers recognize involvement status: Almost no one spends much
a need when they recognize, consciously or subcon- time on mundane and repeat purchases such as soda
sciously, that there is a gap between their current state or laundry detergent. Consumers don’t search for ex-
(the way things are) and their desired state (the way ternal information on or reviews of these products,
they’d like to be). That gap can be between needs, and they don’t read labels to compare ingredients;
wants, or benefits in their current state versus desired they rely on habit and, especially, brands to guide
state. their decisions. On the other hand, some product
categories are almost never approached casually;
INFORMATION SEARCH. The idea that consumers choices of college, choices of cars, and home buying
search for information when making a purchase almost always involve high-involvement and deliber-
seems reasonable; in fact, we know it occurs some of ate consideration, including extended search and
the time. The idea that consumers actively search and careful evaluation. This should not be taken to mean
process information is appealing to marketing man- that involvement is determined by product category.
agers because of the amount of time that the man- Although product categories do have typical levels
agers themselves spend thinking about the various of involvement (e.g., very expensive products usu-
attributes and trade-offs that make up their product. ally are associated with extensive decision making);
But the “information search” stage begins to high- there is substantial variance across customers with
light an important aspect of consumer behavior and regard to their involvement depending upon their
of the overall “decision-making process”: consumers personal attributes and the personal situation.
137
TABLE 1 Sources in Consumer Information Search
Sources of Information
Internal External
Memory Interpersonal Public Marketer-Controlled
Customer information search may tap a range more than 70 percent of the purchase decisions are
of sources (Table 1); each type of source has different reported to be made after the shopper has entered the
advantages, disadvantages, and consequent strategic store.11 What is more, many purchases, even big pur-
implications. Customer information search can be chases such as automobiles, are often driven by emo-
limited and it can be constrained to “internal” tions as much as or more than by “rational” processes.
sources, that is, to memory. Because of the over- One fundamental tenet of consumer behavior
whelming amount of information in the modern en- theory is that consumers form “attitudes” toward
vironment and because of growing consumer skepti- products and those attitudes drive behaviors, espe-
cism, it is increasingly difficult to gain consumers’ cially purchase behavior. Attitudes are relatively en-
attention or to earn a place in consumers’ memory. during summaries of whether something is good or
Other sources of information include interpersonal bad, pleasant or unpleasant, and so forth. Consumers
sources—friends, neighbors, and colleagues. hold these evaluations in their heads across time (but
Marketers recognize the importance of inter-con- not forever—attitudes “decay” if consumers aren’t
sumer or “word-of-mouth” communications. Firms reminded of the product or brand). Elaborate mod-
such as Proctor & Gamble are enlisting armies of un- els of attitude formation have been proposed and
paid but well-organized, well-tracked, and well-at- validated. For example, a well-known model of atti-
tended consumers to “spread the word” about their tude formation hypothesizes that people hold beliefs
products. Information search may also include pub- about whether or not a product has certain attributes
lic sources, such as Internet consumer review sites (things like power, comfort, reliability, and high price
and consumer organizations, and “marketer con- in case of a car) and also make evaluations of those
trolled” sources—advertisements, Websites, sales- attributes and about whether the attribute (power,
people, and published materials and manuals. comfort, reliability, price) is a good or bad thing for
Within this categorization, marketer-controlled the product to have (power is likely a good thing;
sources face increasing clutter, diminishing atten- high price is usually bad). A consumer’s attitude is
tion, and growing skepticism. supposed to be a direct mathematical function of
those beliefs and evaluations.
ALTERNATIVE EVALUATION. As with information This model of attitude formation is highly ra-
search, involvement levels and situational factors de- tional and demanding—it assumes that consumers
termine whether consumers will undertake extensive will think and, in fact, think pretty hard about the
and demanding evaluations of purchase alternatives purchase. This is not always true. In many instances
or routine processing that borders on no evaluation consumers respond with a fairly automatic “feeling”
at all. Marketing researchers have proposed elaborate about the product and act on that—with very little
“information processing” models in which con- rigorous thinking or effort. That is, emotional re-
sumers gather information, weigh attributes, and de- sponses to products, brands, and consumption experi-
termine finely grained rankings of alternatives. At ences also have powerful effects on consumer judgments
the same time, research has shown that grocery and behaviors, including purchase, repeat-purchase
shoppers spend, on average, less than six seconds (loyalty), complaints, and recommendations. The
making most purchase decisions; although shoppers two systems, that is, the rational thinking or “cogni-
may bring carefully thought-out lists to the store, tions” and the more visceral and automatic feelings
138
or “emotions,” have been considered as distinct, al- acquiring and consuming the product (includ-
though they interact and influence each other, and ing monetary costs, time, and effort). This is
both are essential in understanding the way that con- the balance of the “get” and the “give” from the
sumers respond to marketing actions. They are customer’s perspective.15 The appraisal of
sometimes thought of as “the head” and “the heart” value may be subjective. For example, some-
or “gut feelings.” In the literature on integrated market- thing that is worth paying for to one consumer
ing communications and advertising, a well-known will be disregarded as unimportant by another.
framework is the FCB Matrix, so named because it was However, along with attitudes, those appraisals
developed at that forerunner advertising agency by of value are essential in understanding con-
Richard Vaughn.12 This framework organizes prod- sumers’ decision making. Perfectly rational
ucts by their typical level of involvement (high and consumers will often pay more to get some-
low involvement) and whether the typical motiva- thing more or accept less in order to save
tion for buying and consuming the product is emo- money. Many rational consumers will opt for
tional (“feeling products”) or rational (“thinking cheaper alternatives that offer the same per-
products”). Frameworks, such as the FCB Matrix, formance (including brand image as a “get”
guide the development of products and the develop- component) or similarly priced alternatives
ment of communications programs to position the that offer better performance. Very few con-
product and persuade consumers to think and feel sumers will knowingly pay more for the same
about the products in desired ways. performance or accept less performance than
Two additional ideas, brands and customer they could have gotten for the same price.
value, are important to understanding how con- Those tradeoffs and choices combine to define
sumers evaluate alternatives: a “value map” or space and to create a balance
in the marketplace, a “fair value frontier” along
• Brands. Customers face an overwhelming which consumers willingly make choices and
array of information and make innumerable tradeoffs (Figure 3). Offerings that are below
decisions, big and small, every day. They can’t
possibly think about all that information or
reevaluate each decision. Therefore, consumers
establish habits and “heuristics.” Heuristics are
High
shortcuts or “rules of thumb” used in decision

making.13 Brands are the most common “rule
of thumb” in the marketplace. Brands tie cur-
rent and future decisions to past experiences
Relative Price
and satisfaction, simplify decision making, and

offer reassurance. Although brands have been
criticized as unnecessary and exploitive,14 they
are useful to customers and provide real value
to customers. From a buyer behavior stand-
point, brands simplify purchase decisions in an
extraordinarily hectic, cluttered, and demand-
Low
ing environment. Brands offer reassurance and

communicate more complex information in Low High
simplified ways. Relative Performance
(Relative Quality)
• Customer Value. We define “value” as the
difference between, or ratio of, the benefits
that the customer gets from a product (and its FIGURE 3 The Value Map: Tradeoffs along the Fair
consumption) compared with all the costs of Value Frontier16
139
the frontier gain market share because they’re expertise of the well-trained and expert service staff,
more attractive to consumers. Offerings and then go home and purchase the product at deep
above the frontier lose market share—they discount online, it puts the full-service specialty
are unattractive and unsustainable. The slope store’s business model at risk, and that reality has
of the frontier reflects price elasticity—how ominous but still uncertain implications for the fu-
much consumers are willing to pay (give) for ture retail landscape.
incremental gains in performance (get); some
frontiers will be relatively flat—a small POST-PURCHASE PROCESSES. Marketers that are
change in price will justify a relatively large interested in creating profitable long-term relation-
shift in performance. ships with their customers need to understand
post-purchase processes as well, for example, how
PURCHASE DECISION. Once the consumer has they consume or use the product, how they form
evaluated the alternatives, he or she must still decide feelings of satisfaction or dissatisfaction, or whether
when to buy and where to buy. That is, the “purchase they engage in word-of-mouth communications
decision” is about time and place, distinct from eval- and why or why not they become loyal. Marketers
uations of alternative products (the “product deci- are increasingly concerned not only with how to
sion”). Interestingly, although marketers spend persuade consumers to purchase their products but
enormous time and resources communicating with also with understanding how customers consume
customers across settings, the time a consumer and take value from those products. For example,
spends on any individual purchase at a grocery store clothing and clothing-care marketers remain con-
is preciously short—three to six seconds—but more cerned with understanding fashion marketing and
than 75 percent of specific product choices are made merchandising, but they are also concerned with
in the store (these statistics are for grocery stores the entire “customer-value chain” from purchase
and fast-moving consumer goods).17 This indicates and multiple wearing occasions and through gar-
that the “point-of-purchase” is an important deci- ment care toward ultimate disposal (see Figure 5).
sion point, but also that those decisions are made Customer value is defined as what the consumer
quickly and with little effort. gets adjusted for what the consumer gives. The
More and more, consumers choose different value-chain framework provides important, more
channels for different parts of a purchase decision or granular insights into how the consumer gets bene-
process, and they move across channels several times fits from a product and where and in what form the
within a single decision process. By this we mean consumer feels the costs, including the financial, ef-
that different “channels of distribution” ranging fort, and time costs of getting those benefits. This
from brick-and-mortar stores, in-home repair serv- framework is an important overlay to the explo-
ices, to toll-free telephone help lines and the ration for and framing of “customer insights.”
Internet can all deliver certain functional values Whirlpool CEO David Whitwam described the ap-
(product information and training, financing, phys- pliance maker’s reasoning for broad scrutiny of its
ical receipt or delivery, installation, user help, etc.). consumers’ value chains:
Consumers can use different channels to do differ-
ent parts of the purchase and to access different We’re now studying consumer behavior
sorts of value; they may, for example, choose one or from the time people take off their dirty
more channels to “shop” and a completely different clothes at night until they’ve been
channel to buy, creating a disincentive for any chan- cleaned and ironed and hung in the
nel to provide high service or, especially, free advice closet. What are we looking for? The
without somehow also generating revenue or cap- worst part of the process is not the
turing the customer’s loyalty.18 For example, when a washing and drying. The hard part is
customer can visit a full-service specialty store (e.g., when you take your clothes out of the
a camera or stereo specialty shop), use the time and dryer and you have to do something
140
Care
Wash
Iron
Dry
Purchase
Disposal
Store
Wear
Wear
Wear
Care
Drop Off
Dry Clean
Pick Up
Lend/Borrow
FIGURE 4 Hypothetical Consumer Value Chain
with them—iron, fold, hang them up. CUSTOMER SATISFACTION. The marketing con-
Whoever comes up with a product to cept asserts that a marketing strategy and in fact the
make this part of the process easier, sim- overarching strategy of the entire firm should be
pler, or quicker is going to create an in- built around serving—or “satisfying” the customer
credible market.19 needs. Satisfying the customer is an essential goal
that should pervade strategic marketing. Extensive
An important strategic consideration, especially theory and observation across decades of research
in regards to innovations and truly “new to the world” have confirmed that firms that satisfy their cus-
products, is the fact that changing consumer behaviors tomers better prosper while those that leave cus-
is extremely difficult. Innovations are often classified tomers dissatisfied fall short; those findings hold
along a continuum from continuous innovations that across consumer goods, services, and business-to-
demand little change in the way customers consume business markets. Customer satisfaction is the cus-
and solve their needs through dynamically continuous tomer’s evaluation (good to bad, pleasant to un-
innovations, all the way to discontinuous innovations, pleasant) of a specific purchase or consumption
innovations that are truly new to the world and that experience. That is, satisfaction is how the customer
require substantial changes in consumption pat- feels about a specific product choice and usage. I
terns.20 It has been shown that, even when innova- may have an attitude toward a certain fast-food
tions have substantial advantages over existing alter- restaurant—I like its chicken sandwich and its
natives, consumers value existing ways of behaving friendly, fast service—but when I visit that restau-
and existing product alternatives over innovations rant on a specific occasion I form a related but dif-
that necessitate changes in behavior and that require ferentiable evaluation of that specific visit (the sand-
abandoning existing, comfortable, and familiar ways wich tasted great and was fresh and hot; the service
of meeting needs. The tendency to stick with proven was excellent; and the server, remembering my last
solutions has been attributed to economic costs of visit, gave me extra mayonnaise).
change (transaction costs, learning costs, and obsoles- Customers evaluate purchases and consump-
cence costs or the sunk costs of equipment tied to ex- tion experiences and arrive at “satisfaction judg-
isting solutions) and psychological costs related to a ments” by comparing what they actually received or
pervasive perceptual bias toward avoiding losses as op- experienced with their subjective standard about
posed to seeking gains. These have been called the “en- what they thought they’d get or felt that they ought
dowment effect” and “status quo bias”—customers to have got. A customer comes to every purchase
are more reluctant to give up what they have than they with some idea about what they think they’ll get. If
are eager to gain new advantages.21 we go to a fine-dining steak restaurant to order a
141
cheeseburger, we expect a certain sort of product behaviors. Research has shown that satisfaction is an
and service; those expectations include what we important intervening variable that drives subse-
think we should pay for the cheeseburger. If we go quent price sensitivity, positive word of mouth, and
to a quick-service restaurant and order a cheese- loyalty. Loyalty itself, the tendency of customers to
burger, we have vastly different expectations. We stay with a company or a brand, has been closely
might come away from a quick-service encounter related to firm profitability, especially when consid-
having got a pretty unremarkable cheeseburger for ered together with customer-lifetime value. Another
less than a dollar, and, nevertheless, be quite strategic consideration is the emphasis on under-
satisfied—it was, after all, less than a dollar. On the standing customer satisfaction and the role it plays in
other hand, we might spend ten times that amount delivering quality products and exceptional service.
on a cheeseburger at the full-service restaurant and
receive a product many times the quality, with much Factors Influencing the Purchase
more flavor and table-side service, and nevertheless Decision Process
come away far less satisfied because our expectations
Customers make purchasing decisions within spe-
were so much higher. This framework has been tested
cific cultural/social, personal/individual, situational
and retested: Customers form judgments of satisfac-
and commercial (marketer influenced) contexts such
tion by comparing what they get to what they thought
as (Figure 5)
they’d get.
This understanding of customer satisfaction • Personal/Individual Factors. Individuals come
creates an interesting tension for marketing strate- to purchase decisions with different personali-
gists, whose first concern is often to attract cus- ties, such as their degree of introversion or
tomers via appealing offerings, which would lead to extraversion, and motivational factors. All of
extolling the virtues and, thereby, building high ex- those factors influence the way they consider
pectations. On the other hand, creating high expec- options, make purchases, and use products.
tations creates challenges—the product has to deliver
against those expectations or risk dissatisfied cus-
tomers. There may be situations when the strategist
Problem
chooses to “under promise and over deliver.”22
Recognition
There are many ways that a marketer can influence
l
ra
In
expectations and enhance resulting satisfaction. It

tu
di
ul
vi
has been shown, for example, that people waiting in Information

/C
du
al
Search
al
line who are given an expected waiting time and

ci
So
then their wait is shorter than that “expectation” are

more satisfied with the experience than other people Evaluation of
who wait the same amount of time who were not Alternatives
told a longer wait time.23 In any case, regardless of
ns
how the expectations are managed, the marketing

tio
Ac
strategist’s challenge is almost always to somehow Purchase

Si
er
tu
exceed expectations.
et
at
rk
io
Ma
There may be many situations in which the

n
Post-Purchase
marketer can’t set modest expectations and then
Processes
exceed them, but there are few situations in which
the marketer would ever want to “over promise.”
That is a recipe for a short-term relationship with
those customers, because customer satisfaction FIGURE 5 Consumer Decision Making in Context
drives a range of important subsequent customer
142
• Cultural and Social Factors. Factors such as centers” and/or with professional purchasing agents
national culture, regional culture, social class, using formal procedures and approved specifica-
and reference groups influence purchase deci- tions. Business-to-business frameworks on buyer
sions, product preferences, and consumption. behavior include distinctions across types of pur-
People from different nations and regions hold chases and across stages in the decision process as
different values, different norms of behavior well as distinctions concerning roles in the purchase
and manners, and different aesthetic prefer- across members of the organization. As is the case
ences and tastes. with consumer behavior described above, many of
• Situational Factors. Many factors are tied these frameworks lend themselves to graphic pre-
more to particular situations than to ongoing sentations that clarify the relationship between
conditions or attributes of the consumer. Time stages in processes.
pressure, resource or information availability,
and immediate environmental factors (such as Stages in the Buying Process
music, odor, colors) all affect purchases and and the Sales Funnel
consumption.
Like consumer decision making described above,
• Marketing Actions. Although all of these
organizational purchase decisions can be broken
aforementioned factors have powerful influ-
out into process models starting at need recognition
ences on consumer decision-making and
and proceeding through formal need definition—
consumption patterns, the marketing strate-
something that is not necessary for consumer deci-
gist will recognize that the factors that influ-
sion makers—and continuing through the specifi-
ence decision making that are under his or
cation of the solution to be sourced, the identification
her most direct control are the marketing
of viable suppliers or vendors for the purchase, the
mix; the product, the promotion and market-
proposal specification and review, and the ultimate
ing communications, the people, the place or
selection of a vendor and then review and feedback
distribution, and the price. These are the
on performance (Figure 6). At the same time, and
“levers” and “dials” under the marketer’s con-
again parallel to the similar hierarchy of effects in
trol that influence the consumer’s purchase
consumer behavior, another process model can be
decisions.
created by organizing customers taken as segments
along a continuum based on their relationship with
the firm and its offerings. In business-to-business
ORGANIZATIONAL BUYING markets that process is usually called the “sales fun-
nel.”24
In comparison to consumer markets, business mar-
kets are characterized by having fewer buyers and
The Personal Selling Process
fewer transactions (but far larger transactions in
dollar-value and quantity of goods per transaction). Organizational buyers are generally targeted with
Business-to-business segments are easier to address “push” communications strategies, that is, strategies
(catalogue and target with customized communica- designed to create demand at the next level in the
tions). Other differences between consumer and channel of distribution relying heavily on personal
business-to-business markets emphasize the differ- selling and inter-firm partnering. Because of that re-
ences in the way purchase decisions are made. liance on sales, a third process model also offers per-
Consumers, who as a rule make purchases as indi- spective on business-to-business buyer behavior: the
viduals, may use limited problem solving and rely “Personal Selling Process.” That framework organ-
on emotional responses in many situations; busi- izes the various steps that the sales force can take,
nesses are generally more thorough and more ana- from prospecting, to assessing fit, gaining the initial
lytic, and often make purchases with teams or “buy order (“approach” and “closing”) on to “fulfilling
143
Organizational Buyer
Decision Process
Need Recognition
Need Definition
Product/Solution
Specification
Sales Funnel
Supplier
Total Market
Identification/Search
Unqualified
Proposal Solicitation
Opportunities (Leads)
Proposal Evalution and Qualified Lead

Selection of Suppliers (Suspects)
Selection of an Order
Prospects
Routine
Performance Feedback
Closed Customers
and Evalution
FIGURE 6 Organizational Purchase Decision Process and the Sales Funnel25
the initial order” to “delivering value” or “partner- the “Personal Selling Process”; these are the things
ing” (Figure 7).26 that the salesperson, sales team, or company can do
To review and clarify these distinctions and to gain new business and to turn those accounts into
very similar frameworks, the buying organization loyal customers (Figure 7).
moves through a series of decision stages or steps
that are summarized in the Organizational Purchase
Types of Purchases
Decision Process (Figure 7). Those buying organiza-
tions themselves can be characterized by their rela- Organizations are, generally, more involved in every
tionship with the selling organization, from leads to purchase decision than are individual consumers. In
suspects to prospects to customers within the Sales contrast to consumers, in organizational buying it is
Funnel (Figure 7). It is important to note that, in the usually somebody’s job to make the purchase, and
Sales Funnel, it is the various accounts (potential companies have accounting regulations and report-
buying organizations) that are categorized within the ing obligations that require specific and explicit
levels of the funnel. At the same time, the various purchasing policies and procedures. Nevertheless,
steps that the selling organization can take to move organizational buyers certainly devote varying de-
buyers from leads to customers are organized within grees of attention and resources to different sorts of
144
Sales Personal Selling for high cost/high risk purchases, organizations are
Process likely to engage in all of the many steps in the pur-
chase process with a great deal of attention. In
Prospecting
straight rebuys, cases in which the firm buys the
same item in the same quantities from the same ven-
dor, only the essential steps are required. For modi-
Assessing Fit fied rebuys, cases in which some element of the pur-
chase changes (product form, quantity, or vendor),
many of those steps may be reduced or even elimi-
Gaining the Initial Order nated. As shown in Figure 8, the types of purchases
and the steps in the purchase process can be joined to
create the “Buygrid” framework, which shows that,
Fulfilling the Initial Order generally, need recognition is necessary to prompt
any purchase, even if it is as predictable as noticing
that the copier paper supply is low or as routine as
“every Monday we order a new supply of paper.”
Delivering Value
Similarly, the selection of a product specification and
order routine are required, even if they are the rou-
FIGURE 7 The Personal Selling Process27 tine and automatic reorder. The other steps in the or-
ganizational purchase process are included as the
newness and importance of the purchase increase.
purchases. One of the best known representations of
the different sorts of organizational purchases is the
Buy Centers
distinction between straight rebuys, modified re-
buys, and new tasks. For new tasks, that is, for pur- Another perspective on organizational buying is to
chases that have not been made before, and especially understand that, unlike consumer markets, buying
Modified Straight
New Task
Rebuy Rebuy
Need Recognition
Need Definition
Product/Solution Specification
Buy Phases
Supplier Identification/Search
Proposal Solicitation
Proposal Evaluation and Selection of

Suppliers
Selection of an Order Routine
Performance Feedback and Evaluation
FIGURE 8 The Buygrid Framework
145
decisions in organizations are most often made by Gatekeeper. Controls the flow of infor-
teams of people. Some buying teams are formal and mation within the team and
some are informal and emergent. Different people access to the team from
play different roles on those teams, and the roles outside.
themselves can be formalized or left informal and User. The person within the firm
may be made explicit or left implicit. These teams who will actually use the prod-
have been labeled “buy centers,” and several categories uct once it is purchased.
of roles have been identified in the literature, includ-
ing initiators, users, deciders, buyers, influencers, and THE “PURCHASING AGENT MINDSET.” An in-
gatekeepers (Figure 9). Sometimes the same person teresting distinction is between users and “purchas-
will perform more than one of these roles, more than ing agents.” A purchasing agent is employed to
one person can play any given role (e.g., there can be “buy” and to process purchase decisions and orders.
multiple influencers), and sometimes certain roles The agent is, therefore, keenly aware of buying pro-
will not be played in a given purchase: cedures and criteria. He or she may be highly
trained in negotiations and the logistics of fulfill-
Initiator. The person in the organization
ment. In general, purchasing agents tend to be
who recognizes the need or
process focused over outcome focused, not easily
conceives of the purchase.
convinced to abrogate “procedure” to achieve more
Influencer. The person whose expertise or
desirable ends, and a purchasing agent tends to be
opinion affects the purchase.
price conscious; often the agent is evaluated in part
Decider. The ultimate decision maker;
or even predominantly on savings achieved in the
has the authority to make the
procurement process. After price, delivery and in-
purchase decision.
ventory replenishment tend to dominate purchas-
Buyer. The person who executes the
ing agents’ judgments. That mindset is noticeably
transaction.
different than that of users and initiators, whose
focus may well be on performance and quality, and
who may view price and procurement logistics as
“necessary details.”
In the buy center framework, a purchasing
agent can play any role or several roles—or may
Initiators Gatekeepers not be involved in a decision at all. Generally, a
purchasing agent, if involved, would play the role
of the buyer. He or she might also be the gatekeeper
and an influencer via the performance of tasks, in-
cluding need definition, product/solution specifi-
Buy cation, and vendor identification steps. Although
Influencers Center Buyers
those steps may seem procedural, they can have
enormous influences on the ultimate decision.
Strategically, it is valuable to investigate the role
that purchasing agents or “the purchasing agent
mentality” will play in the target organizations’ de-
Users Deciders
cisions. It is reasonable to segment organizational
markets by purchasing process, buy center configu-
rations and dynamics, and the role of purchasing
agents in order to adapt and refine the selling
process, and the composition of the offering and
FIGURE 9 The Buy Center Framework28 sales communications.
146
Organizational Buyer Behavior a salaried, solutions-focused function. That solu-

and Personal Selling tions focus puts the salesperson in the role of a con-
sultant as much as vendor and holds that sales ac-
Personal selling is the fifth P (for “people”) in the
counts are the firms “partners”; success is seen as
marketing mix. A couple of the important trends in
long-term relationships with customers for whom
personal selling connect with organizational buying
the firm can deliver real value in the form of solu-
behavior: Personal selling has gone from a transac-
tions and expertise.
tion- and commission-focused activity toward being
Summary
Understanding consumer and organizational-buyer behav- spend on information search, alternative evaluation, shop-
ior is a foundation for developing effective strategies and ping, and purchase. In business-to-business markets, pur-
valued offerings. This note has presented a concise summary chases are differentiated as straight rebuys, modified rebuys,
and outline of the extant knowledge that has emerged from and new tasks, and the type of purchase drives the amount
decades of academic research focused on consumer and of time and energy the organization will devote to the pur-
business buyers, their decision processes, and their behav- chase. In other regards the two types of buyers are quite dif-
iors. There are parallels between the two sets of buyers and ferent, and models have been developed to explain both.
the models that attempt to clarify their decision making. For This note has taken a strategic and applied perspective on
example, an important factor is the degree of effort that the these ideas and has been limited by space and by the purpose
buyer puts into the purchase decision. In consumer markets of this text. There are many good and comprehensive text-
that is often summarized as “consumer involvement,” and it books and managerial trade books available that elaborate
influences the amount of time and effort the consumer will on and extend these important ideas.
Rogers, Everett. The Diffusion of Innovations. 4th ed., New Solomon, Michael R. Truth About What Customers Want.
York: Free Press, 1995. Upper Saddle River, NJ: FT Press, 2009.
Moore, Geoffrey A. Crossing the Chasm. Revised ed. New Tanner, Jeff, Earl D. Honeycutt, and Robert C. Erffmeyer.
York: Harper Perennial. Sales Management: Shaping Future Sales Leaders. Upper
Schiffman, Leon, and Leslie Kanuk. Consumer Behavior, 10th Saddle River, NJ, Pearson/Prentice Hall, 2009.
Ed, Upper Saddle River, NJ; Pearson/Prentice Hall, 2010.
Endnotes
1. See, for example, Leon G. Schiffman and Leslie International Journal of Advertising 9 (1990): 121–135;
Lazar Kanuk, Consumer Behavior, 10th ed. (Upper and Robert J. Lavidge and Gary A. Steiner,“A Model for
Saddle River, NJ: Prentice Hall, 2010); and Michael Predictive Measurements of Advertising Effectiveness,”
R. Solomon, Consumer Behavior: Buying, Having, Journal of Marketing 25 (1961): 59–62. Demetrios
and Being, 9th ed. (Upper Saddle River, NJ: Prentice Vakratsas and Tim Ambler, “How Advertising Works:
Hall, 2011). What Do We Really Know?” Journal of Marketing 63
2. John A. Howard and Jagdish N. Sheth, The Theory of (January 1999): 26–43.
Buyer Behavior (New York: Wiley, 1969). 5. The AIDA hierarchy is attributed to E. St. Elmo
3. This basic framework is ubiquitous to contempo- Lewis 1898, see Strong, Edward K., Jr., “Theories of
rary consumer behavior textbooks; see, for example, Selling,” Journal of Applied Psychology, 9 (February
Schiffman and Kanuk, Consumer Behavior; and 1925): 75–86 (page 76); and Vakratsas and Ambler,
Solomon, Consumer Behavior. “How Advertising Works.”
4. See Thomas E. Barry and Daniel J. Howard, “A Review 6. See Thomas E. Barry and Daniel J. Howard, “A
and Critique of the Hierarchy of Effects in Advertising,” Review and Critique of the Hierarchy of Effects in
147
Advertising,” International Journal of Advertising 9 18. Jeffrey Grau, Multi-channel Shopping: The Rise of
(1990): 121–135; and, for a more recent compilations the Retail Chains, E-Marketer Report (March 2006),
of perspectives, Vijay Mahajan, Eitan Muller, and www.emarketer.com/Reports/All/Multichannel_mar06
Yoram Wind, eds., New-Product Diffusion Models .aspx. Last accessed June 18, 2010.
(New York: Springer Science+Business Media, 2000). 19. Regina Fazio Maruca, “The Right Way to Go Global:
7. See Everett Rogers, The Diffusion of Innovations, 4th An Interview with Whirlpool CEO David
ed. (New York: Free Press, 1995) and Thomas S. Whitwam,” Harvard Business Review 72, no. 2
Robertson, “The Process of Innovation and the (March 1994): 134–145; quoted from page 143.
Diffusion of Innovation,” Journal of Marketing 31, 20. See Everett Rogers, The Diffusion of Innovations, 4th
no. 1 (January 1967): 14–19. ed. (New York: Free Press, 1995); and Thomas S.
8. See Abraham H. Maslow, “A Theory of Human Robertson, “The Process of Innovation and the
Motivation,” Psychological Review 50, no. 4 (1943): Diffusion of Innovation,” Journal of Marketing 31,
370–396; and Abraham H. Maslow, Motivation and no. 1 (January 1967): 14–19.
Personality (New York: Harper & Row, 1954). 21. See John T. Gourville, “Eager Sellers & Stony Buyers:
9. See Maslow, “A Theory of Human Motivation”; and Understanding the Psychology of New-product
Maslow Motivation and Personality. Adoption,” Harvard Business Review 84, no. 6 (June
10. Russell. I Haley, “Benefit Segmentation: A Decision- 2006): 98–106.
oriented Research Tool,” Journal of Marketing 32, no. 22. Tom Peters, Thriving on Chaos: Handbook for a
3 (July 1968): 30–3; 1 and Russell. I Haley, “Benefit Management Revolution (New York: Alfred A.
Segments: Backwards and Forwards,” Journal of Knopf, 1987): 96–98.
Advertising Research 24, no. 1 (February–March, 23. Regarding expectations and satisfaction with time
1984); 19–25. in lines, see Piyush Kumar, Manohar U. Kalwani,
11. The Economist, 2005; Liljenwall, 2004 and Maqbool Dada, “The Impact of Waiting Time
12. See Richard Vaughn, “How Advertising Works: A Guarantees on Customer’s Waiting Experiences,”
Planning Model ... Putting It All Together,” Journal Marketing Science 16, no. 4 (1997): 295–314.
of Advertising Research 20, no. 5 (1980): 27–33 and 24. D. J. Dalrymple, W. L. Cron, and T. E. DeCarlo, Sales
Richard Vaughn, “How Advertising Works: A plan- Management (Hoboken, NJ: John Wiley & Sons 2004).
ning model revisited,” Journal of Advertising 25. See Patrick J. Robinson, Charles W. Faris, and Yoram
Research 26, no. 1 (1986): 57–66. Wind, Industrial Buying and Creative Marketing
13. Gerd Gigerenzer, Peter M. Todd, and the ABC (Boston, MA: Allyn & Bacon, 1967); and Dalrymple,
Research Group, Simple Heuristics That Make Us Cron, and DeCarlo, Sales Management.
Smart (Oxford, UK: Oxford University Press, 1999). 26. Rosann L. Spiro, William D. Perreault Jr., and Fred D.
14. See Naomi Klein, No Logo: Taking Aim at the Brand Reynolds, “The Personal Selling Process: A Critical
Bullies (New York: Picador, 1999); cf., Johan Review and Model,” Industrial Marketing Management
Norberg, In Defense of Global Capitalism 5, no. 6 (December 1976): 351–363; and James C.
(Washington, DC: Cato Institute, 2003). Anderson, James A. Narus, and Das Narayandas
15. See for example, Bradley T. Gale, Managing Customer (2009), Business Market Management: Understanding,
Value, (New York: Free Press 1994); Robert B. Creating, and Delivering Value, 3rd ed. (Upper Saddle
Woodruff , “Customer value: The Next Source for River, NJ: Pearson Prentice Hall), especially Chapter 8.
Competitive Advantage,” Journal of the Academy of 27. Ibid.; and Anderson; Narus; Narayandas, especially
Marketing Science 25, no. 2 (Spring 1997): 139–153; Table 8-1, page 330.
Valarie A. Zeithaml, “Consumer Perceptions of Price, 28. See Donald W. Jackson, Janet E. Keith, and Richard K.
Quality, and Value: A Means-end Model and Synthesis Burdick,“Purchasing Agents’ Perceptions of Industrial
of Evidence,” Journal of Marketing 52 (July 1988): 2–22. Buying Center Influence: A Situational Approach,”
16. Bradley T. Gale, Managing Customer Value (New Journal of Marketing 48 (Fall 1984): 75–83. Wesley J.
York: Free Press, 1994). Johnston and Thomas V. Bonoma,“The Buyer Center:
17. See Lars Thomassen, Keith Lincoln, and Anthony Structure and Interaction Patterns,” Journal of
Aconis, Retailization: Brand Survival in the Age of Marketing 45 (Summer 1981): 143–156.
Retailer Power (Philadelphia: Kogan Page, 2006).
148
Competitor Analysis—
Competitive Intelligence
In “The Art of War,” one of the oldest and most successful books on military strategy,
Chinese general Sun Tzu wrote: “If you know your enemy and know yourself, you need
not fear the result of a hundred battles. If you know yourself but not the enemy, for
every victory gained you will also suffer a defeat. If you know neither the enemy nor
yourself, you will succumb in every battle.”1 Knowing the objectives, strategies, tactics,
strengths, and weaknesses of the competitor is vital. For example, if you are Microsoft,
producer of the market-dominating Web browser (Internet Explorer), you want to pay
very close attention to what Google is doing with the development of its Chrome
browser; Chrome represents an overt attack on Windows. If you are Google, you should
be concerned with Microsoft’s retaliatory response, Bing, produced in collaboration
with Yahoo and intended to compete directly with Google’s market-dominating search
engine. Understanding the competition is vital to anticipating market actions and to
constructing appropriate strategies and plans to succeed against those actions. A com-
prehensive competitor analysis includes the following four areas:
1. Long-term objectives and motivations of the competitor;
2. Strengths and weaknesses;
3. Strategies; and
4. Marketing tactics.
LONG-TERM OBJECTIVES AND MOTIVATIONS

OF THE COMPETITOR
How competitors act and react in a market largely depends on their strategic objectives
and on their motivations to engage in a business. Therefore, the first step of a competi-
tor analysis should be the investigation of the long-term objectives. The objectives not
only determine the strategy and likely tactical moves, but from them you can also de-
rive what the motivations of your competitor are in a specific business or market. For
example, if a market or segment is seen as the core business of a competitor, it will de-
fend it with all possible means. If the strategic goal of a company is double-digit growth
every year; and, if the company’s strategic objective is to be among the top three players
in terms of market share, then a business unit of that company that is in a low-growth
market with a small market share will not receive much attention and resources, and
149
Competitor Analysis—Competitive Intelligence
can be more easily attacked. To identify the long- constant-sum scale is used: 100 points are
term objectives and motivations of a competitor, the divided among the success factors according
following sources can be examined: to their importance; the higher the impor-
tance, the more points are assigned;
• Vision and mission statements;
• Third, the competitor is rated on each success
• Annual reports;
factor (e.g., using a 5-point scale, where 5 is ex-
• Press releases;
cellent and 1 is very poor). Also rate your com-
• Analyst reports; and
pany on each success factor; and
• Presentations and speeches of executives.
• Fourth, multiply the rating by the importance
weight. The importance weight indicates the
relative advantage or disadvantage.
STRENGTHS AND WEAKNESSES Figure 1 is an example. In the first column, the suc-
The second step of a competitor analysis consists of cess factors in a particular industry are listed. The
the assessment of strengths and weaknesses. This second column contains their importance. The per-
analysis helps you to (1) predict competitor’s actions formance of our company (We) and the competitor
and initiatives—as they probably want to eliminate (Competitor A) is rated on a 5-point scale. Two
their weak points and to emphasize on their advan- weighted scores are computed: one for the competi-
tages and (2) to identify points of difference to posi- tor, and one for our company. The summed weighted
tion your products and services. The analysis consists scores indicate the overall performance of the two
of four steps: companies.
The best way to perform this analysis is by
• First, success factors in a market have to be de- combining several sources of information, such as:
termined;
• Second, the success factors are weighted ac- • Customer surveys (e.g., Assess brand image,
cording to their importance. Usually the service, product quality);
Performance Weighted Score

Critical Success Weight
Factors 1 2 3 4 5 We Comp. A
Brand Image 5 10 15
Product Innovation 10 20 30
Service 20 60 100
Extensive Distribution 15 30 60
Economies of Scale 30 60 90
Logistics 20 60 100
Sum 240 395
We
Competitor A
FIGURE 1 Strengths and Weakness Analysis
150
• Sales force meetings (e.g., Sales people have most likely strategic moves (growth, divest-
close contact with the customers and are con- ment, etc.) And, based on the positioning of
fronted every day with competitors’ offerings, the business units or products, you will be able
their strengths and weaknesses during sales ne- to tell how balanced your competitor’s portfo-
gotiations); lio is, in terms of cash flow and risk. Will your
• Analyst reports; and competitor have enough “cash cows” to gener-
• Discussions with shared suppliers, distribu- ate financial resources for a growth strategy?
tors, etc. Will your competitor have to invest in product
development, as it has not enough “stars” in its
It is advisable to do this analysis as teamwork with portfolio? And so forth.
experts from several functional areas that have com- • Customer Value Analysis: If you create a cus-
petitor knowledge. tomer value analysis, try to look at the posi-
tioning of the products from your competitor’s
point of view! How satisfied will it be with its
positioning? Will it have to increase quality, or
STRATEGIES
to lower prices?
The next step, the analysis of the competitor’s strate- • Growth Strategy: Try also to find out what the
gies, may be the most difficult. Ideally, you can use focus of your competitor’s growth strategy is:
the data you have generated for your own portfolio market penetration, product development,
analysis, customer value analysis, and so on, to create market development, or diversification.
the strategy profile of your competitor. The strategy • Marketing Approach: Is your competitor’s
profile illustrates the strategic priorities and com- marketing approach undifferentiated or differ-
pares them with your own company. So, you can entiated marketing? What are the target seg-
identify the areas of strategic overlap (i.e., where you ments of your competitor?
follow the same strategy) and areas of difference. As • Offensive Strategy: What is the most likely
you can also assume that your competitor uses the “attacking” strategy of your competitor?
most essential tools for strategy formulation, you can • Defensive Strategy: What is the most likely
try to decipher its strategic intent by looking through response to your strategic and tactical moves?
the lens of the competitor when you analyze the data.
When, for example, the strategist creates a strength After having analyzed these strategy dimensions,
and weakness analysis, the question is: What would I you can create the strategy profile of your com-
do, if I were competitor A? A comprehensive strategy petitor, and compare it to your company (see
assessment leads to a strategy profile containing the Figure 2). Sources of competitor data for this
following analyses: analysis can be:
• Portfolio analysis: Portfolio analyses organize • Vision and mission statements,

a given firms’ products or “strategic business • Annual reports,
units” (SBUs) according to the attractiveness of • Press releases,
the market they serve and their strength in that • Newspaper articles,
market; the resulting categorization prioritizes • Analyst reports,
the products/SBUs and directs investment (or • Trade shows,
withdrawal of support) across the various • Fairs,
products. It is useful to understand how the • Sales force meetings,
competition prioritizes its products/SBUs for • Ex-employees,
investment and other efforts. Therefore, it is • Shared suppliers,
useful to create a portfolio analysis of your • Shared customers, and
competitor. It will give you insights into its • Shared distributors.
151
Level of Analysis Analytical Tool Strategic Options

(Note)
Investment Portfolio
Decisions Analysis Invest to Grow Invest to Keep Harvest Liquidate or Divest
in SBU Position
Growth Strategy Ansoff Matrix

Market Penetration Product Development Market development Diversification
of SBU
Competitive Value Frontier
Strategy Superior Customer Value Premium Economy Inferior Customer
of SBU (Differentiation) (Differentiation) (Cost Leadership) Value
Approach to Specific
Internationalization Marketing International Multinational Global Transnational
Strategies
Specific
International Market
Marketing Export Licensing Franchising Joint Venture Direct
Entry Strategy
Strategies Investment
Specific
Timing Marketing First-mover Follower
Strategies
Segmentation
Marketing Undifferentiated Selected Segment Product Full Market
Targeting
Approach Marketing Specialization Specialization Specialization Coverage
Specific
Offensive Strategy Marketing Frontal Attack Flanking Encirclement Bypass Guerilla
Strategies
Specific
Defensive Strategy Marketing Position Mobile Preemptive Flank Counter- Strategic
Strategies Positioning Offensive Withdrawal
Competitor
We
FIGURE 2 Competitor Strategy Profile
MARKETING TACTICS • Promotions;

The final part of the competitor analysis consists of • Sales force meetings;
the assessment of the individual marketing deci- • Trade shows;
sions. They relate to positioning, product and brand • Fairs;
decisions, pricing, distribution and sales manage- • Shared customers; and
ment, and communication. Where the previous • Shared distributors.
analyses should help you to predict what the com-
petitor’s moves most likely are, in this step you assess
what the competitors actually do. Sources can be:
• Price lists;
• Advertising campaigns;
Summary
A competitor analysis can be compared to a jigsaw puzzle. possible in a noisy, chaotic context will nevertheless reveal
Each individual piece of data may be meaningless, and important information about the competition and the fu-
some pieces may be out of place, but accumulating all of ture of the marketplace. The challenge is to collect as many
the available data and organizing those data as nicely as of the pieces as possible, to assemble them correctly, and to
152
create an overall picture of the competitor. The objective tactics. The broad structure and basic tools outlined in this
should be to clarify the competitions’ long-term objectives note will enhance those efforts.
and motivations, strengths and weaknesses, strategies, and
Armstrong, Scott, and Kesten C. Green. “Competitor- Lehmann, Donald R., and Russell S. Winer. Analysis for
Oriented Objectives: The Myth of Market Share.” Marketing Planning. New York: McGraw-Hill, 2008; es-
International Journal of Business 12, no.1 pecially Chapter 2—Defining the Competitive Set and
(2007):117–136. Chapter 4 - Competitor Analysis.
Champy, Jim. Outsmart!: How to Do What Your Ohmae, Kenichi. The Next Global Stage: Challenges and
Competitors Can’t. Upper Saddle River, NJ: FT Press, Opportunities in Our Borderless World. Upper Saddle
2008. River, NJ: FT Press, 2010.
Endnote
1. Sun Tzu, The Art of War, Special Edition, trans.
Lionel Giles (El Paso, TX: EL Paso Norte Press,
2005) 13.
153
154
Missions and Visions
155
Missions and Visions
“McDonald’s vision is to be the world’s best quick-service restaurant expe-
rience. Being the best means providing outstanding quality, service, cleanli-
ness, and value, so that we make every customer in every restaurant smile.”1
“At IBM, we strive to lead in the invention, development, and manu-
facture of the industry’s most advanced information technologies, includ-
ing computer systems, software, storage systems, and microelectronics. We
translate these advanced technologies into value for our customers through
our professional solutions, services and consulting businesses worldwide.”2
“Google’s mission is to organize the world’s information and make it
universally accessible and useful.”3
“Wal-Mart’s mission is to help people save money so they can live
better.”4
H&M describes its mission as “Fashion and quality at the best price.”5
Most successful organizations are driven by a commonly shared and inspiring vision
such as the examples above. Without such guidance, it is easy to lose direction and pur-
pose. It is rare to find a successful company today that does not have such vision.
Decentralized companies that delegate decisions to business units, from business units
to departments, and from departments down the line, will suffer if common long-term
direction and goals are lacking. How can companies decentralize and increase respon-
siveness to new challenges, and at the same time have coordinated efforts, making sure
that people in the far reaches of an organization know where it is heading? The devel-
opment of a shared vision with a definition of the company’s purpose, values, and long-
term, visionary goals is an important response to this problem6.
A strategy—in its broadest sense—is concerned with planning how a company
will achieve its goals. There are three levels of strategies: corporate-level strategies, busi-
ness unit strategies, and functional strategies (e.g., marketing, R&D, human resource,
production). Having a clear vision and carefully crafted, sound strategies is one of the
key success factors in a highly competitive environment.
VISION AND MISSION

The French writer Antoine de Saint-Exupéry once wrote: “If you want to build a ship,
don’t drum up the men to gather wood, divide the work, and give orders. Instead, teach
them to yearn for the vast and endless sea.”7 This famous quote perfectly describes what
156
Company Assessment—Missions and Visions
a company’s vision should do: It should organize and Examples (look at the Web pages of these com-
channel people’s energy toward a direction to go. It panies for a closer description):
communicates sense, and helps to actualize values,
SOS Children’s villages
appealing to someone’s heart and mind.8
A vision and mission statement should contain:9 (www.sos-childrensvillages.org/Publications/
Documents/_26J1-afJ_10A93C.pdf)
• The core purpose of the company,
• Courage: We take action
• The core values of the company,
• Commitment: We keep our promises
• The visionary goal, and
• Trust: We believe in each other
• A vivid description of the envisioned future.
• Accountability: We are reliable partners
IKEA (http://franchisor.ikea.com/)
Core purpose
• Togetherness
The core purpose of the company gives answers to • Cost-consciousness
questions like: What is the company for? What is the • Respect
raison d’être of the company? Why should managers • Simplicity
and employees put all their energy into the company
and do more than the minimum required?10 The Body Shop (www.thebodyshop.com/_en/
The core purpose quickly and clearly conveys _ww/index.aspx)
why the company exists; it is particularly motivating • Activate self-esteem
and inspiring if it is aimed at a higher ideal. It should • Against animal testing
be broad, fundamental, and enduring. • Protect our planet
Examples: • Support community trade
• “We shall simplify the everyday activities of • Defend human rights
parents and children, making the most impor- The core purpose and the values form the core
tant years of life even more enjoyable” (Baby ideology of the company that “provides the glue that
Bjorn, a Swedish baby products company). holds an organization together through time.”12
• “We build families for children in need. We help Together, they preserve the authentic core of the
them shape their own futures. We share in the company. However, a company can only sustain in
development of their communities” (SOS the long run if it evolves. Therefore, the second ele-
Children’s villages, an international nongovernment of a vision and mission statement is concerned
mental social-development organization). with progress and development. It describes the en-
• “To experience the emotion of competition, visioned future with a visionary goal, and a vivid de-
winning, and crushing competitors” (Nike). scription of what it will be like when the goal has
been achieved.
Core Values
Visionary Goal
Core values are those beliefs and moral principles
that shape the company’s cultures and guide em- The visionary goal is a clear and compelling, tangible
ployee’s behavior. They define what a company and inspiring goal with a—at least virtual—finish
stands for, how business should be conducted, and line. It is challenging and ambitious enough that rea-
what is to be held inviolate. As Anita Roddick, son says “this is impossible” and intuition says “we
founder of The Body Shop, puts it: “If business can do it nevertheless.”13 It should be set high
comes with no moral sympathy or honourable code enough that people are motivated to put the maxi-
of behaviours, then God help us all.” As a small set of mum effort to achieve it and do more than a required
three to five timeless principles that have intrinsic minimum, and it should be set low enough that peo-
value, core values need no external justification.11 ple see a realistic chance that it can be reached. The
157
visionary goal should be so inspiring that people say • Profit: Maximize long-term return to
“It’s worth the effort; I want to be a part of it!” shareowners while being mindful of our
Examples: overall responsibilities.
• “Every child belongs to a family and grows with • Productivity: Be a highly effective, lean and
love, respect and security.” (SOS Children’s fast-moving organization.15
villages) Together, the visionary goal and the vivid prescrip-
• “Yomaha wo tsubusu! (We will crush, squash, tion form that part of the vision and mission state-
and slaughter Yamaha).” (Honda) ment that stimulates and ensures progress.
• “To have any book ever printed, in any lan-
guage, all available in under 60 seconds.” Criteria to Assess the Vision and Mission
(Amazon Kindle)
• “To organize the world’s information and make The following criteria can be used to assess the com-
it universally accessible and useful.” (Google) pany’s vision and mission:
Vivid Descriptions
• Is the core purpose clear and compelling?
• Does the core purpose capture the heart and
In order to make the company’s vision and mission ac- the soul of the organization?
cessible to all employees, it should be translated to • Is it motivating and aiming at a higher ideal?
vivid pictures and words that describe the envisioned • Is it broad, fundamental, and enduring?
future in a way that captures the heart and soul of peo- • Are the values authentic and honorable?
ple. It must be authentic, passionate, and convincing.14 • Are they timeless and able to guide behavior?
For example, from Coca Cola: • Do executives and employees live up to the
values?
Our Mission Our Roadmap starts with our
mission, which is enduring. It declares our pur-
• Do executives and employees accept and de-
fend the values?
pose as a company and serves as the standard
against which we weigh our actions and decisions.
• Is the visionary goal long-term, inspiring, and
challenging?
• To refresh the world . . . • Does the visionary goal inspire people?
• To inspire moments of optimism and • Do the vivid descriptions passionately convey
happiness . . . the envisioned future?
• To create value and make a difference.
Our Vision Our vision serves as the frame- CORPORATE STRATEGY
work for our Roadmap and guides every aspect
of our business by describing what we need to In a multi-business company, strategic management
accomplish in order to continue achieving sus- encompasses four major tasks at the corporate
tainable, quality growth. level:16
• People: Be a great place to work where peo- 1. Providing a clear overall vision for the single
ple are inspired to be the best they can be. business units, exercising guidance and control
• Portfolio: Bring to the world a portfolio of over the individual businesses;
quality beverage brands that anticipate and 2. Allocating resources to the single business
satisfy people’s desires and needs. units, thus managing the portfolio in a way
• Partners: Nurture a winning network of that cash flow and risks are balanced, and sus-
customers and suppliers, together we create tainable long-term growth is achieved;
mutual, enduring value. 3. Managing linkages among the business units
• Planet: Be a responsible citizen that makes and exploiting synergies; and
a difference by helping build and support 4. Developing central competences and providing
sustainable communities. services and resources to the business units.
158
Hence, the following criteria are helpful to evaluate 3. The needs the firm will meet (What?);
the corporate strategy: 4. The means the firm will employ (How?);
5. The business model that supports profitability
1. Does the corporate headquarters have a clear
(Why?);
overall vision or “strategic intent” for its
6. The speed and sequences of actions (When?).
business units?
2. Is the portfolio of business units balanced in Each strategy is based on a thorough internal and
terms of cash flow and risk? external analysis, and should withstand the follow-
3. Does the portfolio assure sustainable long- ing test:17
term development and growth?
1. Is the strategy aligned to the vision, mission,
4. Are synergies among the business units exploited?
and corporate strategy?
5. Does the headquarters develop core compe-
2. Are the 5Ws and 1H clearly addressed?
tences, and does it provide valuable services
3. Does the strategy exploit opportunities in the
and resources to the business units?
market?
4. Is the strategy aligned with the key success fac-
BUSINESS LEVEL AND MARKETING tors in the market?
STRATEGY 5. Is the strategy built on core competences and
strengths?
The business level and marketing strategy describe 6. Are the differentiators sustainable?
how a business unit competes within a market, how 7. Are the 5Ws and 1H internally consistent?
it creates competitive advantages, and how it 8. Does the company have enough resources to
achieves its goals. A comprehensive business level pursue and implement the strategy?
and marketing strategy defines:
1. The customers the business will serve (Who?);
2. The geographic markets the business will serve
(Where?);
Summary
Companies need to establish a framework to guide the or- Then, the sections on corporate strategy and individual
ganization. Guidance consists of the company’s vision for business unit and marketing strategy spell out how the vi-
its future and a mission statement that defines what it is sion and mission will be achieved, and how the core values
doing. This chapter has provided many examples of both. of the organization shape company actions.
Campbell, Andrew, and Sally Yeung. “Creating a sense of ———. “Organizational Vision and Visionary
mission.“ Long Range Planning 24, no. 4 (1991):10–20. Organizations.” California Management Review (Fall
Collins, James C., and Jerry I. Porras. “Building Your 1991): 30–52.
Company’s Vision.” Harvard Business Review
(September–October, 1996): 65–77.
Endnotes
1. www.aboutmcdonalds.com/etc/medialib/aboutMc- 2. www.company-statements-slogans.info/list-of-
Donalds/investors.Par.42274.File.dat/2001_Annual_ companies-i/ibm-international-business-machines.
Report.pdf. Last accessed on June 23, 2010. htm. Last accessed on June 23, 2010.
159
3. www.google.com/corporate/facts.html. Last accessed 11. Collins and Porras, “Building your Company’s
on June 23, 2010. Vision.”
4. www.businessweek.com/the_thread/brandnewday/ 12. Collins and Porras, “Building Your Company’s
archives/2007/09/walmart_is_out.html. Last ac- Vision.”
cessed on June 23, 2010. 13. Collin and Porras, “Organizational Vision and
5. www.e-pages.dk/hm/12/. Last accessed on June 23, Visionary Organizations.”
2010. 14. Collins and Porras, “Building Your Company’s
6. James C. Collin and Jerry I. Porras, “Organizational Vision.”
Vision and Visionary Organizations,” California 15. www.thecoca-colacompany.com/ourcompany/mis-
Management Review (Fall 1991): 30–52. sion_vision_values.html. Last accessed on June 17,
7. Antoine de Saint-Exup’ery, The Wisdom of the Sands 2010
(New York: Harcourt Brace & World, 1950), 2. 16. Robert M. Grant, Contemporary Strategic Analysis,
8. Hans H. Hinterhuber, Strategische Unternehmens- 6th ed. (Malden, Oxford, Carlton: Blackwell
führung, Band 1: Strategisches Denken, 7 Auflage ed. Publishing, 2008).
(Berlin, New York: De Gruyter, 2004). Gerry Johnson, Kevan Scholes, and Richard
9. James C. Collins and Jerry I. Porras, “Building Your Whittington, Exploring Corporate Strategy: Text &
Company’s Vision,” Harvard Business Review Cases (Harlow, England: Prentice Hall, 2008).
(September–October, 1996): 65–77. 17. Adapted from D. C. Hambrick and James W.
10. Andrew Campbell and Sally Yeung, “Creating a Fredrickson, “Are You Sure You Have A Strategy?”
Sense of Mission,” Long Range Planning 24, no. 4 Academy of Management Executive 15, no. 4 (2001),
(1991): 10–20. 48–59.
160
The Value Chain
“Competitive advantage cannot be understood by
looking at a firm as a whole. Advantage stems from the
many discrete activities a firm performs—designing,
producing, marketing, delivering, and supporting
products. Each of these activities can contribute to a
firm’s relative cost position and create a basis for
differentiation.”
MICHAEL PORTER1
A company can create competitive advantage when it is able to perform the individual
activities of its “value chain” more effectively (differentiation advantage) or more effi-
ciently (cost advantage) than its competitors. Developed by Porter,2 the value chain or-
ganizes all of the activities a company performs in bringing a product or service to the
market (see Figure 1). Value chain analysis has become exceedingly popular in the lit-
erature. A cursory search produces recent detailed value chain analyses of a wide variety
of firms, including Marks and Spencer, British Airways, Apple Computer, 7-Eleven,
Tesco, Emerson Electric, Wal-Mart, IBM, and others. The value chain distinguishes
strategically relevant activities that can lead to cost or differentiation advantages in the
market, and thus influence the product’s margin. Value chain analysis allows the strate-
gic planner to not only identify what activities can lead to advantage, but also facilitates
identification of what activities for a particular firm do lead to advantage—and which
do not. Primary activities are concerned with the creation or delivery of a product or
service. Those activities typically include:
• Inbound logistics: Activities related to receiving, storing, and distributing inter-
nally the inputs needed to produce a product or service, including warehousing,
stock control, and internal transportation systems.
• Operations: Activities related to the transformation of inputs into products,
including production, assembly, packaging, equipment maintenance, quality
assurance, etc.
161
Company Assessment—The Value Chain
Scope of Xerox Activities
Features
All
Rich Integrated
High Speed Low-Volume Segments
Dry Custom Sourcing Direct Technical
Xerography Parts United States Direct Sales Service
Component Distribution Customer

Technology Assembly Service
Parts Channel Segments
Liquid Modular Japan Dealers Dealers

Toner Parts Parts from
Low Speed Subcontractors Low Volume
Standard (decentralized use)
Parts
Savin
FIGURE 1 The Value Chain3
• Outbound logistics: Activities concerned with • Procurement: Activities for acquiring re-
the distribution of the product, such as collec- sources as inputs for the primary activities,
tion, storage, and delivery to the customer. such as the selection of suppliers, negotiation
• Marketing and sales: Activities like market of quality, prices, delivery terms, etc.
segmentation, targeting, positioning, sales
The individual activities of the value chain are strate-
management, advertising, pricing, and prod-
gically relevant because each of them can constitute a
uct and brand management.
cost advantage or differentiation advantage, and in
• Service: Activities to enhance the value of a
each of these activities a company can either win or
product, such as after-sales service, repair and
lose money, depending how effectively and efficiently
maintenance, customer training, customer
it performs them compared to the competitors.
care, etc.
Hence, a value chain analyses should answer
Support activities are needed to perform the primary the following questions:
activities and contribute to their effectiveness and ef-
1. What are the activities of a company’s value
ficiency. They are:
chain? Figure 1 illustrates a generic value
• Firm infrastructure: All activities and formal chain, which can be adapted to the industry
systems of planning, finance, quality control, ac- and the company by adding, subtracting or re-
counting, information management, and so on. naming activities.
• Human resource management: Activities re- 2. Which of them are strategically important in
lated to the recruitment, training, develop- the industry? In this step, the strategic impor-
ment, and compensating people. tance of the activities is assessed. This is impor-
• Technology development: All activities related tant, as the nature of the industry determines
to know-how, research and development, which activities are critical to success.
product design, process improvement, and IT 3. How well do we perform on the activities? By
development. comparing the individual activities with the
162
strongest competitor in the industry, the a significant competitive advantage. If this ac-
strengths and weaknesses of the company can tivity or process cannot be imitated or substi-
be identified. tuted, it is a core competence.
4. Which activities generate profits and which 6. Which activities should be outsourced? The
cause losses? When costs associated with each value chain analysis can also be used to identify
activity are analyzed, and when the value is those activities that should be outsourced, for
generated in each activity can be measured, a example, if a company has little competence in
company can determine where exactly it gen- this activity and an outsourcing partner could
erates profits and where losses are incurred. do it more efficiently or effectively.
This analysis requires detailed data that many
information systems do not provide. Figure 2 illustrates the value chain analysis of a phar-
5. Which activities constitute competitive ad- maceutical company. In this example, the strategic
vantages or core competences? When a com- importance of the primary activities, the budget
pany shows stronger performance on an activ- share of these activities, and the relative performance
ity (more effectiveness or efficiency than a (compared to the strongest competitor) are shown. It
rival) that has high strategic importance, it has illustrates whether the amount of money a company
25%
25 23% 22% 5 = Better
20%
18% 18%
Importance/ Budget Share
3 15% 15%
(Compared to Competitor
10% 10% 2 2
6% 5% 7% 6%
1
0 0
−2
−3 −3
−5 −5 = Worse
R&D Procurement Operations Logistics Marketing Sales Service
Cooperation Global 25 Plants Own Strong Brand Effective and IT-based

with Research Sourcing Decentralized Distribution Focus on Direct Well-Trained Feedback
Institutions Centralized Production Network Marketing Sales Force System
2 Research Sourcing Low High Flexibility Effective Call
Lab Just-in-time Economies and Reliability Center
7 New Delivery of Scale Good
Products/ 60 Suppliers Effective Coordination
Year Quality with Logistics
Management Partners
Budget Share
Strategic Importance
Relative Performance (Compared to Strongest Competitor)
FIGURE 2 Analysis of the Value Chain of a Pharmaceutical Company4
163
invests in each activity and its performance are in two-dimensional matrix, where importance of the
line with the strategic value of this activity. individual value chain activities is depicted along
The following major conclusions can be drawn: the x-axis and performance along the y-axis, four
specific recommendations can be derived (Figure 3):
• R&D has the highest strategic importance
(25%), but receives only 18 percent of the • Quadrant I: Activities evaluated high both in
budget. As performance of R&D is below com- performance and importance represent op-
petition, more resources should be devoted to portunities for gaining or maintaining com-
this activity to improve it. petitive advantages. These are the company’s
• Operations constitute a major problem: It has key strengths and it should “keep up the good
very little strategic relevance (10%), consumes work.” Only marketing (and sales) in our ex-
23 percent of the budget, and performance is ample is located in this quadrant. This activ-
below competition. This activity obviously is a ity should be rewarded in future strategic
candidate for outsourcing. planning.
• Also marketing seems to be unbalanced: It is of • Quadrant II: Low performance on highly im-
central importance (20%) but receives only 7 portant activities demands immediate atten-
percent of the budget. As marketing, however, tion. We have great risk here. To enhance com-
performs better compared to competition, no petitiveness, a company should improve these
actions are necessary. activities. If they are ignored, a serious threat is
posed to the business. In our example, research
Another useful illustration of a value-chain analysis and development, as well as service, need
is the strategic priority analysis (SPA).5 Using a strong efforts to be improved.
Better
Quadrant IV: Quadrant I:
Irrelevant advantage? Keep Advantage! 1 = Research & Development
(Key Strenghts) 2 = Procurement
3 = Logistic (Inbound and Outbound)
4 = Operations
2 5 = Marketing
(Compared to Strongest Competitor)
6 = Sales
7 = Service
3
1
4
Quadrant II:
Quadrant III: High Priority!
Low Priority! (Key Weaknesses)
Worse
Low High
Strategic Importance
FIGURE 3 Strategic Priority Analysis (SPA)
164
• Quadrant III: These activities are both low in committed to these attributes would be better
performance and importance. Usually, it is not employed elsewhere. High performance on
necessary to focus additional effort here. These unimportant activities indicates a “possible
activities of the value chain are of “low prior- overkill”. Procurement and logistics are located
ity.” In the case of the pharmaceutical com- in this quadrant. If resources were redeployed
pany, operations is positioned here. We are not to quadrant I and II, the company would prob-
very good at it, and it is not very important ably be better off.
strategically.
• Quadrant IV: Activities located in this quad- The value chain analysis is an important tool for a
rant are rated high in performance, but low number of other analyses, including, for example,
in importance. This implies that resources identifying competitive advantages.
Summary
The ability of a company to understand the critical success to its customers, differentiates its products, and creates
factors in an industry, its own capabilities and compe- profits or losses. Applied in a systematic way (by answering
tences, and through which activities it creates competitive the seven questions in this note), it leads to a profound
advantages is essential in strategic management and mar- strategic assessment of the company and to a sound basis
keting. The value chain is a systematic and useful tool to for strategic decisions.
think through the ways in which a company delivers value
Madsen, Benny, and Rob Brownstein. The New Industrial Service-Profit Chain to Work,” Harvard Business Review
Revolution: The power of dynamic value chains. Ramsey, 72, no. 2 (March–April, 1994): 164–174.
NJ: Arbor Books, 2008. Normann, Richard, and Rafael Ramirez.“From Value Chain
Hansen, Morten T., and Julian Birkinshaw. “The to Value Constellation: Designing Interactive Strategy,”
Innovation Value Chain,” Harvard Business Review 85, Harvard Business Review 71, no. 4 (1993): 65–77.
no. 6 (June 2007): 121–130. Porter, Michael E., Competitive Advantage: Creating and
Heskett, James L., Thomas O. Jones, Gary W. Loveman, W. Sustaining Superior Performance 2nd Ed. (New York:
Earl Sasser Jr., and Leonard A. Schlesinger “Putting the Free Press, 1985).
Endnotes
1. Michael E. Porter, Competitive Advantage: Creating Strategische Initiativen Zum Wandel Führen, 3, aufl
and Sustaining Superior Performance, 2nd ed., ed. (Stuttgart: Schäffer-Poeschel, 2005).
(New York: Free Press, 1985). 5. J. A. Martilla, and J. C. James, “Importance-
2. Ibid. Performance Analysis,” Journal of Marketing 41, no. 1
3. Adapted from Porter, “Competitive Advantage.” (1977): 77–79.
4. Adapted from Müller-Stewens, Günter, and
Christoph Lechner, Strategisches Management—Wie
165
166
Industry Analysis
167
Industry Analysis
Profitability varies significantly from industry to industry. The average return on in-
vested capital (ROIC), that is, earnings before interest and taxes, in industries in the
United States ranged from negative to more than 50 percent between 1992 and 2006.1
The average profitability was 14.9 percent; airlines on average earned 5.9 percent, hotels
10.4 percent, grocery stores 16 percent, medical instruments 21 percent, pharmaceuti-
cals 7 percent and soft drinks 37.6 percent. Obviously, from a profitability standpoint,
there are some industries that are more attractive than others. To understand industry
competition and profitability, Michael E. Porter developed an analysis framework (see
Table 1) consisting of five forces that shape industry competition:2
• The bargaining power of buyers;
• The bargaining power of suppliers;
• The threat of new entrants;
• The threat of substitute products or services; and
• The rivalry of existing competitors.
These five forces drive the intensity of internal competition and overall industry prof-
itability (as depicted in Figure 1).
They provide a framework for anticipating and influencing competition over
time and are essential parameters to formulate a viable strategy. Hence, a thorough
analysis and understanding of these five forces is of vital importance in strategy formu-
lation. An industry analysis is carried out in five steps:3
1. Definition of the industry
2. Identification of participants (buyers, suppliers, competitors, substitutes, poten-
tial entrants)
3. Assessment of the drivers of competitive forces and of overall industry structure
4. Analysis of future changes in the industry
5. Identification of aspects of industry structure that can be influenced by competi-
tors, new entrants, or by ourselves.
STEP 1
Is Red Bull’s market the energy-drink market or the soft drink market? In the first case,
Red Bull is the clear market leader of a fast-growing market. The major competitors are
Monster and many other smaller brands. The target market is mostly male teenagers
and twentysomethings, and people interested in extreme sports. In the second case, Red
Bull is only a minor competitor of a fairly mature market, including products like car-
bonates, fruit juices and drinks, and also bottled water, competing against giants like
168
Industry Analysis
TABLE 1 Porter’s Five Forces Analysis
Potential
Participant Entrants Customers Suppliers Competitors Substitutes
Key question How likely is it How much of the How much of How aggressively How do potential
that new value created do the value or “friendly” do substitutes threaten
competitors customers capture? created do competitors act sales in an industry
enter the How price-sensitive suppliers and react?
industry? are they? capture?
Force Market entry Bargaining power Bargaining Rivalry among Threat of substitution
barrier of customers power of competitors
suppliers
Drivers • Economies • High • High • Numerous • Substitute offers an
of scale concentration of concentratio competitors of attractive price-
• Network buyers n of equal size performance trade-
effects • Undifferentiated suppliers • Low industry off
• Customer products • Suppliers do growth • Low switching
loyalty and • Low switching not depend • High exit costs of buyers
switching costs of buyers on the barriers
costs • Easy backward customers • Undifferentiated
• Capital integration for its products,
requirements • Product revenues • Low switching
• Incumbency represents • High costs
advantages significant switching • High fixed costs
independent fraction of cost costs of and low
of size (e.g., structure or customers marginal costs
proprietary procurement • Highly • Perishable
technology, budget differentiated product
raw material • Buyers earn low products of
sources) profits or have to suppliers
• Unique cut purchasing • No
access to costs substitute
distribution • Quality of products
channels products do not • Easy forward
• Restrictive affect quality of integration
government customer’s offers
policy
Future Do market • Do suppliers • Do • Does • Are new
development entry barriers change their customers competition technologies
change?Are strategy and change change over arising that
new entrants structure? their time? create new
attracted? • Does their strategy substitutes?
bargaining and • Do switching
power change? structure? costs to
• Does their substitute
bargaining change?
power
change?
169
Industry Analysis
Bargaining
Power of
Suppliers
Threat
Threatof
of Competitive Threat of
New
NewEntrants
Entrants Rivalry Substitute
Bargaining
Power of
Buyers
FIGURE 1 Five Forces Influencing Rivalry and Profitability4
Coca Cola and Pepsi who push their offerings to all analysis, as it reveals the forces that shape competi-
soda drinkers. tion and industry attractiveness and provides a
Some arenas have well-defined boundaries framework to anticipate and influence competition
with clearly identifiable competitors. Others have over time. Usually the analysis of the five forces is
fuzzy boundaries and rivals are difficult to identify or taken from the perspective of an incumbent (as in the
anticipate. Therefore, the definition of the market following sections). But it can, of course, also be used
arena is a crucial task and often not easy. The defini- to understand the challenges faced by a new entrant.
tion can be based on these four dimensions:5 (1) the
array of product or service categories (single product THREAT OF ENTRY. Whether or not existing com-
versus broad category); (2) the customers (single petitors are threatened by new entrants largely de-
versus multiple segments); (3) geographic scope (re- pends on market entry barriers.
gional, country-wide, global); and (4) activities in • Important market-entry barriers are economies
the value chain (many versus few). of scale. Economies of scale exist when the unit
costs of a product fall as a function of the
STEP 2 firm’s production volume. They can be
achieved in most business functions (i.e., R&D,
In this step, the participants in the industry have to purchasing, production, marketing & sales).
be identified by answering the following questions: They accrue when fixed costs can be spread
1. Who are the buyers? over a large sales volume, when purchasing dis-
2. Who are the suppliers? counts can be exploited, or when specialization
3. Who are the competitors? advantages are present. In the pharmaceutical
4. Which products or services are substitutes for industry, for example, the development of a
the product in this industry? new drug costs on average $ 500 million.
5. Who are the potential entrants into this industry? Therefore, a market leader has a huge cost ad-
vantage over a new entrant, as it can spread the
fixed costs over a larger number of units and
STEP 3
thereby reduce unit costs.
Now the analysis of the underlying drivers of each • Network effects constitute demand-side bene-
competitive force and the industry structure begins. fits of scale and arise when a buyers’ benefit in-
This activity is usually the most interesting part of the creases with the number of customers of a
170
Industry Analysis
company. Credit card companies are more at- prices down and demand better quality or service.
tractive the more contractual partners they Customers have a high bargaining power:
have, and eBay has a competitive advantage be-
cause of its huge customer base. • When customers are highly concentrated. High
• When customers are highly loyal to a vendor, concentration can be found among grocery re-
or when they face high vendor switching tailers in many European countries. In Austria,
costs, it is often difficult for outsiders to enter for example, the three biggest grocery retailers
this market and attract buyers. Amazon.com, have a market share of more than 75 percent,
for instance, has very high brand recognition and in Germany more than 60 percent. The
and a loyal customer base, which pose barriers German retailer Aldi (under its brand name
for new entrants. In the enterprise resource Hofer in Austria) takes advantage of its size.
planning software industry, customers have Their relatively small outlets carry a limited as-
to invest much time to implement the soft- sortment of only about 700 products (com-
ware, to train the employees, and even to pared to more than 25,000 in a traditional su-
adapt internal processes. Hence, customers permarket), of which you find only one brand
are reluctant to change suppliers after such of sugar, four types of jelly, five types of soap,
investments. five types of pasta, and so forth. This strategy
• Another market entry barrier is capital re- enables Aldi to sell more of each product, and
quirements. Most Internet companies face therefore to negotiate lower prices. On average,
minimal capital requirements when they enter the yearly purchase volume of each product is
the market, whereas entry into the auto indus- 30 million Euros, compared to 1.5 million
try requires billions of investments in R&D, Euros at Walmart.
production facilities, and so forth. • When the products of the rivals in the industry
• Patented technologies, managerial know-how, are standardized and undifferentiated. 90 per-
access to raw materials, and learning-curve cent of Aldi’s products are store brands. As a
cost advantages are entry barriers independent result, its suppliers are interchangeable, and
of size that market leaders often can have. Aldi exerts greater power over them as a result
• A strong market entry barrier can be limited of that interchangeability; if one supplier tries
access to distribution channels. In the beverage to resist Aldi’s pressure, any other will do just
industry, for instance, restaurant chains usu- as well.
ally have long-term contracts with their beer • When there are low switching costs of buyers.
and soft drink suppliers. As a result, it is diffi- This is the case for many undifferentiated
cult for a new entrant in this industry to get ac- components and parts in the automobile in-
cess to this distribution channel. dustry. The auto manufacturers keep a handful
• Finally, the government can impose market of suppliers, playing them off against each
entry barriers. In Austria for instance, there is other, as they can easily switch from one sup-
strong regulation of the pharmacy market. plier to another for these products. The furni-
One person is allowed to own only one phar- ture dealer IKEA uses the same strategy. It has
macy. There must be a catchment area of a more than 1,500 suppliers in 40 countries and
least 5,500 people for each pharmacy. And, some of them sell up to 100 percent of their
there must be a special distance of at least 100 output to IKEA. As there are relatively low
meters between each pharmacy. Obviously, switching costs for IKEA to change suppliers,
this policy strongly restricts market entry of the Swedish furniture dealer has an enormous
new competitors. bargaining power.
• When backward integration is easy. In that case
BARGAINING POWER OF CUSTOMERS. Customers a customer can continuously threaten to take
can capture more value when they are able to force over this element of the value chain and produce
171
Industry Analysis
the product himself. In the soft drink industry, the buyer. “.Pdf ” is a threatening substitute for print
producers have long increased their bargaining forms, and it strongly reduces demand in the print-
power over the packaging manufacturers by ing industry. Voice-over IP is a strong substitute for
threatening to produce packaging materials mobile and fixed-line telephony.
themselves.
RIVALRY AMONG EXISTING COMPETITORS.
Customers are hard negotiators when they are Rivalry can take numerous forms. It can lead to price
price sensitive. When they are price sensitive, they wars, increased differentiation efforts, higher speed of
seek to create pressure to reduce procurement costs. innovation—all leading to lower industry profitability.
This especially happens when: Rivalry among existing competitors is particularly high
• The product represents a significant fraction of when there are numerous competitors about the same
the cost structure or the procurement budget. size attempting to gain dominance over one another.
• Buyers earn low profits or have to cut costs. Another factor increasing rivalry is industry growth.
• In business to business markets, when the in- When a business is mature, companies can only grow
dustry’s products are inputs to customers own by taking market share from competitors. High exit
products and the quality of those inputs does barriers, the flip side of entry barriers, may prevent
not affect the quality of customers’ own outputs companies from leaving the business—despite low
(the firm’s own products to its customer’s). profitability. Finally, high price competition can make
an industry unattractive. Price competition especially
BARGAINING POWER OF SUPPLIERS. When sup- occurs when markets are highly transparent (i.e., cus-
pliers have high bargaining power, they can charge tomers and competitors can easily see price cuts), when
higher prices, limit quality or services, and shift costs customers are price sensitive, the products are not dif-
to their customers. This situation is the flipside of the ferentiated, and when customers have low switching
customer’s bargaining power. Therefore, most argu- costs. If these characteristics are coupled with high
ments that have just been made, apply for the bar- fixed costs in an industry and perishable products,
gaining power of suppliers, but now viewed from the price wars are likely to occur. A good example is the air-
perspective of the customer. Suppliers are especially line industry: Fixed costs make up 60–70 percent of the
powerful when: traditional network airline’s costs. The product is
highly undifferentiated. There are low switching costs
• The supplier group is more concentrated than
for customers, and the product is “perishable.” In addi-
the industry to which it sells to or even reaches
tion, customers are price sensitive, and, due to Internet
a near-monopoly position.
booking systems, markets are highly transparent.
• The suppliers do not depend on single customers.
These factors led to massive price competition in re-
• There are high switching costs for customers.
cent years and a major industry shakeout.
• The products are highly differentiated or spe-
cialized to the specific needs of the customer or
customer groups. STEP 4
• There is no affordable substitute for the sup- Once the industry structure and the major forces
plier’s products or services. driving competition are understood, a careful look at
• Suppliers can threaten to integrate forward, possible future changes in the industry is in order.
e.g., when customers make too much money Five questions are appropriate:
compared to the supplier.
• Do market entry barriers change? Are new en-
THREAT OF SUBSTITUTION. Ease of substitution trants attracted?
strongly reduces an industry’s attractiveness and • Do suppliers change their strategy and struc-
profitability. The threat of substitution is high when ture? Does their bargaining power change?
an alternative offers an attractive price-performance • Does the customer base change? Do they gain
trade-off and when there are low switching costs to more power?
172
Industry Analysis
• Are there any new technologies arising that • Understand the forces that shape competition
create new substitutes? within an industry
• Does competition change over time? • Better understand and predict changes that af-
fect industry structure, profitability and the
A helpful model for this analysis is the product
strategies of competitors
lifecycle, which illustrates changing competitive condi-
tions and strategies along the single phases of a lifecycle.
• Assess strengths and weaknesses of competi-
tors in relation to these forces
STEP 5 It can also help managers to understand what they
can do to influence the competitive forces, for exam-
The industry analysis is a useful tool to:6 ple, how can market entry barriers be built? How can
• Identify attractive industries, in which a com- bargaining power be increased? How can we react to
pany can invest possible substitutes?
Summary
Industry analysis identifies the forces that shape industry at- The five forces analysis has become one of the most impor-
tractiveness, especially the intensity of internal rivalry and tant tools in the strategic analysis of businesses and strategy.
resulting industry profitability, and the behavior of industry Some businesses will have the luxury of selecting industries
participants. By identifying the specific determinants of ri- to enter or invest in—others will not. Regardless of whether
valry and profitability—customers’ and suppliers’ bargain- it is being used to select industries to compete in or simply to
ing power, market entry barriers, substitution products, and understand existing markets and competition, industry
rivalry among competitors—industry dynamics and com- analysis within the five forces template is invaluable to strat-
petitors’ strategies can be better understood and predicted. egy development and implementation.
Day, George. “Assessing Competitive Arenas: Who Are Your Porter, Michael E. Competitive Strategy: Techniques for
Competitors?” In Wharton on Dynamic Competitive Analyzing Industries and Competitors. New York: The
Strategy, edited by G. Day, D. J. Reibstein, and R. E. Free Press, 1980.
Gunther, 23–47. Hoboken, New Jersey: John Wiley & ———. The Five Competitive Forces That Shape Strategy.
Sons, 1997. Harvard Business Review. (January 2008): 78–93.
Endnotes
1. Michael E. Porter, “The five competitive forces that 5. George Day, “Assessing Competitive Arenas: Who
shape strategy,” Harvard Business Review (January are your competitors?” in Wharton on dynamic
2008): 78–93. competitive strategy, ed. G. Day, D. J. Reibstein, and
2. Michael E. Porter, Competitive Strategy - Techniques R. E. Gunther (Hoboken, New Jersey: John Wiley &
for Analyzing Industries and Competitors (New York: Sons, 1997), 23–47.
The Free Press, 1980). 6. Gerry Johnson, Kevin Scholes, and Richard
3. Porter, “The five competitive forces.” Whittington, Exploring Corporate Strategy: Text &
4. Adapted from Porter, “The Five Competitive cases (Harlow, England: Prentice Hall, 2008).
Forces” ; figure is at page 80.
173
174
The Product Life Cycle
175
Every market is new at some point; it has to start somewhere. After that, inevitably, it
evolves; and some important aspects of that evolution are similar across all or at least
most markets. Every product moves through an introduction phase, a growth phase, a
maturity phase, and ends with a decline phase. Each of these phases is characterized by
changes in demand, competition, marketing tasks, and decisions. These changes during
the “product life cycle” can be generalized across markets, and understanding and antici-
pating those changes is important for planning and for effectively adapting marketing
strategies. This note summarizes: (1) the market factors that change as markets evolve;
and (2) the effects of those changes on marketing strategies and on the marketing mix.
One essential proviso is that, in order to understand the product life cycle for any
market, it is essential to first define the market or the product under consideration.
Understanding life cycle effects at the various coexisting levels of the industry, the mar-
ket, the product category, and the version allows for valid and valuable inferences. That
is, there are life-cycle effects underlying the evolution of an industry, a specific market, a
product form, and individual products. Each of these life cycles can provide insight for
marketing strategy and tactics. But it is also important to keep the level of analysis in
mind in identifying and drawing conclusions from changes in the market. An industry
life cycle, such as that of the telecommunication industry, is much longer than a product
life cycle, such as that of a specific generation of cell phones. And demand for a specific
generation of cell phones depends on more specific factors (e.g., technology, price, com-
petition), than demand for telecommunication in general that depends more on general
need for telecommunication. It is also worth noting that not all products, and certainly
not all industries, enter a “decline” stage in the life cycle. While industries such as beer
and clothing have matured, and markets for beer are somewhat shrinking, these are re-
ally extended, and perhaps eternal, “maturities” rather than true declines. On the other
hand, product forms such as “ice” beer and bell-bottom trousers have very specific life
cycles (“fad” life cycles) that grow, mature, and decline toward obsolete fairly quickly.
CHANGES IN MARKETS ACROSS THE PRODUCT LIFE CYCLE

The single phases of a product life cycle differ in a number of important characteristics
such as competition and assortment, customer behavior, segment configuration, distri-
bution, etc. In the following sections we describe these characteristics.
Competition and Product Assortment

Initially there are very few offerings in any market. A market must begin with a single
offering—at some point, someone offers the very first version of any new product, even
176
if other entrants follow quickly. As a market grows, they tend to do so by lowering prices. Thus, competi-
more firms offer more alternatives. Because con- tors who would not otherwise resort to price compe-
sumers tend to be price insensitive in introductory tition end up “wrecking the market” in order to utilize
and growth stages—they’re still focused on the new their capacity—capacity that should not have been
benefits—margins tend to be high and those high built in the first place.
margins attract competition and investment, in- These changes in the competitive landscape
cluding investment in production capacity to meet lead to some predictable changes in profitability
the growing demand for high-margin sales. During (shown in Figure 1). Early in the product life cycle,
the growth phase, entry of each new competitor firms must invest in order to develop products and
means the expansion of available assortment, and, to open markets. These investments represent nega-
importantly, each competitor offers a wider and tive profitability for the industry in the early stages.
wider variety of products, creating a rapid profusion During the growth stage, firms take advantage of the
in the variety of products available—and intensify- investments and the product’s newness to com-
ing the rivalry for customers and for distribution mand fair margins and to reap profits. Profitability
(discussed below). usually carries on into the early maturity stage.
Eventually growth decreases and markets enter Later, in the late maturity stage and the decline
“maturity.” One problem as a market enters maturity stages, when industry-wide capacity is at its peak
is that, production forecasters often miss the “inflec- and as customers come to expect core benefits (dis-
tion point” and regularly build capacity as if markets cussed below), margins narrow, and price competi-
will continue to grow, if not forever, at least beyond tion emerges to reduce profits. Nevertheless, average
the point that growth actually slows. This inevitably industry profits over any extended period should
causes “pain” in the form of excess capacity. If com- rarely be negative; that is, an industry will not lose
petitors’ excess capacity cannot be converted to other money for long. Although increased price-based
uses, for example, by producing other products with competition is typical, almost inescapable, and mar-
the same production facilities or by selling those fa- gins will necessarily narrow, competitors and rivals
cilities to other industries, those competitors will try will exit an industry characterized by losses over any
to stimulate demand to maintain production, and extended period.
t
en
n
tio
pm
“Pain”
uc
ity
e
th
elo
(Over Capacity )
lin
rod
tur
ow
v
c
Ma
De
De
Int
Gr
Industry Capacity
Industry Sales
Industry Profitability
Investment
FIGURE 1 The Product Life Cycle
177
Customer Behavior and Segment avoidable. Then, in the early 1990s, Toyota introduced
Configuration the Lexus brand of luxury sedans; Lexus’s offerings
were highly reliable and came with extraordinary
Across product categories, whether they are new tech-
service. The high-end luxury segment split into high-
nologies or not, several important changes in con-
end performance (which BMW continued to domi-
sumer behaviors emerge as the markets evolve; the
nate) and high-end reliability/comfort (won by
most basic of these are simply logical and inevitable.
Lexus). Lexus was positioned as a “cocoon” from the
In markets for truly-new products, that is, the mar-
outside world.1 In the early twenty-first century,
kets for disruptive or “discontinuous” innovations,
however, BMW and others, such as Audi and
initial sales growth may be slow. Many consumers
Mercedes Benz, began to match Lexus’s service and
wait to see new products in use by others—that is, the
reliability, and segments that had been differentiable
majority usually prefers to “imitate” others rather
began to blur. An assortment of manufacturers took
than innovate. The rate of “penetration” or “diffu-
advantage of advances in production technologies to
sion” will accelerate as more consumers use a product
offer similarly reliable and comfortable cars with
and thereby create more opportunities for imitators
similar performance. It might be more accurate to
to observe the product in use. That growth may liter-
say that the segments reconfigured, rather than
ally be exponential in some phases for some markets,
merged. Luxury car buyers in America are still het-
if a consumer shows the product to three others, and
erogeneous—and are still different from European
those three each buy it and tell three others who all
luxury car buyers—but the basis of segmentation
tell three more, and so on; but, because markets and
changed toward brand image and other differences.
consumer resources are never unlimited, those peri-
Another factor that tends to drive a shift toward
ods of high growth do not last forever and, in some
price-based competition across the product life cycle
cases, may be very short-lived.
(along with over capacity, discussed above) is the fact
One important certainty about consumers and
that the attributes of a product that began as new-to-
the product life cycle is that, as the life cycle progresses,
the-world and capable of differentiating one offering
consumers become more familiar with the product.
from another, eventually—sometimes very quickly—
Consumers are initially inexperienced with a product,
become “old hat.” These benefits become expected as
but, as the market evolves, customers gain experience
competition matches performance, making the
and expertise; inevitably, consumers’ needs become
benefits some “must have” attributes instead of “de-
more specific as they become more knowledgeable
lighters”—that is, product attributes that are not
and sophisticated. Consumers who were initially satis-
expected and which positively surprise customers.
fied by one basic offering begin to understand that
When the core benefits have been “commoditized” in
they’d rather have a somewhat different version of the
this way, other benefits, augmentations, and improve-
product or technology—something that more specifi-
ments—such as additional features or convenience and
cally meets their particular needs—and, therefore,
packaging features—or peripheral benefits—such as
segments emerge from what were, in the early stages, un-
service, design, and brand image/social status—begin
differentiated markets. Single segments often become
to replace the core benefits as drivers of consumer
two or more different segments in the growth phase of
choice. Additionally, and almost inescapably, price
the product life cycle.
emerges as an important consumer choice variable and
It is also true that, as some markets mature,
can become the dominant basis of competition.
multiple segments merge or join into one—especially
A useful model to distinguish between differ-
as technology progresses and the need to decide be-
ent types of product attributes is Kano’s model of
tween options in the product is alleviated. For exam-
customer satisfaction, which describes three different
ple, in the late 1980s, BMW “owned” the high-end
types of product characteristics (see Figure 2).
luxury/prestige segment of the American automobile
“Delighters” are attributes that cause satisfaction or
market. “Yuppies” drove BMWs and accepted their
even excitement if delivered, but that do not neces-
high maintenance costs and lack of reliability as un-
sarily lead to dissatisfaction if not delivered. They are
178
Satisfaction,
Delight
Delighters
Performance
Factors
Low Attribute High Attribute

Performance Performance
Time
Must Haves
Dissatisfaction
FIGURE 2 Kano’s Model of Customer Satisfaction2
not explicitly expected and articulated. Overhead dis- tionship between inputs and outputs in research and
play in cars is an example. “Must haves” (basic factors) development and new product development forms
are minimum requirements that a product must fulfill. an “S-curve,” which is a classic case of the “produc-
They do not lead to satisfaction if fulfilled, but lead to tion function” relating inputs to outputs and of the
dissatisfaction if not present. An example is the brakes law of “diminishing margin returns”. Small invest-
of a car. “Performance factors” are those attributes that ments may be inadequate to realize any results and
lead both to dissatisfaction or satisfaction depending getting started requires investment, but then there is
on how well they perform: The higher the product per- a range of investments that will realize substantial
formance, the higher the satisfaction, the lower the per- advances. Eventually when the “low fruit” has been
formance, the lower the satisfaction. An example is fuel harvested and the most accessible innovations dis-
consumption of a car, battery life of a laptop, or resolu- covered, the successive generations of breakthroughs
tion of a digital camera. This model is dynamic, that is, become more and more difficult to realize. Thus, at
the three types of attributes change over time. What the same time when customers may be taking the old
delights customers today (not expected product attrib- technology for granted, it becomes more expensive
utes, but those that surprise customers and create a and takes longer to bring new technologies to mar-
“WOW-effect”) become explicit expectations after ket, further emphasizing the migration toward non-
some time and turn into “must haves”. core features and peripherals.
These changes in the market and consumer be- Thus, as product life cycles evolve, so do the
haviors are also related to a reality about research drivers of consumer preferences and choice (see
and development investments and returns. The rela- Figure 3). Early in the life cycle consumers focus
179
Performance
(Core Benefits)
Peripherals
(Service, Image, Designs, Convenience, etc.)
Price
FIGURE 3 Criterion in Consumer Preferences and Choice
on product performance and core benefits. During new difficult to imitate features or upgrade existing
growth and especially product maturity, greater product; (2) Bundle: Sell the commoditized product
consideration is given to “peripheral” product attrib- with a differentiated ancillary service that increases
utes such as service, comfort, convenience, nonfunc- the value of the product (e.g., after-sales service)
tional design, and the like. Most importantly, price and motivates consumers to pay a price premium
emerges as a more and more important decision cri- for more convenience; and (3) Segment: Try to seg-
terion as the product life cycle moves forward; and ment the mature market and address customers that
price often becomes the dominant decision driver for are less price-sensitive4.
many consumers in the later stages of the life cycle.
This is especially true when core product attributes CHANNELS OF DISTRIBUTION. Gaining shelf
and benefits are so commoditized that they appear, space in traditional channels of distribution is a
largely, the same across alternatives (Figure 2). challenge for the most proven of brands. Getting
Attributes go from delighters/motivators (things that distribution for new and unproven products that
exceed customer expectations and move consumers frequently require augmented customer service and
to action) toward “must-haves” (things that con- “customer education” is especially challenging and
sumers expect and take for granted), and the ab- creates a natural constraint on channel penetration
sence of a “must have” can dissatisfy customers, but in the introductory stages of the product life cycle.
the presence of which rarely satisfies or delights. Often, new products are distributed through specialty
This process of commoditization denotes a compet- channels, where sales staff have a particular interest
itive environment where (1) product differentiation and expertise in the product category; specialty sales
becomes very difficult, (2) customer loyalty and clerks are often “product enthusiasts” themselves and
brand preferences erode, (3) competition is based serve as facilitators and even opinion leaders in their
primarily on price, and (4) where competitive category. As a product gains acceptance, that accept-
advantages come from cost leadership3. As products ance and “track record” in the market combined
move into the maturity phase of the life cycle, com- with the substantial margins realized during the
moditization becomes a likely threat. There are basi- growth stage facilitate greater channel acceptance.
cally three ways to delay the forces of commoditiza- Nevertheless, as markets grow, so does the competi-
tion: (1) Innovate: Introduce a new product with tion and each competitors’ assortment—leading to
180
clutter and increased competition for shelf space demonstrating slow initial take-off, leading toward
amongst competitors, even as the overall product- accelerated growth, but then, eventually, to slowing,
category shelf space grows. In maturity, fewer cus- maturity, and even decline as the market becomes
tomers need the “hand holding” that was necessary for saturated and alternatives are introduced. These
early market offerings, and, as discussed above, more changes in the market have important implications
competitors tend to emphasize price; therefore, mass for viable marketing strategies and for the marketing
and lower-service retailers dominate the trade and mix—things that work in one stage may not work in
discounters become a bigger factor. The emergence another, and recognizing “inflection points” can gen-
of Wal-mart as the dominant retailer in America, Aldi erate great strategic advantage.
as the similar channel captain in Central Europe, and
other large-scale discounters around the world, such STRATEGIC IMPLICATIONS
as Tesco in the UK and Carrefour in Western Europe,
Generic strategy frameworks generally stress two di-
have exacerbated and accelerated this “class-to-mass”
mensions of strategy—competitive scope and com-
effect across consumer-goods categories, leading to
petitive advantage. This text emphasizes these two
earlier and earlier emphasis on discounters. In later
as “who to serve/what need to meet” and “how to
maturity and in decline, no-frills “discounters” and,
serve those customers/needs better than the compe-
more recently, direct retailers (“e-tailers”) dominate
tition and at a profit”. Those two-dimensional frame-
many channels of distribution.
works are useful in organizing and summarizing
changes in marketing strategies across the product
Summary of Changes in Market
life cycle; some strategies become more common and
Some basic logical and underlying realities drive a may generally be more effective (although it should
general market evolution or product life cycle be noted that the full range of strategies are often
(Figure 1), and there are predictable, although not present in some form at most product-life cycle
uniform, patterns that provide important insight stages). Those generic strategy taxonomies do not
into what to expect as markets are created and as they isolate innovation as a separate dimension of strategy—
grow, mature, and eventually decline (summarized in the output of innovation is subsumed by “differentia-
Table 1). The product life cycle forms an S-curve, tion”—but it may be useful to view innovation as a
TABLE 1 Market Characteristics Across the Product Life Cycle
Introduction Growth Maturity Decline

Competition None to limited Growing; Larger Intense Concentrating and
players attracted contracting
Industry capacity Low; building Increasing Over capacity Contracting capacity
Products One to limited Assortment/Variety Proliferation Contraction/Consolidation
increasing
Customers/Benefits Unsophisticated, More sophisticated; Price Price Dominant
sought uneducated, Greater homogeneity consciousness
unaware More demanding
Segments Gross Emergence and Clarification Agglomeration
Customer choice Core product Differentiate by new Core benefits Commoditization of core
drivers (also see benefits are attributes (delighters); migrate toward benefits; Differentiate by
Figure II-8-2) delighters copycats emulate “must haves.” new, noncore attributes
Channels Limited Broader distribution Mass, discount More limited; Discount
availability; and direct and Direct
Specialty
181
TABLE 2 Marketing Strategies Across the Product Life Cycle
Stage in the Life Cycle

Dimension of
Strategy Introduction Growth Maturity Decline
Scope (Who? Targeting innovators Growing segments and Niche opportunities Profitable
What? Where?) and early-adopters but greater heterogeneity; remain but become survivor
often via “shotgun” Opportunities for niche limited; (consolidation)
marketing mix. and mass strategies Mass dominates.
Differential Core benefits Differentiation: core Differentiation: Price
Advantage (Performance) Speed- benefits Peripheral benefits
(What? Why?) to-market Price
Innovation Paramount; “Basic” Differentiating/Features Continuous Innovate to
research and Innovation innovation; extend life cycle
discontinuous Incremental or breakthrough
breakthroughs benefits to new category
third dimension of strategy, when considering stage is driven by firms attempting to differentiate
changes in viable and typical strategies across the life their offerings in consumer perceptions. Later in the
cycle. That is, strategies can be distinguished by the life cycle, innovation becomes less salient and be-
(1) scope of customers/needs they target, (2) basis of comes different. Instead of searching for and exploit-
competition (differentiation versus cost/price), and ing fundamental breakthroughs driven by basic re-
also (3) degree of innovation, and these three charac- search, firms focus on incremental innovation—new
teristics of strategies are useful in considering what features and the adaptation and convergence of exist-
sorts of strategies are typically deployed and are most ing technologies—improvements that result from ap-
effective across the product life cycle. plied research and new product development. These
Early in the product life cycle the scope of com- strategic implications are summarized in Table 2.
petition is notable, because the markets are small and
narrow; however, the focus of most marketing pro-
grams must often be broad, because consumers are TACTICAL IMPLICATIONS
unfamiliar with the product and they cannot articu- The life cycle-related changes in the market, dis-
late the need. Marketing research, therefore, is chal- cussed above, and the different strategies firms pur-
lenging. It is difficult to focus communications and sue across the life cycle drive changes in the type of
distribution even though the target segments—inno- marketing mix and offerings that a firm can effec-
vators and early adopters—are inherently narrow. As tively offer. These implications are described in this
the market moves through introduction toward section.
growth, it becomes broader and more differen-
tiable—that is, there are more customers and they are
Introduction
organized into more distinct segments. As discussed
above, when markets move toward maturity these Because the product life cycle’s beginning is defined
segments become dynamic, and they are likely to split by a single new and innovative product, the number
into more subsegments as consumers become more of products in the early stages is necessarily limited
familiar with their needs and with the availability of and focused on the new technology and its core ben-
product alternatives; however, but they may also efits (“product performance”; see Figure 3). There
merge as product features become less distinct and are two basic pricing strategies that a firm may adopt
technology “overwhelms” the core needs. Finally, in in the introductory stage: (1) skimming and (2) pen-
terms of competitive advantage, early stages of the etration pricing. Skimming takes advantage of the
product life cycle emphasize innovation. The growth newness of the technology and the relative advantage
182
of the innovation to demand (“skim”) higher prices price promotions, and accelerating product-form
and margins. Penetration involves low pricing in- cycles. Customers no longer require education or
tended to gain market penetration and the ensuing “hand holding,” they’re familiar with the product, its
benefits of scale, brand awareness, and “installed underlying technology, and their own preferences
base”—that is, lower penetration prices are designed across configurations. Therefore, mass and discount
to quickly gain as much market share as possible and channels as well as low- to no-touch (direct) chan-
should be supported with some assumed benefits of nels gain share, especially vis-à-vis high-support
early market share. Early in the life cycle, promotions channels, such as specialty stores. Importantly, atten-
can rely on word of mouth more than at other tion to loyalty-building tactics and customer satis-
stages—risk-averse customers are more likely to be faction in this and earlier stages can drive significant
persuaded by interpersonal communications (and competitive advantages in the maturity stage. That is,
observations of others adopting the product), and entering the maturity stage with a strong base of
the early-adopters of something that is truly new are loyal customers or building that base in maturity can
more likely to talk about it and pass along information. be a significant competitive advantage as markets
The channel strategy of any particular firm in a new move toward more intense rivalry with products that
market may be shaped by existing channel strengths are inherently more difficult to differentiate.
and distribution coverage of similar products.
Decline
Growth
Not all products enter a true decline stage—at least
The growth stage emphasizes differentiation—as a
not inevitably. We have emphasized the notion that
strategy and across the elements of a marketing pro-
changes in underlying market realities (especially
gram. Product alternatives proliferate—new entrants
changes in the competitive landscape, and in the
bring new offerings and existing competitors offer a
consumers’ relationship with the product) inex-
wider variety of products. Channels become more
orably drive changes in viable marketing strategies
accessible to the category as it gains acceptance and
and effective marketing tactics, but it may be true
wider market penetration, but competition within
that firm decisions and choices across marketing
the category for space and attention within the
strategies actually accelerate the product life cycle in
channels becomes more intense. Prices supports fair
some instances. That is, the decline stage may, in
margins but increased competition prevents exorbi-
some ways, be a “self-fulfilling prophecy”; once the
tant returns. Gaining market share in the growth
competitor(s) in an industry decide that the industry
stages is paramount in preparation for maturity and
is in a decline mode, their actions—especially with-
price competition. Market share leads to scale effects
drawing support for innovation and initiating price
(economies of scale and learning) and grabbing mar-
competition, may actually cause or at least exacer-
ket share in the early growth stage is less difficult
bate the decline. That is, forecasts of decline become
than later in the life cycle.
a “self-fulfilling prophecy.” Competitors “wreck the
market” by moving too quickly and too willingly to-
Maturity
ward price competition, and viable entrants with-
The maturity stage in the product life cycle is marked draw brand-building support in favor of harvesting
by increasing price competition evident in increasing profits from mature products (and shifting invest-
consumer and trade promotions (i.e., price deals for ment and attention toward “stars” and potential
customers and volume or price deals for channel stars). In the maturity and decline stages of the prod-
partners, especially retailers in consumer goods uct life cycle, viable strategies that are too often over-
channels and distributors in business channels). It is looked include consolidating brands into a “profitable
also characterized by an emphasis on peripheral ben- survivor” portfolio (accumulating brands and en-
efits and new features on existing core products, couraging exit by acquiring the competition and
brand-reinforcing communications programs seeking benefits of scale across the expanded assort-
(image-building and reminder) along with those ment), retrenching around core profitable and loyal
183
TABLE 3 Marketing Tactics Across the Product Life Cycle
Introduction Growth Maturity Decline

Products Limited Expand Assortment; Full Assortment; Fewer; Technology
Differentiated, Augmented with may overwhelm and
especially by features Service blur consumer needs
Price Skimming or Full (Collect margins Increasingly Price-based
Penetration and profits) Competitive competition/Deal
Promotion Informative; may be Differentiation; Reminder/Competitive; Reminder/Price
product category Advertising and Proliferation of price
related more than promotions geared promotions
specific product or to distinguishing
brand. Interpersonal products and brands.
communications (and
observations) very
important. Public
relations most viable.
Distribution Limited; Emphasis on Expanding Broadest; Shifting Contracting; low to
specialty and on high toward discount and no service/support.
service/high lower service/less to no
customer education customer education.
customers (which may move a “mass” or “multiple” to external factors such as general economic cycles—
segmentation scheme toward a focused or niche ap- there are several markers of maturity:5
proach), and augmenting “commoditized” products
with innovative new features and services rather than • Price Competition. As discussed, two phe-
nomena that may be harbingers of market ma-
succumbing to the apparent inevitability of mutu-
turity are the building of too much capacity at
ally-destructive price wars.
the industry level and the commoditization of
core benefits in a category. Commoditization
RECOGNIZING “INFLECTION POINTS” here refers to the fact and the perception by
All of these observations about differences in mar- customers that all products deliver the same
kets, strategies, and tactics across the product life benefits. As discussed, these two phenomena
cycle are of no value if the manager cannot recognize lead toward price competition. Increased price
the stage of the life cycle a product offering is in and, competition or even just signs that price com-
especially, if the strategist cannot anticipate and pre- petition may be imminent should be fore-
pare for life cycle changes. Generally, the introductory warnings that maturity is imminent.
stage is obvious—the new technology emerges and • Buyer Sophistication. Whether price compe-
receives media coverage. One of the attributes of the tition seems imminent or not, increased buyer
introductory and early-growth stages is the willing- sophistication is an indicator of maturing
ness of media to respond to public relations efforts markets. Sophisticated buyers tend to be better
with coverage; and sales begin slowly but accelerate as shoppers, buying what they need and unfazed
channel coverage expands. The move from growth to- by—and in fact unwilling to pay for—features
ward maturity is less obvious and often more relevant or services that aren’t relevant to them.
to strategy and strategic success. Besides moderating Knowledgeable customers need little informa-
sales growth—which is the definition of the passage tion and less service.
from growth toward maturity, but which may often • Substitutes Emerge. Another mark of a ma-
be disguised as a temporary adjustment or attributed turing market is not only increasingly intense
184
rivalry amongst existing competitors but also grow via first-time trial, by developing new
increased availability of substitutes and in- markets, or by targeting new segments.
creased buyer willingness to consider substi- • Customer Disinterest. Finally, a large segment
tutes. This buyer acceptance of substitutes is a of an active market being indifferent toward
market condition related to increased sophisti- the technology or category is an indication of
cation and understanding of core needs. The maturity. As discussed, it is relatively easy to
availability of substitutes is an external condi- gain media coverage for truly new products,
tion that may cause maturity (it is not a result and that is not only true for high-technology
of maturity). innovations. As markets move toward matu-
• Market Saturation/Fewer Growth rity, fewer mainstream media (in comparison
Opportunities. Growth markets are driven by to industry specific media) are interested in
trial—large numbers of first time users being covering offerings and events in the sector. By
introduced to and then adopting the new the time markets reach maturity, buyer and
product. In mature markets, most customers media attention is elsewhere and the product is
have tried the product and either adopted it or “yesterday’s news.” Signs that interest is waning
rejected it, and there are fewer opportunities to may be warnings of impending maturity.
Summary
Product markets emerge, grow, mature, and decline over strategic objectives, and cost and profit structures.
time. The product life cycle represents the typical moves of Therefore, marketing programs must be adapted to the
a product through these four phases and shows how sales changing characteristics and challenges of each life cycle
volume, competition, and profits evolve. Thus, understand- phase. Monitoring the environment for signals that a mar-
ing the product life cycle is essential. The product life cycle ket may be approaching an inflection point, moving from
stage fundamentally determines and constrains strategic one stage to another, particularly from growth to maturity,
and tactical alternatives. The single phases are characterized can offer crucial strategic advantage.
by differences in the competitive environment, priorities in
Carpenter, Mason A., and Wm. Gerard Sanders. Strategic Matrix: A PIMS-Based Analysis of Industrial Product
Management. A Dynamic Perspective. Upper Saddle Businesses” Academy of Management Journal 25, 3
River, NJ: Pearson Education, 2009. (September 1982): 510–531.
Christensen, Clayton M., and Michael E. Raynor. How to Moore, Geoffrey A. Crossing the Chasm (Revised ed.). New
Avoid Commoditization. Boston: Harvard Business York: Harper Perennial, 1999.
School Press, 2003. Moschis, George P. Marketing Strategies for the Mature
Hambrick, Donald C., Ian A. MacMillan, and Diana I. Day. Market. Westport, CT: Quorum, 1994.
“Strategic Attributers and Performance in the BCG
Endnotes
1. Camilla Palmer, “Saatchi Creates Lexus ‘Cocoon,’ ” 144–96, The International Center for Research on
Campaign 17 (May 3, 2002): 6. the Management of Technology, Sloan School of
2. Adapted from K. Matzler, H. H. Hinterhuber, F. Management, MIT, 1996).
Bailom, and E. Sauerwein, “How to Delight Your 4. John Quelch, When Your Product Becomes a
Customers,” Journal of Product and Band Management Commodity (2007), http://hbswk.hbs.edu/pdf/item/
5, (1996): 6–18. 5830.pdf. Last accessed on February 2, 2010.
3. Henry Birdseye Weil, “Commoditization of 5. Adapted from David Aaker, Strategic Market
Technology-based Products and Services: A Generic Management, 8th ed. (Hoboken, NJ: John Wiley &
Model of Market Dynamics,” (Working Paper # Sons, 2008), 65–66.
185
186
Experience Curve
Effects on Cost
Reduction
187
Experience Curve
Effects on Cost
Reduction
“Any customer can have a car painted any color that he wants so long as it is black,” said
Henry Ford about the Model T, the most influential car of the twentieth century. With
his Model T, Henry Ford wanted to create a car that “will be low in price that no man
making a good salary will be unable to own one—and enjoy with his family the bless-
ing of hours of pleasure in God’s great open spaces.” By standardizing the product and
taking advantage of cost savings through mass production, the price dropped from
$850 when it was introduced in 1909, to $260 in the 1924.1 Looking at the prices and
the cumulative number of cars produced over time, one can note a remarkable rela-
tionship: Every time the cumulative output doubled, the prices of the car dropped by
15 percent (see Figure 1).
85% slope:
Average List Price in 1958 Dollars
4,000 Unit prices dropped by 15% each time

the cumulative output was doubled!
1909 1910
Unit Price:
1911
2,000 1914
1912 1915
1913 1916
1923
1,000 1920
10,000 100,000 1,000,000 10,000,000

Cumulative Units Produced
FIGURE 1 Price of Model T, 1909–19232
188
Experience Curve Effects on Cost Reduction
EXPERIENCE CURVE EFFECTS TABLE 1 Cumulative Production

AND UNIT COSTS and Costs for PV Technology
Henry Ford took advantage of an empirical general- Cumulative PV Module Module Costs
ization, which the consulting firm BCG (Boston shipments in MWp (1994$/Wp)
Consulting Group) later coined as the “experience
0.25 51
curve.” After observing the behaviour of unit costs in 0.5 41
a number of industries like bottle caps, refrigerators, 1 32
and integrated circuits, BCG generalized the regular- 2 26
ity of reductions in unit costs with increased cumu- 4 20
lative output in its “Law of Experience.” Costs of 8 16
16 13
value added (total cost per unit of production less 32 10
the cost per unit of production of bought-in compo- 64 8
nents and materials) decline by a fixed percent in real 128 7
terms each time accumulated experience is doubled.3 256 5
Consider the example of the Photovoltaic 512 4
1024 3,4
Technology. In the 1950s, photovoltaic (PV) technol-
ogy, commonly known as “solar cells,” was developed
to provide long-term power for satellites. The PV mod- 941 MWp in 1998.4 Table 1 shows the cumulative in-
ules house an array of solar cells that deliver direct cur- stalled PV technology and the cost of a PV module,
rent power. In the 1970s, companies started to offer measured in dollars-per-peak-watt ($/Wp).5 In 1976,
PV technology for commercial applications (Harmon, at the outset of commercialization, module costs were
2000). Starting with a cumulative installed base of $51/Wp; in 1998, it was $3.50/Wp. Applying the expe-
15 MWp (⫽Megawatt peak, where “peak watt” is de- rience curve to PV technology, it can be seen that the
fined as the power of full sunlight at sea level on a clear average “learning rate” (experience-curve effect) is
day) in 1983, the annual average growth rate was 20.2 percent. Thus, every time the cumulative output
15–16 percent. In 1995, the cumulative installed capac- is doubled, unit costs are reduced to 79.8 percent.
ity reached 579 MW, which corresponded to just .02 Figures 2 and 3 shows the experience-curve ef-
percent of the global power generating capacity, and fect graphically. In the upper diagram the vertical
50 51
Module Price (1994$Wp)
Experience curve = 79.8%

40 41 (Every time the cumulative output
doubles, unit costs are reduced by 20.2%)
32
30
26
21
20
17
13
11
10
8
0
0 10 20 30 40 50 60 70
Cumulative Photovoltaic Module Shipments (MW)
FIGURE 2 Experience Curve of Photovoltaic Technology
189
100
(1968) $90 Experience curve = 79.8%
Module Price (1994$Wp)
(1976) $51 (Every time the cumulative output

doubles, unit costs are reduced by 20.2%)
10
(1998) $3.50
1
0.01 0.1 1 10 100 1000 10000
Cumulative Photovoltaic Module Shipments (MW)
FIGURE 3 Experience Curve of Photovoltaic Technology
TABLE 2 Experience Curves

specialization and redesign of labor, etc. It is important
for Selected Industries6 to note, however, that such cost reductions do not
occur automatically; they require management and
Industry Experience Curve can be achieved only if all learning and improvement
Microprocessors 60% opportunities are exploited. The experience curve has a
LCDs 60% number of important implications:
Airlines 75%
Personal Computers 77%
• Growth is not an option in many markets. If a
company grows slower than its competitors it
DVD players/recorders 78%
Cars 81% has to expect a cost disadvantage.
Color TVs 83% • If market shares do not change over time, unit
costs of competitors will remain the same.
• Profitability depends on experience curve ef-
axis shows the unit costs (as of 1994) and the hori- fects, hence companies with higher market
zontal axis the accumulated volume of production. share can expect a higher return on investment
In the lower diagram, the relationship between the • The first-mover advantage can be important.
accumulated volume of production and the deflated Especially in industries with high experience-
unit costs is expressed in a log-log graph as a straight curve effects, first movers can try to gain mar-
line, expressing a 79.8 percent experience curve. ket share quickly, create a cost advantage and
The experience curve is dependent on the in- prevent competitors from entering the indus-
dustry. Table 2 gives some examples of experience try by reducing prices along the experience
curves in different industries. curve.
• Unit costs can be predicted. This is important
for a company’s competitive strategy (espe-
IMPLICATIONS FOR MARKETING cially the cost-leadership strategy) and valu-
able for pricing decisions.
These experience curve effects occur as cost savings
and are gained through activities such as learning, Consider this example: There are three major and
technical progress, product and process improvement, one smaller producer of Solar Cells. The experience
curve is 79.8 percent. All of them had unit costs of $10
190
TABLE 3 Cost and Volume Comparisons of Selected Levels of Competition
Cumulated production Sales volume Market Unit Margin @ Unit

Competitor Volume (MW) in 2008 Share (%) Costs Price $4.0
A 400 40 50 2.43 1.7
B 200 20 25 3.01 .99
C 100 10 12,5 3.77 .23
D 100 10 12,5 3.77 .23
800 80
when they entered the industry with a production he could lower his prices, for example to $3.5. In that
volume of 5 MW (Table 3). case he would still earn enough money and gain
Figure 4 shows the experience curve and market share. Competitor C and D would not be able
the relative cost position for each competitor. Given to produce and to sell at a profit and might decide to
the current industry price, competitor A has the go out of business. Then, if competitor A continu-
highest margin. Strategically, he could either take ad- ously reduces his prices along the experience curve,
vantage of the higher return on investment and in- he would prevent other competitors from entering
vest in further product or process improvement, or the industry.
10
4.73
C, D Current Industry Price
3.77
B
3.01
A
2.43
10 50 100 200 400 1,000
FIGURE 4 Experience Curve and Relative Cost Position
191
Summary
As companies get more experienced in the production of a mate competitor’s cost advantages or disadvantages, and it
product (or in any task), they learn and become more effi- can provide the firm with substantial and enduring cost
cient at it. The associated cost savings have been labelled advantages. Those cost advantages can be passed on as a
experience curve effects (or “learning curve effects”). Every price advantage (savings) from the customer’s perspective,
time the cumulated output is doubled, unit costs drop at a which should lead to higher unit sales, higher market
regular rate. Computing and taking advantage of experience share, and even greater experience (in a “virtuous circle”)
curve effects have important strategic marketing implica- or reaped in higher margins and higher returns. The expe-
tions. It allows for the prediction of unit costs, it grounds rience curve has become a major concept especially for
the formulation of pricing strategies, it serves to help esti- companies that pursue a cost-leadership strategy.
Additional Resources:
Abernathy, William J., and Kenneth Wayne. “Limits of Carpenter, Mason A., and Wm. Gerard Sanders. Strategic
the Learning Curve.” Harvard Business Review Management. A Dynamic Perspective. Upper Saddle
(September–October, 1974): 109–119. River, NJ: Pearson/Prentice Hall, 2009.
Buzzell, Robert, and Bradley Gale. The PIMS Principles: Swieringa, Joop, and Andre Wierdsma. Becoming a
Linking Strategy to Performance. New York: Free Press, Learning Organization: Beyond the Learning Curve.
1987. Upper Saddle River, NJ: Addison-Wesley.
Endnotes
1. http://en.wikipedia.org/wiki/Model_T. Last accessed Perspectives on Strategy from The Boston Consulting
on July 28, 2008 Group (New York: John Wiley & Sons, 2006), 15–17.
2. Adapted from W. J. Abernathy and K. Wayne, 4. C. Harmon,“Experience curves of photovoltaic tech-
“Limits of the learning curve,” Harvard Business nology” (Institute of Applied Systems Analysis,
Review (September–October, 1974): 109–119. Laxenburg, Austria, 2000), unpublished manuscript.
3. B. Henderson,3/2006 “The Experience Curve 5. Based on data used by Harmon, and estimations for
Reviewed: History,” in Carl W. Stern and Michael S. missing data based on Harmon’s computed overall
Deimler eds., Perspectives on Strategy from The experience curve effect of 20.2%.
Boston Consulting Group (New York: John Wiley & 6. Gottfredson M. Gottfredson, S. Schaubert, and H.
Sons, 2006), 12–14 and B. Henderson (1974/2006), Saenz, “The New Leader’s Guide to Diagnosing The
“The Experience Curve Reviewed: Why Does It Business,” Harvard Business Review (February
Work,” in Carl W. Stern and Michael S. Deimler, eds., 2008): 63–73.
192
Economies
and Diseconomies
of Scale
Former CEO of General Electric Jack Welch had an iron rule: “First, second, or out!”
Each strategic business unit (SBU) was to achieve the first or the second market posi-
tion—in terms of market share—or be divested or closed. Behind this dictum lay a sim-
ple observation: Return on investment is closely related to market share. In other
words, size matters. Market leaders are usually more efficient than firms with lower
share because they benefit from economies of scale. Economies of scale exist when each
1 percent increase in production volume results in an increase of less than 1 percent in
the total cost of production. Each new unit, therefore, is less expensive to produce than
the previous one. Economies drive industry concentration or consolidation, causing
many markets like the car industry, airlines, the pharmaceutical industry, the telecom-
munications industry, aircraft production, and many others to be dominated by a few
industry giants. These giants are often referred to as the “eight-hundred-pound guerril-
las.” Advertising costs in the United States soft drink industry is a good example of the
effects of economies of scale (see Figure 1).1
A sixty-second television commercial can cost more than $5 million to pro-
duce. Coke and Pepsi spread those costs over a much larger sales volume. And they
then negotiate volume discounts with the advertising agencies that produce the ads
and the media (television networks) that run the ads. Therefore, advertising expendi-
tures per case are below five cents, compared to about twenty cents for Schweppes,
the producers of ginger ale and other mixers. Economies of scale can be achieved in a
number of ways:3
1. Cost Spreading. This is particularly important in industries with high fixed costs.
Examples of high fixed costs include research and development (R&D) costs in
the pharmaceutical industry, high advertisement costs in the fast-moving con-
sumer goods industry, and high manufacturing overhead (plant and equipment)
in the auto industry.
For example, development of the largest passenger airliner in the world,
the Airbus A380, cost about : 12 billion (roughly $18 billion US dollars). It
was estimated that Airbus must sell 250 airplanes to break even; : 48 million in
R&D costs per unit. If Airbus sells 500 A380s, the development costs per unit
would be cut in half. To benefit from economies of scale companies with high
193
Economies and Diseconomies of Scale
0.20 Schweppes
Advertising Expentiture ($ per case)
0.15 Diet 7-Up Diet Pepsi
Diet Rite
0.10 Fresca
Seven-Up
0.05 Sprite Dr. Pepper
Pepsi Coke
0.02
10 20 50 100 200 500 1,000

Annual Sales Volume (millions of cases)
FIGURE 1 Economies of Scale in Advertising: The U.S. Soft Drink Industry2
fixed costs usually try to maximize volume 4. Specialization of Technology. Large companies
output by serving very broad, even global have more capital and can more easily afford
market segments. expensive machines and technology that bring
2. Purchasing Power. Another source of scale costs down.
economies are the volume discounts that com-
Diseconomies of scale occur when various
panies receive due to the size of their purchases
kinds of forces cause larger firms to produce goods
and their bargaining power with vendors.
and services at increased per-unit costs. In other
Supermarket chains, fast food chains, car man-
words, each 1 percent increase in production volume
ufacturers and many other big companies are
results in an increase of greater than 1 percent in the
able to gain price and service concessions from
total cost of production. If companies or plants exceed
suppliers due to the sheer volume of their pur-
the optimal volume of production, costs can increase
chases in both units and in dollars. Wal-Mart,
due to diseconomies of scale (see Figure 2) for the fol-
the largest retailer ($400 billion in sales) in the
lowing major reasons:4
world, is well known for using its purchasing
power to achieve lower costs than many of its 1. Physical Limits to Efficient Size. When the
competitors. production volume exceeds capacity, addi-
3. Specialization of Labor. Economies of scale tional investments have to be made; thus, addi-
also occur because large companies with high tional fixed costs increase unit costs. Too much
volumes of production can divide labor into high-capacity utilization can prevent workers
discrete activities which then are performed from having the time to maintain the ma-
more efficiently. When complex processes are chines and this can result in more machine
broken down into a few repeatable tasks per- breakdowns.
formed by specialized workers with specialized 2. Managerial Diseconomies. Size can increase
equipment, time loss from switching from one complexity and bureaucracy, and this can re-
activity to the next is avoided, and automation duce the manager’s ability to effectively man-
is possible. age an organization.
194
Economies of scale:
• Spreading Fixed Costs
• Purchasing Discounts
• Specialization of Labor
• Specialized Machines and
Technology
Diseconomies of scale:
• Physical Limits to Efficient Size
• Managerial Diseconomies
• Worker De-motivation
• Distance to Market
Unit Costs
Low High
X
Optimal Volume
of Production
FIGURE 2 Economies and Diseconomies of Scale
3. Worker De-Motivation. In larger companies 4. Distance to Market. Finally, diseconomies of

workers become segregated and communicate scale can occur because of the physical distance
less with each other, the individual’s contribu- of larger, centralized companies from the mar-
tion is diminished and increased specialization ket which leads to higher transportation costs,
can lead to demotivation. less direct customer contact, etc.
Summary
Size can lead to cost advantages. Known as economies of are exceeded, when large organizations become complex
scale, this important concept lies behind cost leadership and bureaucratic, etc. Marketing strategists need to know
strategies and mass marketing. The larger the market how costs behave depending on production volume, when
share and the production and sales volume, the lower the they formulate their strategies (e.g., cost leadership versus
unit costs as, for example, fixed costs can be spread over a differentiation, mass marketing versus targeting small seg-
larger amount of units. However, if an optimal volume of ments) and when they determine prices of products and
production is exceeded, diseconomies of scale can occur. contribution margins.
This can happen when physical limits to an efficient size
195
Barney, Jay B., and William S. Hesterly. Strategic Management Haskett, James L., W. Earl Sasser Jr., and Joe Wheeler.
and Competitive Advantage. Upper Saddle River, New Ownership Quotient: Putting the service profit chain to
Jersey: Pearson Education, 2006. work for unbeatable competitive advantage. Boston:
Carpenter, Mason A., and Wm. Gerard Sanders. Strategic Harvard Business School Press, 2006.
Management. A dynamic perspective. Upper Saddle Tom Peters “Rethinking Scale.” California Management
River, NJ, Pearson Education, 2009. Review. 35, 1 (Fall, 1992): 7–29.
Endnotes
1. Robert M. Grant, Contemporary Strategic Analysis, 6th 4. Jay B. Barney and William S. Hesterly, Strategic
ed. (Malden, Oxford, Carlton: Blackwell Publishing, Management and Competitive Advantage (Upper
2008). Saddle River, New Jersey: Pearson Education, 2006).
2. Source: Ibid.
3. Adrian Haberberg and Alison Rieple, Strategic
Management. Theory and Application (Oxford:
Oxford University Press, 2008).
196
Economies of
Scope/Synergies
and Virtuous Circles
Compared to economies of scale, which are driven by producing more of a single product,
economies of scope are realized when producing more than one product makes the pro-
duction of all units in the assortment cheaper. Whereas size and volume lead to
economies of scale, diversity brings economies of scope. If producing product Y makes
producing product X more efficient (cheaper per unit), that is an economy of scope.
Economies of scope are a form of “synergy” (from the Greek meaning “working
together”). Synergies are realized when two (or more) inputs or activities (factors)
come together or act together to result in output that is greater than the sum of the two
factors taken separately [i.e., (1⫹1) ⬎ 2]. A good example of an economy of scope and
synergy is the use of by-products from the production of one product in the produc-
tion of another product (i.e., “by-product synergies”). Chaparral Steel, for example, re-
alized improved efficiencies and reduced pollution by using slag “waste” from steel pro-
duction in the production of Portland cement, another of its product lines. The
productive use of the slag lowered the waste, and thereby the costs of steel production
and the slag itself was a more efficient input than the lime it replaced, which in turn re-
quired less processing and lower energy inputs, thereby lowering the cost of cement
production.1 Economies of scope and synergies can be an important source of sustain-
able competitive advantages—and one that may be particularly difficult for competi-
tors to replicate or substitute for. Chaparral’s competitors who produced only steel or
only Portland cement, for example, could not easily match the new efficiencies of by-
product usage.
Economies of scope exist whenever there are cost savings from using a resource
in multiple activities carried out in combination rather than carrying out those activi-
ties independently. There are basically six forms of synergies:2
1. Shared Tangible Resources. Unit costs can be reduced when tangible resources
such as production plants, transportation systems, or information facilities are
utilized across a range of products. The German car manufacturer Volkswagen,
for example, reduced costs of the SUV Touareg by 30 percent by sharing re-
sources, including production facilities with Porsche’s SUV, the Cayenne.
2. Shared Intangible Resources. Hewlett Packard discovered that its inkjet technol-
ogy could replace hypodermic needles or pills for the delivery of vaccines or
197
Economies of Scope/Synergies and Virtuous Circles
other medications. It used that intellectual Economies of scope is a common reason for
property and innovation to develop patches for mergers and acquisitions, and for diversification
drug delivery. The medications in the patch are strategies. When companies move into new products
heated and then injected through the needles, and/or markets which are related to the core busi-
delivering combinations of different drugs de- nesses in one or more of the following ways, they can
livered at different times with dosages meas- benefit from synergies.3
ured in a more controlled fashion.
3. Pooled Negotiating Power. By combining their • Customer assets: Brand recognition, cus-
tomer loyalty and trust can reduce costs dra-
purchases, different strategic business units
matically when new products are introduced.
can benefit from bulk discounts and from cost
savings in transportation and logistics. • Channel assets: Access to distribution channels
and distributor loyalty facilitates the establish-
4. Coordinated Strategies. Multi-business-unit
ment of a dealer network and can help to over-
companies can coordinate market entry strate-
come shelf-space restrictions for new products.
gies, product development, pricing strategies,
etc., to avoid duplication of efforts and to ben- • Input assets: Knowledge of and access to sup-
plier markets and cheap raw materials or compo-
efit from cross-selling etc.
nents can also reduce costs and time to market.
5. Vertical Integration. Vertically integrated
companies can benefit from a faster flow of • Process assets: Product or market-specific expe-
rience and know-how in, for example, produc-
products through the supply chain, reduced
tion and marketing processes can facilitate the
inventory costs, and improved market access.
development and marketing of new products.
6. Combined Business Creation. Diversified
companies can combine the know-how and • Market knowledge assets: Knowledge of com-
petitors, customers, etc. provides valuable in-
technologies of each business unit to create
sights into the marketing process.
new products or businesses.
Summary
While economies of scale arise when producing greater types of synergies exist and to what extent they reduce
quantities of a single product, economies of scope come costs. In practice, however, it is difficult to estimate the ef-
from selling a greater variety of products that share syner- fect of economies of scope and to realize them. In most
gies. There are many ways to benefit from synergies, and cases, companies tend to overestimate the potential of
for a marketing strategist it is important to know what economies of scope.
Carpenter, Mason A., and Wm. Gerard Sanders. Strategic A Resource-based View.” Academy of Management Journal
Management. A dynamic perspective. Upper Saddle 39, no. 2 (1996): 340–367.
River, NJ: Pearson Education, 2009. Kaplan, Robert S., and David P. Norton. Alignment: Using
Markides, Constanctinos C., and Peter J. Williamson. the Balanced Scorecard to Create Corporate Synergies.
“Corporate Diversification and Organizational Structure: Boston: Harvard Business School Press, 2006.
Endnotes
1. See Gordon Forward and Andrew Mangan, “By-prod- 3. C. C. Markides and P. J. Williamson, “Corporate
uct Synergy,” The Bridge 29, no. 1 (Spring 1999): 12–15. Diversification and Organizational Structure: A
2. Michael Goold and Andrew Campbell, “Desperately Resource-based View,” Academy of Management
Seeking Synergy,” Harvard Business Review Journal 39, no. 2 (1996): 340–67.
(September–October, 1998): 131–43.
198
Market-Share Effects
Most organizations want to have high market share, all else being equal, and some hold
high market share as their primary objective. This may be the case because marketing
managers are inherently competitive; in fact, marketing strategy is often analogized to
competition in warfare and sports, with the “winner” being whichever firm has the
greatest market share. Another reason for this focus may be the fact that “increasing
market share” looks a lot like “increasing sales” on a day-to-day basis. In other words, as
marketers strive to improve sales, they are also working to improve market share. Thus,
the processes of increasing sales and increasing market share are inextricable, especially
in low- or no-growth markets.
MARKET SHARE AS A STRATEGIC OBJECTIVE

Besides its appeal as a competition-oriented yardstick for one’s own performance, mar-
ket share for many companies is a strategic objective. Empirical studies have demon-
strated that it is related to cost advantages and profitability, and many managers incor-
porate market-share effects into their strategic considerations. As empirical findings
regarding market share are somewhat ambiguous and the use of market share comes
with some problems, a more thorough, critical look at its effects and managerial impli-
cations is necessary.
Market Share and Cost Advantages

An improvement in market share signifies more than simply a “win” or a jump in sales
figures. Because market share is a relative measure—in other words, it shows a firm’s
success relative to the competition—an increase in this measure should also lead to cer-
tain competitive advantages. For one, the firm with higher market share has, by defini-
tion, greater scale, and scale leads to advantages in learning and unit costs. In particular,
scale effects (experience or learning curve effects and economies of scale) connect the
number of units produced to lower per-unit costs, which offer a significant competitive
advantage. The experience curve posits that the more often a task or operation is re-
peated, the lower will be the cost of completing it. Specifically, the relationship that has
been observed is that each time cumulative volume is doubled, value added costs de-
cline by a predictable percentage.
Economies of scale, on the other hand, arise, when unit costs decrease as output
increases. In practice, the experience curve and economies of scale are related and often
occur together. One way to think about the difference is that experience is based on
number of units produced regardless of time and scale is based on number of units
produced per period of time.
199
Market Share and Profits Therefore, the correlation of share with profits may
not be as straightforward as it first appears. For that
The firm with lower costs can charge a lower price for
reason, this note will briefly describe some important
its product (further increasing its unit sales, and thus
findings related to market-share effects and link those
its market share, in a virtuous cycle), or it can take
findings to their marketing strategy implications.
higher margins at the market price. Experience curve
effects also offer the benefits of higher reliability and
quality. In other words, as a firm makes more units, EMPIRICAL FINDINGS: THE PROFIT
its number of defects decreases and its “conformance” IMPACT OF MARKETING STRATEGY
or uniformity across units increases. (Conformity is a (PIMS) DATA
dimension of quality, especially from an operations
Research on business strategy in general and on the
standpoint.). These basic share-profitability connec-
market share—profitability relationship in particular
tions are illustrated in Figure 1.
has been facilitated by compilation of the so-called
Thus, increased market share seems to be a de-
Profit Impact of Marketing Strategy (PIMS) database.
sirable outcome that is associated with specific com-
Collection of the PIMS data was initiated by Sidney
petitive advantages. For this reason, many firms in-
Schoeffler in the 1960s at the request of General
clude market-share targets in their objectives and
Electric, which had begun analyzing similar informa-
strategic planning. Extensive research has shown that
tion about its own business units in the 1960s. In the
market share and profitability do correlate—meaning
early 1970s, the Management Science Institute at
that firms with higher market share are, in fact, more
Harvard Business School, with Schoeffler’s continued
profitable. However, the relationship between share
involvement, extended PIMS data collection across
and profits is complex, and it is not clear whether
many more companies and industries. Then, in the
market share actually causes higher profitability. It
mid-1970s, the Strategic Planning Institute, a not-
could be that the reverse relationship is true:
for-profit organization, was created to facilitate the
Profitability may lead to higher market share, and
movement of the project from an academic to operat-
other factors (such as higher quality products) may
ing system. Today, the PIMS data include standardized
lead to the differences in both profits and share.
information about 3,800 business units, including
their income statement and balance sheet, quality and
price data, new product development outcomes, data
Market Share on market share and changes in share, and descrip-
tions of markets, channels, and tactics for each busi-
ness unit and its major competitors. Although the
Strategic Planning Institute recently closed its North
American offices, it continues to operate in Europe
Scale Effects and to maintain the existing data base. The PIMS data
• Economies of Scale have provided researchers with invaluable insight into
• Learning Curve Effects the relationships between firm activities, strategies,
and results, including the effects of market share on
profitability.1
The PIMS data have led to several observations
that are now axiomatic in strategy literature, includ-
Profitability ing the fact that market attractiveness (growth and
investment intensity) and competitive position (es-
pecially market share) are strongly correlated with
FIGURE 1 Market Share and Profitability profitability and returns. In fact, the market share—
Higher market share leads to increased scale effects and profitability relationship is so robust and so often
lower costs—which leads to higher profitability. replicated in the PIMS database that “PIMS” was
200
sometimes mistakenly taken to stand for “Profit STRATEGIC IMPLICATIONS

Impact of Market Share.”2 Various researchers OF MARKET SHARE
adopting different assumptions, covariates, and sta-
tistical methods have offered different estimates of A number of issues emerge, when companies use
the market share—profitability relationship, but the market share for their strategic considerations. They
absolute magnitude seems to be about three market- must be aware that market share depends on market
share points to one point in ROI (i.e., an increase of definition, and that market definition can be a tricky
three percentage points in market share is related to a task. Also, the causal direction between market share
one-percentage-point increase in profitability; see and profitability might be inverse, and market-share
Figure 2). Furthermore, a review of more than 48 orientation might lead to an excessive competitor
studies and 276 reported share–profit elasticities that orientation. Finally, market share has several strate-
have been estimated using the PIMS and other data gic implications that should be considered when
and found that, even with the influence of many di- strategies are formulated.
verse covariates taken into account, the relationship
Defining the Market That Is Shared
between share and ROI is still about five share points
to one ROI point.3 Nevertheless, there are several is- Relating strategy and results to market share raises
sues that must be highlighted when considering an important question: For what market is the market
market share, especially when considering market share being computed? Markets can be defined and la-
share as the basis of a firm’s marketing strategy. beled in many ways, and decisions about market def-
These include difficulty in defining what market is inition can have powerful effects on strategic think-
being shared; ambiguity in the causal direction of the ing and vision, objectives setting, and competitive
relationship and the likelihood that intangible fac- actions. Market definition is obviously essential in
tors (such as product quality) drive both share and the consideration of share as a means toward profits
profits; and the fact that market share should be ap- or as an evaluation metric. In fact, before computing
proached with caution as an external, competitor- market share, the denominator must be specified,
oriented objective. and that specification will influence all subsequent
considerations.
For example, Pepsi’s Gatorade holds a dominant
75 to 80 percent share of the sports drink market in the
45 United States (Coca-Cola’s PowerAde is a distant sec-
40 ond), and Aquafina, another Pepsi brand, is the U.S.
Average Pre-Tax ROI
35 market-share leader in bottled water, just ahead of

30 Coca-Cola’s Dasani (although this is not true in
25 Europe). So, which “market” should Pepsi be con-
20
cerned with, and under what circumstances? The
15
Gatorade and Aquafina brand managers may argue for
10
5
the “sports drink” or “bottled water” denominators,
0 but the substantive benefits of market share—
<10% 10%- 20%- 30%- 40%- 50%> economies of scale in production and distribution,
20% 30% 40% 50%
Market Share
channel leverage, experience curve effects, and pur-
chasing power—may not be achieved at the submarket
or national level. Rather, they may accrue to the domi-
FIGURE 2 Market Share and ROI4
nant overall U.S. beverage-category leader (Coca-Cola
This figure suggests that as market share rises, pre-tax
Corporation), or instead to the global beverage-cate-
ROI does as well by a fairly predictable percentage. For
example, a share of 10 percent or less obtains an ROI of gory leader (also Coca-Cola). Thus, understanding the
a bit more than 10 percent, while a share of greater underlying drivers of share effects and the reasoning
than 50 percent obtains an ROI of around 40 percent. for holding share as an objective is crucial to defining
201
the market for computing share effects. Moreover, an seems, is that all of these connections are real, at least
appropriate and clear definition of the market is essen- in some degree and in some situations. Indeed, more
tial to effective use of market share in strategy forma- skillfully managed firms do enjoy both higher market
tion, implementation, and assessment. shares and higher profitability, and better product
quality does lead to both higher margins (which con-
Causation and Covariates tribute directly to higher profitability) and higher
market share. Thus, it is unsurprising that product
As previously mentioned, the causal direction of the
quality, managerial skill, cost control, low-cost pro-
relationship between market share and profitability
duction, and advertising effectiveness all lead to both
is less clear than simple observations might suggest.
higher market share and higher ROI. The core con-
That is, even though these two things unquestion-
nection between market share and profitability,
ably correlate, it is unclear whether market share
mediated by the benefits of scale, is also real.
causes profitability or vice versa. Alternatively, it is
Nevertheless, it remains unclear whether market share
possible that this correlation could be “spurious” and
causes profitability or simply correlates with it, and
explained by the fact that both market share and
even if one leads to the other, it may not be true that ef-
profitability are driven by other characteristics, such
fective strategy can be developed based on the premise
as product quality, management skill, organizational
that increased share leads to increased profits.
culture, access to scarce resources, or even luck.5
Figure 1 illustrates these alternative explanations. In
Competitor-Oriented Objectives
the figure, market share contributes to profitability
via increased scale, but, at the same time, relation- Another problem with building strategy on market-
ships exist between other variables (especially prod- share objectives is that market share is a competitor-
uct quality) and both share and profits. As depicted oriented objective: It is inherently based on how the
in the figure, profitability and the resources it pro- firm performs in comparison with the competition,
vides can also “feed back” to increased market share. rather than on how it delivers value to its customers,
The complex relationships between market how it performs essential value-adding activities, or
share, profitability, and other characteristics of a firm how profitable it is. That is, according to this view,
have been examined via extensive research using so- market share is not itself about profitability; rather, it
phisticated statistical techniques. The conclusion, it involves external phenomena and comparisons to
Market Share
Other Factors:
• Management Skill
• Quality
Scale Effects
• Corporate Culture
• Economies of Scale
• Access to Resources
• Advertising Effectiveness • Learning Curve Effects
• Luck
Profitability
FIGURE 3 Possible Market Share—Profitability Relationships
202
others. Even more problematic is the fact that exter- (RC) Cola, which can’t wrest shelf space or media
nal, competitor-oriented orientations have been time from the two giants.8 Similarly, Wal-Mart relies
shown to result in worse performance across a variety on its market dominance to apply purchasing lever-
of settings. age to lower costs, and its scale justifies investments,
Wharton Business School Professor J. Scott (both by it and by its vendors) in efficiencies such as
Armstrong has reviewed and extended findings on RFID tag (radio-frequency identification tag) inven-
the negative effects of competitor-orientated strate- tory tracking; Wal-Mart’s purchasing leverage and
gies. According to his results, and looking across investments in efficiencies then lead to even greater
many diverse tasks, people who adopt or who are market share, more purchasing leverage, and yet
manipulated into a competitor-oriented mindset re- more resources to invest in efficiencies—forming a
alize inferior results compared to those who adopt classic virtuous cycle. In fact, market leaders, by defi-
internally focused objectives. Similarly, as per analy- nition, enjoy greater benefits of scale, including
sis of data from more than four decades of corporate economies of scale and experience curve advantages,
performance by twenty Fortune 500 firms, those and they may also influence category-wide price
firms with competitor-oriented (market share) ob- points and promotion policies. Market leaders can
jectives fared worse than those with internal, profit- also invest in category expansion—advertising and
oriented objectives.6 Importantly, these results relate promotion that grows overall category sales—and
to how strategy and objectives are established, not to retain the benefits of this expansion, whereas “also-
the basic relationship between market share and rans” that invest in category expansion end up con-
profitability. That is, the question is not whether tributing to other firms’ sales more than to their own.
firms would, all else being equal, prefer higher mar- Nevertheless, other examples emphasize that
ket share; after all, most firms would always choose high market share is not the only way to achieve re-
higher market share over lower market share. Rather, turns; indeed, they suggest that market share itself
the question is whether firms are wise to establish may not be enough, and some recent research has
strategic objectives around market share or to under- concluded that setting competitor-oriented objectives
mine other objectives, such as positioning and mar- in general and market-share-based objectives in par-
gins, to achieve market share? Armstrong’s research ticular may actually be deleterious to firm perform-
indicates that internally focused objectives are far ance. It is certainly true that many firms realize high
more effective than competitor-oriented objectives. returns without high market share and, conversely,
that many high-market-share firms fail to garner high
returns—or even any positive returns whatsoever. For
Market Share and Strategy
example, at the same time that Toyota has succeeded as
“First, second, or out.” a market-share leader, GM has failed. Until very re-
Jack Welch, Former CEO cently, General Motors was the leading producer of au-
of General Electric (GE)7 tomobiles in terms of units sold. Still, despite this mar-
ket share, GM was leaving customers dissatisfied and
Jack Welch’s famous dictum for General Electric’s losing money. In the video game market, Sony (with its
(GE’s) portfolio management practices grounded PlayStation 3) and Microsoft (with its Xbox 360) strug-
GE’s strategy on the conviction that market share gle to realize profits even though they dominate the
leads to profits, and behemoths like Wal-Mart, market in terms of share; meanwhile, Nintendo, with
Microsoft, and Toyota seem to confirm that supposi- the Wii system, is one of the most profitable companies
tion. If market share doesn’t make profits inevitable, in Japan.9 Similarly, during the “Dot.Com” bubble of
it is certainly a powerful weapon to have in a brand’s the late 1990s, many firms raced to capture market
arsenal. For example, even if Coke and Pepsi fight for share but failed to focus on the immediate need to
number one and number two in market share with- make money: “Speed was crucial in being first to mar-
out gaining substantial advantage over each other in ket, and the key to success was to capture ‘eyeballs’ or
profitability, they are still the envy of Royal Crown visitors to your Web site. [It was believed that] eyeballs
203
would lead to market share, which would eventually Some particular issues to consider when inte-
result in profits somewhere down the line.”10 grating market-share considerations into a strategy
Unfortunately, this belief failed to hold true for many include the following:
Internet-based start-ups.
Given these scenarios, what conclusions can be • Scale effects: The chief precondition to using
drawn from the existing research on market-share ef- market share as an objective in strategy defini-
fects? Market share certainly provides some specific tion should be some well-tested expectation of
benefits, including economies of scale, experience substantial benefits from scale. Can the firm
curve effects, and leverage to influence marketwide expect to learn in important competitive areas
norms (such as price points and discounting pat- as it gains share and experience?
terns). These benefits may lead to marketplace and fi- • Dissuasion of competitors: Often, market
nancial success. However, there is also evidence that share can serve as a barrier to entry for com-
share is not the only route to profitability and that the peting firms. Thus, companies may seek to
very act of defining strategy and objectives by market- gain market share as a way to discourage new
share metrics may hurt performance. Many appar- entrants and increased rivalry.
ently contradictory cases—Toyota versus General • Standardization: If an industry is expected to
Motors, Nintendo versus Sony and Microsoft, and the establish standards, then the firm with the
short-lived Dot.Com bubble—underscore the need highest market share for that industry will usu-
to carefully consider use of market share as a strategy ally earn the power to influence or even lead
objective and to carefully examine assumptions about the process of standard setting—and the ablil-
how share might drive or impede success. ity to dictate industry-wide standards is a pow-
So, with all else being equal, market share is an erful strategic advantage.
indicator of and correlates with profitability and af- • Ancillary sales: Market share can establish an
fords a firm certain advantages in operations and in the “installed base” of equipment and establish re-
market. However, market share is also an outcome of lationships with customers who will purchase
important strategic, managerial, and tactical accom- ancillary products, supplies, or services from
plishments—that is, doing other more immediate tasks the firm. This is sometimes called “razor-blade
well leads to increased market share. Thus, market economics,” because razor companies often
share itself may not be an effective means to success so give away razors (the handles) with the expec-
much as it is a marker of success. In addition, market tation of future, highly profitable blade sales.
share can be a distracting and even misleading consid- • Customer “stickiness”: Customers gained via
eration in some instances. In particular, market share market-share oriented strategies must be re-
that is achieved (“bought”) with low prices, meager or tained as costs come down, margins go up, or
non-existent margins, and/or consequent degradation competition in the market changes; otherwise,
in product quality may be a Pyrrhic victory. share-based strategies may be ill-advised.
Summary
Market share and profits move together (correlate), but the wise to recall Edward Abbey’s admonition: “Growth for
wisdom of using market share as a dominant strategic ob- growth’s sake is the ideology of the cancer cell.”11 Setting
jective or of organizing marketing activities around gain- market share as an objective or taking actions motivated
ing share is uncertain. Share that corresponds to other, primarily to gain share should be carefully considered and
well-thought-through strategies, especially to a strategy should be based on solid understanding, or at least on def-
aimed at increasing production to realize the benefits of inite and well-tested assumptions about future profits.
scale, may well be worth pursuing. Nevertheless, it may be
204
Armstrong, Scott, and Kesten C. Green. “Competitor- Jacobson, Robert, and David A. Aaker. “Is Market Share All
Oriented Objectives: The Myth of Market Share.” that It’s Cracked Up to Be?” Journal of Marketing 49
International Journal of Business 12, no. 1 (2007): 117–136. (Fall 1985): 11–22.
Buzzell, Robert D. “The PIMS Program of Strategy Simon, Hermann, Frank F. Bilstein, and Frank Luby.
Research: A Retrospective Appraisal.” Journal of Business Manage for Profit, Not for Market Share: A Guide to
Research 57, no. 5 (May 2004):478–483. Greater Profits in Highly Contested Markets. Boston:
Buzzell, Robert, and Bradley Gale. The PIMS Principles: Harvard Business School Press, 2006.
Linking Strategy to Performance. New York: Free Press,
1987.
Endnotes
1. For more on the PIMS database, its history, and its of Marketing Research 31, no. 2 (May 1994, Special
content, see the Strategic Planning Institute’s site at Issue on Brand Management): 191-201; Robert
http://pimsonline.com/index.htm; also see Robert Jacobson and David A. Aaker, “The Strategic Role of
Buzzell and Bradley Gale, The PIMS Principles: Product Quality,” Journal of Marketing 51, no. 4
Linking Strategy to Performance (New York: Free Press, (October 1987): 31–44; and Robert Jacobson,
1987); and Robert D. Buzzell, “The PIMS program of “Distinguishing among Competing Theories of the
strategy research: A retrospective appraisal,” Journal of Market Share Effect,” Journal of Marketing 52, no. 4
Business Research 57, no. 5 (May 2004): 478–483. (October 1988): 68–80.
2. Ibid., p. 479. 6. See J. Scott Armstrong and Kesten C. Green,
3. See Buzzell and Gale, The PIMS Principles; and “Competitor-Oriented Objectives: The Myth of
David M. Szymanski, Sundar G. Bharadwaj and P. Market Share,” International Journal of Business 12,
Rajan Varadarajan, “An Analysis of the Market no. 1 (2007): 117–136; and J. Scott Armstrong and
Share–Profitability Relationship,” Journal of Fred Collopy, “Competitor Orientation: Effects of
Marketing 57, 3 (July 1993): 1–18. Compare these Objectives and Information on Managerial
results with those of Robert Jacobson and his col- Decisions and Profitability,” Journal of Marketing
leagues, who, in questioning the causal nature of Research 33 (1996): 188–199.
the market share–ROI correlation, arrived at sub- 7. Jeffrey A. Krames, The Jack Welch Lexicon of
stantially lower estimates of the relationship using Leadership: Over 250 terms, concepts, strategies &
several different assumptions and testing for ef- initiatives of the legendary leader (New York:
fects on change in ROI. McGraw Hill, 2002), quoted on page 90.
4. From Buzzell and Gale, The PIMS Principles, page 9, 8. “RC Cola Wins Suit Against Coca-Cola,” New York
Exhibit 1-2: Market Share and ROI (noting that this Times, June 24, 2000, page 14.
graph is “based on 4-year average of pretax, pre-in- 9. J. Surowiecki, “In Praise of Third Place,” The New
terest ROI for 2,611 business units in the PIMS Yorker (December 4, 2006)
database). 10. Jeffry A Timmons and Stephen Spinelli, New
5. See, for example, Robert Jacobson and David A. Venture Creation: Entrepreneurship for the 21st
Aaker, “Is Market Share All that It’s Cracked Up to Century (New York: McGraw-Hill/Irwin, 2004); 188.
Be?” Journal of Marketing 49 (Fall 1985): 11–22; 11. Edward Abbey, Voice Crying in the Wilderness (Vox
David A. Aaker and Robert Jacobson, “The Financial Clamantis in Deserto): Notes from a Secret Journal
Information Content of Perceived Quality,” Journal (New York: St. Martin’s Press, 1990) 98.
205
206
Scenario Analysis
207
Scenario Analysis
Scenario analysis is, essentially, an elaborate “if . . . then . . .” planning tool. It might be
better described as an “if . . . and if . . . and if . . . and if . . . [all at the same time], then . . .”
tool in which multiple forces (“drivers” of future conditions) are simultaneously com-
bined to create rich “possible futures” or scenarios1. If forecasting asks “What will the
world be like in the future?” scenario analysis asks “What could the world be like . . . and
what will we do if that future comes about?” Scenario analysis also asks “What
should we do now [or between now and then] to prepare, just in case the future looks
that way?”
For example, if a regional home construction company wants to forecast interest
rates, because interest rates have a strong impact on the building industry, the builder
would base that prediction on trends in the economy and on inputs from economists
and bankers. However, forecasting interest rates is challenging and expensive, and inter-
est rates are not the only driver of any company’s circumstances and strategic results.
Other drivers for a builder might include the regulatory environment (such as local
housing policies) and the competitive environment. Instead of forecasting specific vari-
ables, a marketing strategist might conduct a scenario analysis for the builder in which
several levels of interest rates are incorporated (e.g., high, moderate, and low interest
rates), along with two levels of competition (a large, national builder enters the market
or no change in the competition), and a couple of possible regulatory shifts (such as
continued pro-growth policies versus tightened regulations/slow-growth policies are
enacted).
In scenario analysis, several concurrent factors or “drivers” such as interest
rates, building regulations, and competitive intensity, are combined to create descrip-
tions of complex possible “futures”—which may not come true, but could. In the real
world, many factors change at the same time and many factors influence strategic
results; scenario analysis captures that multifaceted nature of reality. Instead of
focusing on a single factor, such as interest rates or even the economy, or describing
multiple factors separately, scenario analysis brings the factors together to jointly
describe a complex strategic context. For example, one scenario for the regional
building company, discussed above, might encompass high interest rates, local
governments constraining growth and limiting building permits, and a large builder
entering the regional market. A more optimistic future might be low interest rates,
moderate building permitted, and no new competition. These scenarios’ multifaceted
nature would enrich analysis in a realistic way and challenge assumptions, and
broaden strategic thinking.
In this example three drivers, with three, two, and two levels or possible future
conditions respectively, could generate 12 different scenarios. Not only would analyzing
208
Scenario Analysis
12 scenarios be unwieldy, but also it is unnecessary. It the environment (interest rates, consumer prefer-
is best to develop three or four complex scenarios for ences, attitudes etc.) may be quite accurate in the
further consideration. Each plausible and internally near-term but scenario analysis is more realistic and
consistent (but not real) scenario is then analyzed accurate in the long-term because it accommodates
against the firm’s strategies and possible strategies, the inherent uncertainty of long-term forecasts.
and the most important drivers of the future and
prudent actions to prepare for the future can be Identify Drivers
identified. By using scenario analysis, it becomes less
What factors or forces could drive the firm’s future
important that any forecast—for interest rates or any
or the industry—and which of those drivers are
other driver—be precisely right. Because several pos-
most important? Searching for the three to five most
sible outcomes for each driver are included in the
important drivers involves consideration of the var-
analysis, the process highlights the range of possibili-
ious elements of the situation (the PEST domains of
ties and the possible impacts of each driver as well as
political/regulatory/legal, economic, social/cultural,
helps to identify feasible strategic responses to those
and technical/physical as well as the competitive en-
eventualities.
vironment) and consideration of internal factors
and initiatives with uncertain outcomes, such as new
THE SCENARIO ANALYSIS PROCESS product development/R&D projects and human re-
source and training initiatives. That is, all drivers
As powerful as it is, scenario analysis can nevertheless
need not be external, but most uncertainties and un-
be reduced to a few basic steps:2
controllable drivers are external. In the example
1. Define the scope of the analysis; developed briefly above, there were three drivers
2. Identify the drivers of future strategic contexts; (interest rates, building regulation, and competi-
3. Select specific levels, changes, or events within tion); generally it is useful to include at least three
each driver to frame the future; and as many as five drivers.
4. Combine those drivers and levels/changes/events
to develop comprehensive scenarios; Select Specific Levels, Changes,
5. Select three or four scenarios for analysis; or Events within Each Driver
6. Analyze and plan for each selected scenario;
Many drivers have a continuous range of possible
and
outcome levels—not all equally likely, but certainly a
7. Integrate results to identify near- and long-
wide range of values the driver could have in the fu-
term directions, actions, and investments and
ture. For example, inflation is, in reality, a continuum
to appraise strategic alternatives.
of percentage changes that can range from 0 (or even
negative in those rare instances of “deflation”) to 5,
Define the Scope
10, or 15 percent—and the reality will certainly be
Most scenario analyses in marketing strategy are measureable down to the tenth or hundredth of a
focused on specific product offerings and their target percent (e.g., 6.9% or 3.48%). Creating specific sce-
markets. In order to encourage deep analysis, creative narios for analysis and planning requires selecting a
thinking, and relevance, the sector (markets/industries), few specific levels of each driver to represent the whole
the environmental/internal factors to be considered range (e.g., low inflation will be 2%, moderate infla-
(at a broad level, such as economic, social, competition will be 6%, and high inflation will be 12%). The
tive, etc.), and the specific timeframe should all be chance that the analysts will have selected the exact
spelled out at the outset. Scenario analysis can level that eventually occurs is very low—but the
accommodate a variety of timeframes but is most chance that scenario analysis can select a set of
useful for longer-term strategizing, and long-term specific values that, taken together, represent the
horizons. Specific forecasts about various factors in range of possibilities is very high. The specific levels
209
Scenario Analysis
selected for analysis are not necessarily the “most 36 scenarios). Therefore, three or four scenarios should
likely”; they should be the levels that insure that the be chosen that frame the range of possible outcomes.
planning process considers the whole range of possi- That is, all of the possible scenarios define the universe
bilities; they should also include levels or conditions of possibilities—but the analysis should consider a
that, even if unlikely, would have extreme impacts. sample from that universe. In that way it is possible to
dig deep into the selected scenarios rather than to skim
Combine Drivers into Scenarios a wider range. The ultimate reality will be different
The next step is to select levels from each driver and than any of those three or four fictitious scenarios—
combine those into internally consistent scenarios but three or four is enough to facilitate consideration
(Figure 1). Levels of some drivers may be incompati- of the range of possible futures and the implications of
ble with some levels of other drivers and are thereby those possibilities for current and potential strategies.
internally inconsistent; national competition may not At this stage it is useful to name each selected scenario
enter a market during a recession or downturn in the to help organize and enliven discussions, and each
housing market. Therefore, high interest rates would scenario should be expanded into a fully-developed
be internally inconsistent with intensification of the narrative to enrich discussions.
competitive environment—that scenario wouldn’t
make sense. Analyze each Scenario
“If these drivers worked out in this pattern to create
Select Scenarios for Further Analysis
this scenario, then a strategy for this firm
A very few drivers can quickly create an unmanage- would be best, a strategy will meet chal-
able number of scenarios (two drivers with two levels lenges in . The firm would want to have
each and two drivers with three levels each yield between now and then.” For each scenario,
Driver 1: Defining Outcomes: A, B, C
Driver 2: Defining Outcomes: A, B
Driver 3: Defining Outcomes: A, B, C
Driver 4: Defining Outcomes: A, B
Driver 1: Driver 2:
Level C Level A
SCENARIO #4
Driver 3: Driver 3:Driver 1: Driver 2:

Level C Level C Level A Level B
Driver 1: Driver 1:
Level A Level A
SCENARIO #1
SCENARIO #2
Driver 3: Driver 4:
Level B Level B
Driver 3: Driver 4:
Level B Level B Driver 1: Driver 2:
Level B Level B
SCENARIO #3
Driver 3: Driver 4:
Level A Level A
FIGURE 1 Drivers of Scenarios
210
Scenario Analysis
Driver 1: Driver 2: Plan I: Response to Scenario 1

Level A Level B
• Strategy
SCENARIO #1 • Tactics
Driver 3: Driver 4:
Level B Level B
FIGURE 2 Analyze Each Scenario
how would the firm answer those related questions? alternative strategy would work well? This process is
Essentially, the analysts (or cross-functional team of graphed in basic terms in Figure 2.
strategists) assume the scenario will come true and
plan for it. These analyses should consider the resulting
Integrate Results
industry structure (within a five-forces framework or
otherwise), competitive actions and reactions, key Analyzing across scenarios and plans allows the firm
uncertainties and risks, and the resulting impacts on to identify near- and long-term directions, actions,
the firm and its offerings. Existing strategies and investments, and to appraise strategic alternatives. As
alternative strategies should be tested within the shown in Figure 3, this is a matter of integrating
“reality” of each scenario: How will this strategy work the results of all of the scenarios/plans and gleaning
in the future envisioned in the scenario? What would insights from commonalities and differences across
have to be done to make the strategy work better? What them. Some insights come from what is very likely or
Driver 1: Driver 2:
Level A Level B Plan I: Response to Scenario 1
• Strategy
Driver 3: Driver 4:
Level B Level B
Driver 1: Driver 1:
Plan II: Response to Scenario 2
Level A Level A
• Strategy
Driver 3: Driver 4:
Level B Level A
Driver 1: Driver 2: Plan III: Response to Scenario 3
Level B Level B
• Strategy
Driver 3: Driver 4:
Level A Level A
Driver 1: Driver 2:
Plan IV: Response to Scenario 4
Level C Level A
• Strategy
Driver 3: Driver 4:
Level C Level B
FIGURE 3 Integrate Results
211
Scenario Analysis
what is common to many results, but others may company to take early, cost-effective steps to address
come from the anomalies, the things that are true potential threats and to preclude or cope with cata-
only if a certain set of outcomes occurs, and from strophic scenarios.
considering very unlikely but potentially impactful The planning against the whole set of scenarios
possible futures. That is, the questions facing the an- will identify likely events that should be dealt with as
alysts are not only about what strategy the firm well as unlikely but potentially impactful events that
would want to have pursued if the future ended up should be prepared for regardless of their improba-
looking like any given scenario, likely or improbable; bility. That is, things that are likely to occur require
scenario analysis also offers the chance to look at planning even if the impacts are not extraordinary;
low-cost/low-risk investments to position the firm to and unlikely events that would, if they occurred,
take advantage of improbable but potentially lucra- “change the firm’s world,” so to speak, also require
tive opportunities. Furthermore, it can also enable a planning because of their potential impact.
Summary
Scenario analysis is a powerful framework for formaliz- the like. Regardless of the industry or the times, scenario
ing situation assessment, surfacing assumptions and im- analysis has the capacity to develop effective responses to
portant uncertainties, dealing with uncertainty and clar- concurrently evolving forces and for unlikely but poten-
ifying possible future events, and determining the firm’s tially debilitating disruptions. Scenario analysis is done
possible and preferred responses to those events. best by diverse teams of managers and experts “brain-
Scenario analysis clarifies the forces or drivers that shape storming.” The more diverse the team in terms of func-
or could shape the future operating context, promotes tional area (marketing, operations, research and devel-
creative, long-range thinking, and produces robust, opment, etc.), geographic location, and perspective, the
action-oriented “contingency plans.” Business strategy broader the scope of the thinking will be—and broaden-
applications of scenario analysis were pioneered by ing the scope of the analysis (in terms of time horizon
Royal Dutch Shell in the global oil industry to plan for and regarding elements of the environment considered)
catastrophes, wars, price shocks, supply disruptions, and is critical to the quality of the outcomes.
Lindgren, Mats, and Hans Bandhold. Scenario Planning: Schwartz, Peter. The Art of the Long View: Planning for the
The Link Between Future and Strategy. Revised and up- Future in an Uncertain World. New York: Bantom
dated ed. New York: Palgrave Macmillan, 2009. Doubleday Dell.
Mercer, David. “Scenarios Made Easy.” Long Range
Planning 28, no. 4 (1995): 81–86.
Endnote
1. Paul J. H. Shoemaker, “Scenario Planning: A Tool for 2. This process is adapted from David Mercer,
Strategic Thinking,” Sloan Management Review “Scenarios Made Easy,” Long Range Planning 28,
(Winter 1995): 25–40. no. 4 (1995): 81–86.
212
“There is only one valid definition of business purpose:
to create a customer. . . .
It is the customer who determines what a business is. It is
the customer alone whose willingness to pay for a good or
for a service converts economic resources into wealth. . . .
Because its purpose is to create a customer, the business
enterprise has two—and only these two—basic
functions: marketing and innovation. Marketing and
innovation produce results; all the rest are ‘costs.’”
PETER DRUCKER1
Managing a business is, without doubt, a complex undertaking involving diverse tasks
across distinct functional areas ranging from financing the firm and making investments
to managing operations and logistics, from tax and accounting matters to marketing and
strategic issues. At any given moment every manager is faced with different, sometimes
competing concerns across these functional areas. Individual executives, management
teams, and whole corporate cultures tend to have distinctive priorities and approaches to
problem solving; that is, they have distinct “orientations” and philosophies that drive
what gets attention and what, on the other hand, gets neglected. These managerial ori-
entations shape resulting strategies. Some firms focus on technical issues, logistics, and
operations. Others emphasize financial management, and investments and returns
dominate decision making. Some firms are driven by marketing and concern for cus-
tomers. An important set of questions for management is: What is the “best” executive
orientation? What factors should lead decision making and which should follow?
213
The marketing strategist’s natural emphasis will In the mid-twentieth century, supply began to
be on the market and the customers—but there is also meet and exceed demand. Managers recognized that
compelling evidence that a market focus and concern promotion and selling activities facilitated sales in
for the customer should pervade the entire organization competitive markets. Manufacturers had to inform
and should guide the whole the strategy of an organiza- and persuade customers to buy what they were mak-
tion. The “marketing concept” holds that firms will be ing, especially instead of buying a competitor’s offer-
most successful at achieving goals, including profits, ings. Large dry-goods companies, including Pillsbury,
when they orient around the consumers’ needs and Kellogg’s, and Proctor & Gamble innovated their ad-
align the entire organization, including production, fi- vertising and promotion strategies during what is
nance, accounting, and marketing around satisfying now called the “sales era.” A “sales orientation” begins
those needs.2 This is a “market orientation”—a firm- with production and holds production paramount;
wide customer and competitor focus and coordination that is, “marketing makeable products.”7
of activities3—and it has been shown to lead to supe- In the 1950s and 1960s, businesses and man-
rior firm-level performance, including profitability, agement experts recognized that production and
ROI, and stock returns.4 selling, along with operations, finance, other core
functions and strategic direction all become more ef-
A HISTORIC, EVOLUTIONARY fective and more efficient if they began with a deep un-
ACCOUNT derstanding of and emphasis on customer needs and
wants.8 In 1960, Professor Ted Levitt of the Harvard
Over time, dominant business philosophies, the pre- Business School presented the logic of the marketing
vailing priorities and problem solving modes of concept, especially in guiding firms and industries
business leaders, have evolved. In the early twentieth toward innovation and growth, and argued that “the
century, demand for goods exceeded supply, and man- organization must learn to think of itself not as pro-
agers focused on efficient manufacturing and control; ducing goods or services but as buying customers, as
that is, their emphasis was on production; that period doing the things that will make people want to do
has been called the “production era.” Henry Ford, business with it.”9 This has been summarized as
founder of the Ford Motor Company and inventor of “making marketable products.” 10
the modern “assembly line,” is sometimes held up as This historic account of the evolution of
the archetypical production-focused executive. When prevalent business philosophies may be allegorical;
it was introduced in 1908, for example, the Model T during the “production era” there were, of course,
was available in a variety of colors but painting the cars businesses that created products designed to meet
became a production bottleneck, requiring up to customer needs and, on the other hand, there are
18 days as each of five coats was hand painted and then firms that continue to prioritize production and
allowed to dry.5 Henry Ford’s managerial orientation efficiency over customer needs—without great dis-
was clear when, in 1923, he wrote that: advantage. 11 Henry Ford may, in fact, have been
“Salesmen always want to cater to whims considering customer needs along with production
instead of acquiring sufficient knowledge efficiencies when he decided to paint all Fords black;
of their product to be able to explain to the variety of colors used on earlier Model Ts had
the customer with the whim that what faded and cracked in use, and the “Japan black
they have will satisfy his every require- enamel” paints withstood the climate and wear
ment. . . . [I]n 1909 I announced one best.12 Nevertheless, it is certainly true that, whether
morning, without any previous warning, or not businesses in general followed this evolution,
that in the future we were going to build many companies have progressed through very simi-
only one model. . . . I remarked: lar stages from internal, production-focused decision
‘Any customer can have a car making toward a market orientation.13
painted any colour that he wants so long Critics of the marketing concept have argued
as it is black.’” 6 that it requires managers to focus on short-term
214
and superficial customer needs and fads,14 but that and doesn’t require the firm to meet every customer
criticism confuses a market orientation with a short- whim. It is more accurately understood as organizing
term orientation. In fact, a market orientation should and focusing strategy around meeting customer
lead to the logical corollary that more substantive and needs at a profit. All other activities are oriented
compelling needs equate with more substantive and around serving those customer needs at a profit, and
compelling market opportunities. As a result, solutions no activity has value in and of itself if it is not con-
may well require longer term, more basic research. tributing to meeting those needs at a profit.
Customer needs are met by many types of innovation The marketing concept also does not require
and exploration, including basic research. The mar- that customers can articulate their wants, or that
keting concept isn’t to blame if firms overlook basic they even know what they will want or what will sat-
research in favor of less substantive but more immedi- isfy their need. Table 1 defines customer needs,
ate opportunities in applied new-product develop- wants, and demand. The marketing concept asserts
ment. The preference for immediate opportunities is that firms should begin strategic planning and man-
better attributed to forces ranging from Wall Street de- agerial decision making with a keen focus on the cus-
mands to human-resource evaluation cycles. These all tomer needs that it aspires to serve. Needs are basic
contribute to a pervasive and detrimental short-term human requirements, starting with the most basic
managerial time horizon. physiological needs required for survival but also in-
It is useful to highlight some things that a mar- cluding higher-level needs such as social needs.
ket orientation is not. It is not an altruistic or feel- Wants are those needs translated into desire for spe-
good mantra; it is a practical and pragmatic principle cific solutions. Demand is that desire backed by the
that has been shown to lead toward short- and long- resources and willingness to buy. Most people are
term market success and profitability.15 The market aware of basic needs—although psychological mod-
orientation doesn’t imply that the firm should or could els of needs, such as Maslow’s hierarchy,17 hold that
serve a need without realizing a profit—specifically, higher-level needs are subjugated to lower-level, more
for most private organizations profitability must be a urgent needs; meeting basic needs may preclude at-
condition of serving a need. Additionally, a market tention to or even awareness of higher-order needs.18
orientation does not mean that the customer is A starving person will not think about or even neces-
“always right”; customers are not always right. In sarily be conscious of their need for self-actualization,
fact, firms may choose not to serve a customer, a seg- for example. A want is a need focused on a specific so-
ment of customers, or a type of customer for any lution (product or brand); needs may manifest them-
number of reasons. Some customers are inherently selves in any number of wants. That is, any number of
unprofitable and firms are well advised to avoid specific solutions might solve a need and, in the fu-
those “devils.” Other customers may simply be in- ture, a need may be satisfied by products (“solutions”
compatible with the firm’s offerings. Southwest or wants) that customers can not yet describe or even
Airlines is famous for its world class, no-frills but in- imagine. Marketing research is not a prerequisite for
formal and fun service. Nevertheless, one customer action within a market-oriented firm (although mar-
was chronically dissatisfied, writing so many letters keting research is certainly invaluable in analyzing
complaining about everything from boarding proce- and planning investments in new products).
dures to the color of the planes that she was given the A focus on customer needs is invaluable in mar-
nickname “Pen Pal.” Eventually her dissatisfaction ket definition and planning for growth. The firm that
stumped the customer service staff, who kicked the defines its market by the technology it produces will
letter up to CEO Herb Kelleher. Kelleher looked at miss important opportunities as new technologies
the letter and the history of complaining and emerge to meet the same customers’ needs. In the
promptly responded: “Dear Mrs. Crabapple, We will early twentieth century, for example, railroads defined
miss you. Love Herb.”16 The marketing concept does themselves as being in the “railroad industry;” they
not cede control to the customer, it doesn’t require operated heavy rolling-stock on iron rails moving
that service personnel put up with abusive behaviors, people and goods from one place to another. Had they
215
TABLE 1 Needs, Motives, Wants, and Demand
Construct Definition Example

Need Basic human requirements; “states of felt Physiological (food, water), safety, belonging,
deprivation.”19 ego-status or esteem (respect), self-actualization.
Felt need Recognized gap between current situation
and desired situation (e.g., hunger,
loneliness); see “motive.” A lonely consumer feels a need to go out and
Motive A need that is sufficiently pressing to direct meet people.
the person to seek satisfaction of the need.20
Latent need Unrecognized or unconscious gap between A lonely consumer too busy meeting critical
current and desired state. needs, such as food, to think about social life.
Want Needs directed toward specific object/ A lonely consumer (person who needs
product that can satisfy the need; “The belonging) wants to connect with others.
form human needs take as shaped by
culture and individual personality.”21
Apparent or A need-want linkage that the consumer is A lonely consumer goes to a café for its sense of
State Want aware of and feels community
Unrecognized A need-object relationship that has not A lonely consumer (person who needs
Want been recognized because consumers belonging) is unaware of online social networks
don’t understand or are unaware of the that might meet that need.
object/product
Demand Wants for specific object/product backed by A consumer is thirsty, wants a cola, and has the
an ability and willingness to pay; “Human money to purchase a cola
wants that are backed by buying power.”22
defined their industry as the “transportation indus- will meet—no firm can meet all customer needs—and
try,” they might not have missed, as they did, the exo- it is also possible to define the scope too broadly.
dus of passengers from trains to cars and airplanes, or Nevertheless, a focus on customer needs offers an im-
the shift of freight toward trucks.23 Of course, the firm portant perspective on market definition and in
retains the prerogative and duty to define the needs it thinking about “what business the firm is in.”
Summary
The marketing concept asserts that “achieving organiza- concept and its emphasis on satisfying the customer was
tional goals depends on knowing the needs and wants of well-articulated by Sam Walton, founder of Wal-Mart,
target markets and delivering the desired satisfactions bet- when he said:
ter than competitors do.”24 It does not repudiate the neces-
“There is only one boss. The customer. And
sity or importance of other functions, but it does argue
he can fire everybody in the company from
that all functions should be aligned with a core purpose
the chairman on down, simply by spending
centered on the customer needs the organization will serve
his money somewhere else.”25
at a profit. Ultimately, the logic and force of the marketing
216
Drucker, Peter. Management. New York: Harper & Row, 1973. Slater, Stanley F., and John C. Narver. “Market Orientation,
Levitt, Theodore. “Marketing Myopia.” Harvard Business Customer Value, and Superior Performance.” Business
Review 38 (July–August, 1960): 24–47. Horizons 37, no. 2 (1994): 22–28.
McGee, Lynn W., and Rosann L. Spiro. “The Marketing
Concept in Perspective.” Business Horizons 31, no. 3
(May–June, 1988): 40–45.
Endnotes
1. Peter Drucker, Management (New York: Harper & 12. Klier and Rubenstein, Who Really Made Your Car.
Row, 1973), 61. 13. Robert J. Keith, “The Marketing Revolution,”
2. See, for example, E. Jerome McCarthy and William D. Journal of Marketing 24 (January 1960): 35–38.
Perreault Jr., Basic Marketing, 8th ed. (Homewood, 14. R. C. Bennett and R. G. Cooper, “Beyond the
IL: Irwin, 1984) 35. Marketing Concept,” Business Horizons 22 (June
3. Stanley F. Slater and John C. Narver, “Market 1979): 76–83.
Orientation, Customer Value, and Superior 15. For reviews of the literature linking market orienta-
Performance,” Business Horizons 37, no. 2 (1994): tion to firm performance, see G. Tomas M. Hult,
22–28. David J. Ketchen Jr., and Stanley F. Slater. “Market
4. For reviews of the literature linking market orienta- Orientation and Performance: an Integration of
tion to firm performance, see for example Ahmet H. Disparate Approaches,” Strategic Management
Kirca, Satish Jayachandran, and William O. Bearden, Journal 26 (2005): 1173–118, and Ahmet H. Kirca,
“Market Orientation: A Meta-Analytic Review and Satish Jayachandran, and William O. Bearden,
Assessment of Its Antecedents and Impact on “Market Orientation: A Meta-Analytic Review and
Performance,” Journal of Marketing 69 (April 2005): Assessment of Its Antecedents and Impact on
24–41. Performance,” Journal of Marketing 69 (April 2005):
5. Thomas H. Klier and James M. Rubenstein, Who 24–41.
Really Made Your Car: Restructuring and Geographic 16. Kevin Freiberg and Jackie Freiberg, Nuts! Southwest
Change in the Auto Industry (Kalamazoo, MI: W.E. Airlines’ Crazy Recipe for Business and Personal
Upjohn Institute, 2008). Success (Austin TX: Bard Press, 1996), 270.
6. Henry Ford (with Samuel Crowther), My Life and 17. Abraham Maslow, Motivation and Personality, 3rd ed.
Work (Garden City, NY: Garden City Pub. Co., (New York: Addison-Wesley, 1987).
1922), 71–72. 18. Ibid., page 57.
7. Robert H. Hayes and William J. Abemathy, 19. Philip Kotler and Gary Anderson, Principles of
“Managing Our Way to Economic Decline,” Harvard Marketing, 13th ed. (Upper Saddle River, NJ:
Business Review 58 (July–August, 1980), 67–77. Pearson Prentice Hall, 2009), 6.
8. Peter Drucker, The Practice of Management (New 20. Ibid., page 6.
York: Harper and Row Publication, Inc., 1954), 37. 21. Ibid., page 6.
9. Theodore H. Levitt, “Marketing Myopia,” Harvard 22. Ibid., page 6.
Business Review 38, no. 4 (July–August, 1960): 45–56. 23. Theodore H. Levitt, “Marketing Myopia,” Harvard
10. Robert H. Hayes and William J. Abemathy, Business Review 38, no. 4 (July–August, 1960), 45–56.
“Managing Our Way to Economic Decline,” Harvard 24. Kotler and Anderson, Principles of Marketing, page 10.
Business Review 58 (July–August, 1980): 67–77. 25. Philip Verghis, The Ultimate Customer Support
11. Ronald A. Fullerton, “How Modern Is Modern Executive: Unleash the Power of Your Customer
Marketing? Marketing’s Evolution and the Myth of (Summit, NJ: Silicon Press, 2006), 17.
the ‘Production Era,’ ” The Journal of Marketing 52,
no. 1 (January 1988): 108–125.
217
218
What is a Marketing
Strategy?
219
What is a Marketing
Strategy?
What is strategy? There are many definitions and conceptualizations of strategy and
strategy means different things to different people. A simple and direct definition is:
“Strategy is the coordinated means by which an organization pursues its goals and ob-
jectives.”1 It encompasses an integrated set of choices and decisions intended to sup-
port and advance the company’s vision and objectives. A marketing strategy describes
how to compete in a particular market or market segment. Hence, strategic marketing
decisions address a range of issues and critical tasks, including
• The long-term direction of a company,
• The scope of the company,
• The identification and/or creation of competitive advantages,
• The maintenance and protection of those competitive advantages, and
• The identification and prioritization of opportunities and threats in the external
environment, including
• The identification and prioritization of customer needs as well as expectations
and the needs and interests of other stakeholders.2
A sound and compelling marketing strategy should consider all of these issues. It
should fulfill three basic requirements:
1. It should be comprehensive and address the 5 Ws and 1 H (see Table 1);
2. It should be integrative in a way that the 5 Ws and the 1 H must fit together and
reinforce each other; and
3. It should be consistent with the long-term vision, the core competences, and envi-
ronmental opportunities.
A comprehensive marketing strategy must specify who, where, what, why, why,
and how (“5 Ws and 1 H”):
1. Who the company will serve—the customer segments and products: A strategy
requires a clear definition of the target market, the intended position within each
market and the products and services that are tailored to it.
2. Where the firm will do business—the geographic markets and regions: Related to the
first question is the definition of the geographic market— worldwide, country focus,
regional focus, etc. This decision also involves setting priorities in market entry.
3. What needs the firm will meet—needs that a firm can meet better than the
competitors and lead to a sustainable differentiation: This is a key question of
220
What is a Marketing Strategy?
TABLE 1 The 5 Ws and 1 H of the Marketing Strategy3
“5 Ws and 1 H” Typical Questions Typical Analytical Tools

Who? Who are the customer • Which market segments? • Market segmentation
segments the company wants • Which product categories? • Targeting
to serve, and what are the • Which products and services? • Positioning
products and services? • Which technologies? • Portfolio analysis
Where? What are the geographic • Which Countries? • Product-Market growth
markets a company wants to • Which Regions? analysis
serve? • Which distribution channels? • Place/distribution strategies
What? What customers needs should • What are the differentiators? • Positioning
the company meet? ° Quality • Porter’s generic strategies
° Brand Image • The value frontier
° Design • Sustainable competitive
° Functionality advantages
° Price • Core competences
° Service
° Customization
How? How will we get there? Which • Which core competences? • Core competences
core competences and • Which activities of the value • SWOT analysis
activities of the value chain? chain? • Value chain analysis
• Internal Development?
• Strategic Alliances?
• Joint Ventures?
• Licensing? Franchising?
When? What is the speed and • Speed of expansion • Product-Market growth
sequence of the single moves? • Sequence of initiatives strategies
• SWOT-Analysis
Why? Why do we obtain our returns? • What is the economic logic • Value chain analysis
and what is the compelling • Experience curve
business model? • Economies of scale
° Economies of scale • Economies of scope
° Experience curve • The value frontier
° Economies of scope
° Price premiums
strategy as it defines how a company creates a advantages, through outsourcing, or through

difference that it can preserve, and how it cre- collaboration with partners).
ates value to the customer. 5. When the firm will act—the speed and se-
4. How will the company serve the customers and quence of the firm’s actions: Without specifi-
needs—the means (core competences and ac- cation of the single steps and a time schedule,
tivities of the value chain): A comprehensive a strategy is not implementable, resources
strategy must also say how the company intends cannot be committed, costs for the single
to achieve competitive advantages and deliver time periods of the strategic plan cannot be
against the target customers’ needs (through estimated, and the progress of implementation
internal development of those competitive cannot be effectively monitored.
221
6. Why the firm will do these things—the com- for the many people . . . by offering a wide range of
pelling business model and economic logic: A well-designed, functional home furnishing products
sound strategy must explicitly explain why a at prices so low that as many people as possible will
company should earn returns with a specific be able to afford them,” each distinct element of the
strategy. Each strategy must be based on a sound strategy is directed towards that vision. The single el-
economic logic, for example, lower costs through ements, illustrated in Figure 1 (the “hexagon” of
economies of scale or scope, higher price pre- strategy), fit together and reinforce each other.
mium through super customer value, etc. Helmuth von Moltke, the famous Prussian
field marshal (1800–1891) once defined strategy as
When formulating a strategy this summary
“the evolution of the original guiding idea according
framework offers a useful, comprehensive, and prac-
to continually changing circumstances.” Similarly,
tical guideline. For each of the six elements (5 Ws
there is an old military axiom “the best battle plans
and 1 H) you find typical questions that should be
never survive the first shot.” These quotes emphasize
answered. The last column contains the analytical
a cardinal truth about strategies: They are not static,
tools that can be used for the single decisions.
they’re dynamic; strategies must evolve according to
A good example of a comprehensive strategy is
changing conditions!
that of IKEA. The Swedish furniture retailer with
Before any strategy is implemented it should be
about 130,000 employees, operating in 24 countries
carefully tested for consistency and viability. The ulti-
with a yearly turnover of over : 21 billion (about
mate test is answering the following questions:
$30 billion) has a clear and compelling strategy that
has been consistent and enduring; its basic elements 1. Is the strategy aligned to the vision, mission
have been almost unchanged for more than 30 years. and corporate strategy?
Guided by the vision to “create a better everyday life 2. Are the 5Ws and 1H clearly addressed?
Who? Segments and Products:

• Young People Who Often Furnish Their First
Apartment Where? Countries and Regions:
• Young Families • Worldwide: All Countries Where
• Furnishing Solutions With Good Design and Socioeconomic and Infrastructure Conditions
Function at a Low Price for Every Room Support IKEA’s Concept
Why? Economic Logic and Business Model:

What? Differentiation
Economies of Scale Through IKEA • Good Design and Function, Reliable Quality at
• Standardized Products Vision and Business Idea: Low Price
• Modular, Interchangeable Parts To Create a Better Everyday Life • Swedish Image
• Worldwide Identical Store and Marketing for the Many People. Our • Fun, Nonthreatening Shopping Experience
Concept Business Idea Supports This • Instant Fulfillment
Low Logistics and Transportation Costs Through Vision by Offering a Wide Range
• Modular Parts, Space-saving Packaging Core Competence: Development of Well-
of Well-designed, Functional Designed, Contemporary Furniture in a
• Transport and Assembly Through Customer Home Furnishing Products at Modular System, That Can be Produced,
Shopping Experience Through Prices so Low That as Many Transported and Stored at Low Cost and Can
• Family Orientation (Playground, Restaurant, etc) People as Possible Will be Able be Easily Assembled by the Customer.
• Store Architecture, Instant Fulfillment to Afford Them.
When? Speed and Sequence of How? Core Competences and Activities of

Moves: Value Chain:
• Fast International Expansion by Region Core Competence: Development of Well-
• Early Footholds in Each Country Designed, Contemporary Furniture in a
• Fill in Later Modular System, That Can be Produced,
Transported and Stored at Low Cost and Can be
Easily Assembled by the Customer.
• Centralized Design and Marketing
• Production Outsourced to Suppliers
• Organic Growth
• Wholly Owned Stores
FIGURE 1 The “Hexagon” of Strategy (IKEA)4
222
3. Does the strategy exploit opportunities in the needs will the venture target and how will it serve
market? those segments/needs better than existing solutions?
4. Is the strategy aligned with the key success fac- The two key elements are:
tors in the market?
5. Is the strategy built on core competences and • Target Segments. Questions about who the
firm serves, when the firm meets those needs
strengths?
(i.e., on what occasions), where it does these
6. Are the differentiators sustainable?
things (i.e., geographic markets) and, espe-
7. Are the 5Ws and 1H internally consistent?
cially, what needs the firm meets are all essen-
8. Does the company have enough resources to
tially about what segments the business serves.
pursue and implement the strategy?
Where’s the pain? and
In summary, those six essential elements of a • Competitive Advantages. Questions about
comprehensive marketing strategy can really be sum- how the firm serves those target segments and
marized under two broader headings: their needs better than the competition, and
why the firm does that (the business model or
• What customers/customer needs does the
profit logic), are all really about what competi-
strategy target? and
tive advantages (resources or capabilities) the
• How does the firm serve those targets better
firm has or will build. Where’s the magic?
than the competition at a profit?
A sound strategy must, eventually, reduce to meeting
When reviewing business proposals, venture capital-
some specific needs of some specific customers better
ists sometimes reduce those two questions to
than the competition within profitable relationships.
“Where’s the pain?” and “Where’s the magic?” What
Summary
A strategy is an integrated set of choices and actions elements together and by matching them with the firm’s
pointed towards the vision and the long-term objectives long-term vision, with the firm’s core competences, and
of the company. It should be comprehensive, integrative, with environmental opportunities, a strategy becomes
and consistent. By addressing the 5 Ws and the 1 H, the viable and achieves it objective: to create long-term sus-
strategy becomes specific and actionable. By fitting those tainable competitive advantages.
Carpenter, Mason A., and Wm. Gerard Sanders. Strategic Porter, Michael. What is Strategy? Harvard Business Review
Management. A dynamic perspective. Upper Saddle 74, no. 6 (November–December, 1996): 61–78.
River, NJ: Pearson Education, 2009. Porter, Michael. Competitive Advantage: Creating and
Hambrick, D. C., and J. W. Fredrickson. Are You Sure You Sustaining Superior Performance. New York: Free
Have a Strategy? Academy of Management Executive 15 Press, 1985.
(2001): 48–59.
Endnotes
1. M. A. Carpenter and Sanders, W. G. Strategic 3. Adapted from D. C.Hambrick, and J. W.
Management. A Dynamic Perspective (Upper Saddle Fredrickson, Are You Sure You Have a Strategy?
River, NJ, Pearson Education, 2009). Academy of Management Executive 15 (2001):
2. G. Johnson, K. Scholes, and R. Whittington, 48–59.
Exploring Corporate Strategy: Text & Cases (Harlow, 4. Adapted from Ibid.
England, Prentice Hall, 2008).
223
224
Advantage and Scope
225
Advantage and Scope
Over the years, many experts have tried to summarize all possible strategies within some
reduced set of characteristics (dimensions) and/or types (categories). These efforts have
generally converged on two fundamental characteristics of strategies that, together, de-
lineate a limited number of categories of strategies; this précis of “generic” strategies
has, as a rule, included about three or four broad types.1 Although these characteristics
and types have been labeled differently by different authors, their basic content appears
robust across perspectives; the underlying logic makes it clear that, while strategies can
also be described in other ways (in fact, strategies can be described in innumerable ways
and countless specific strategies are feasible), these high-level characteristics and types
are a useful starting place in understanding what strategies are possible, how they differ,
and how they relate to each other.
The first characteristic or dimension along which all strategies can be described is
the “basis of competition” or competitive advantage. Strategies can either emphasize
product differentiation (which can take many forms, elaborated on below) or they can
pursue cost leadership (which looks like “price leadership” from the customers’ perspec-
tive). This distinction is logical; you can either compete on cost or you can compete on
something else. The other principal way strategies can be differentiated is with regard
to their competitive scope—the breadth of the market and range of customer segments
that the strategy intends to serve. This note describes these two dimensions and also the
types of basic strategies that they delineate: differentiation, cost leadership, and niche
strategies. These are “generic strategies” because, at this high level of description, they
distinguish a few very basic strategies that encompass all possible strategies. It is worth
reiterating that, within these broad categories, there are almost infinite specific forms a
particular strategy can take.
COMPETITIVE ADVANTAGE
Harvard Professor Michael Porter has argued that that “[a] company can outperform
its rivals only if it can establish a difference that it can preserve.”2 Wal-Mart, Toys-R-Us,
and Black & Decker have advantages because of their size and the corresponding bene-
fits of scale that give them the lowest cost structure amongst their competitors. Proctor
& Gamble has unrivaled marketing and branding skills. Apple has similarly unparal-
leled design capabilities. Amazon.com has a sophisticated value chain that yields cash-
flow, efficiency, and high-speed customization. These companies are successful because
226
Generic Strategies—Advantage and Scope
Product TABLE 1 Sources of Cost Advantages

Differentiation
Economies of • Spreading fixed costs over
Scale large volume
• Purchasing discounts/leverage
• Specialization of labor
Basis of • Specialized machines and
Competition technology
Economies of • Shared resources between
Scope products
• Pooled negotiation power
• Coordinated strategies
Cost
between business units
• Vertical integration
FIGURE 1 Basis of Competition: Cost Leadership and • Combined business creation
Differentiation Experience • Improved skills and routines
Curve Effects • Improved quality
they were able to create a sustainable difference. Production • Process innovation
Creating a difference means either bringing an identi- Techniques • Automation
cal or similar product or service to market more cost Product • Standardization of designs and
effectively than the competitors (and therefore being Design components
able to charge the customer less or reap higher mar- • Design to manufacture
gins) or bundling unique benefits in an offering for Input Costs • Location advantages
which customers are willing to pay a price premium. • Access to low-cost inputs
These two strategies, cost leadership and the differen-
tiation, are fundamentally different approaches to
forging competitive advantage (Figure 1). the lowest costs, because low costs are related to high
scale, and because high scale is dependent on high
Cost Leadership market share, market share becomes crucial to becoming
and staying the cost leader.
A cost leader typically offers a standardized, no-frills
Cost leaders’ products are highly standardized,
product; adding ‘frills’ adds costs. Wal-Mart is the classic
with no-frills, and are usually produced for mass mar-
cost leader, continuously innovating to reduce costs in
kets. Operational efficiency and process improvement
its procurement, distribution, and logistics systems.
are critical—the cost leader must excel in these areas.
The strategic objective of the cost leader is to deliver
The cost-leader organization must run as a well-oiled
the products at lowest costs, to sell those products at
machine to avoid inefficiencies, and its structure
the lowest price, and to communicate that proposition
therefore is usually formal, standardized, and mecha-
to price-sensitive markets. Such a positioning gener-
nistic. The dominant values are cost-consciousness,
ally requires producing an undifferentiated offering (a
efficiency, and risk aversion. Cost leaders usually
commodity) and having a zealous focus on reducing
adopt a top–down approach and are authoritative to
costs. Potential sources of cost advantages are summa-
enforce smooth flowing, standardized processes, and
rized in Table 1; many of those sources of cost advan-
consistency.
tage are tied to achieving scale advantage—that is, to
being the biggest or among the biggest competitors in
Differentiation
the market. Usually there is room for only one cost
leader per industry; if there is more than one, a price An advantage can be created when a company is able
war is likely. Because cost leadership, by definition, en- to deliver a superior product or service to the cus-
tails gaining competitive advantages through having tomer, for which the customer is willing to pay a
227
premium because it better fulfills his needs. Superior continuous innovation and exceptional brand
value can stem from higher quality, better service, management; otherwise there is the chronic risk
more features, more convenience, better brand that a competitor will imitate or surpass the firm’s
image, and other distinctive qualities. Table 2 sum- offerings. A differentiated offering is typically highly
marizes some selected sources of differentiation, in- sophisticated, depending on that technological supe-
cluding product and service quality, image factors riority for strategic advantage, and it usually offers
(such as brand personality), and distribution quali- exceptional quality and/or a unique brand image—
ties, all of which can, potentially, serve as points of otherwise no customer would be willing to pay a the
differentiation. This assortment of potential points premium for it. To achieve and maintain these ad-
of differentiation emphasizes the range of ways that vantages, a differentiator must be customer oriented
an offering can deliver superior satisfaction and and innovative and must have special skills in brand
greater value to customers. management. To react to changing customer needs,
A differentiation strategy requires almost the to be innovative and flexible, these companies must
opposite skills and organizational characteristics have very flexible and organic organizational struc-
than a cost-leadership strategy. Differentiation requires tures. To ensure fast information flow and cus-
tomer orientation throughout the company, these
companies often work with cross-functional teams,
TABLE 2 Common Bases of Differentiation especially in product development. Dominant val-
ues of the organizational culture are risk taking,
Quality in Goods3
speed, flexibility, and experimentation—these are
• Performance
the ingredients of innovativeness. Leaders of dif-
• Features
• Reliability
ferentiated organizations are often visionaries who
• Conformance involve employees in decision making and who en-
• Durability courage employees to innovate and generate cre-
• Serviceability ative ideas.
• Aesthetics
° Form Cost Leadership versus Differentiation
° Style The choice of a generic strategy has long-term con-
• Design
• Other Perceptions sequences; in fact, it is usually irreversible, at least
in the near- and mid-term. Importantly, the choice
Brand Personality4
must be carefully thought through and should fit
• Sincerity
• Excitement
the company’s strengths (or with strengths the
• Competence company will develop). Table 3 describes and com-
• Sophistication pares the two alternatives. Table 4 lists core func-
• Ruggedness tions of the firm—from manufacturing through
sales—that must be carried out and distinguishes
Quality in Services5
• Reliability
approaches to those tasks within cost leader and
• Responsiveness differentiation strategies. The table highlights the
• Assurance fact that the two strategies require quite different
• Empathy strengths and emphasize different, and in some in-
• Tangibles stances conflicting approaches.
Channel Functions
• Transactional functions Hybrid Strategies
• Logistical functions
Some experts have argued that, in certain instances,
• Facilitating functions
companies can pursue a hybrid strategy that
simultaneously seeks to achieve differentiation and
228
TABLE 3 Comparing Cost Leadership and Differentiation6
Cost Leadership Differentiation

(or “Exploitative Business”) (or “Exploratory Business”)
Strategic Intent Low cost, market share Differentiation, innovation, price premium
Offering Standardized, no-frills Sophisticated, high quality, branded product
Critical Tasks Operations, efficiency, process Customer orientation, product innovation,
improvement brand management
Organizing Structure Formal, standardized, mechanistic Flexible, organic, cross-functional product
development teams
Organizational Culture Efficiency, low risk, cost-consciousness Risk taking, speed, flexibility, experimentation
Leadership Role Authoritative, top down Visionary, involved
TABLE 4 Generic Strategies and Their Requirements7
Function Cost Leadership Differentation

Manufacturing Lean, automated, low cost, reliable quality Flexible automation
Marketing Emphasize value, reliability, and above all price Emphasize unique product features and brand
R&D Incremental product improvement, process New product development
innovation
Finance Focus on low cost and stable financial Enough funds for R&D
structure
Accounting Tight cost control, adopt conservative Accounting system that allows cost
accounting principles calculation for customized, complex products
Sales Focus on value, reliability, low price, Focus on uniqueness, brand, strong customer
ubiquitous availability support
lower prices.8 IKEA is an example of such a strategy; competitive advantage as a distinction rather than
it has the lowest prices in the industry and is able to as a continuum and argues against straddling a cost-
differentiate itself through design, image, and shop- leadership and differentiation strategy. Michael
ping experience. However, given the characteristics of Porter argued that firms that try to combine the two
these two strategies and their requirements (discussed will end up “stuck in the middle”:
above and summarized in Tables 3 and 4), it be-
comes clear that hybrid strategies are more the ex- “The firm stuck in the middle is almost
ception than the rule and that they are particularly guaranteed low profitability. It either
difficult to execute. If it is not impossible, it is cer- loses the high-volume customers who
tainly extremely difficult to do both of these things demand low prices or must bid away its
better than the competition: Differentiation costs profits to get this business from the low-
money, and costs necessitate higher prices. That cost firms. Yet it also loses high-margin
unavoidable logic—and the contrasting, some- business—the cream—to the firms who
times conflicting, attributes of successful cost lead- are focused on high-margin targets or
ers vis-à-vis differentiators—argues for treating have achieved differentiation overall.”9
229
One exception to the rule of choosing one or Mass Target

the other may be in an offering that is distinct for its
low cost (and therefore low price to the customer) as Narrow/
well as differentiated by its high reliability and/or Niche Target
conformity. This is true because both costs per unit
and reliability improve with scale. Costs go down
and reliability goes up though experience curve ef- FIGURE 2 Scope of Competition
fects and economies of scale. The more units of a
standardized offering a firm produces, the lower the
costs and, at the same time, the more reliable the For example, Toyota is a global brand, taking
units produced become. For example, Toyota pro- advantage of scale effects to produce low-cost, high-
duces more than 10 million small engines and vehi- value automobiles and light trucks. Toyota makes
cles every year. That industry-leading scale along about 10 million vehicles a year. Porsche is a highly
with “the Toyota Way” of continuous improvement focused automobile manufacturer which produces
in manufacturing has led to Toyota and its brands about 100,000 vehicles a year.11 Those two brands
(Toyota, Lexus, and Scion) leading the world not represent the extremes, a global mass marketer and a
only in value pricing (not necessarily lowest price, focused niche brand. (In point of fact, Porsche is also
but consistently great value for cost) as well as relia- global in its operations and in the geographic disper-
bility and conformance.10 sion of its distinctive market segment). But between
Toyota and Porsche lies an assortment of other man-
ufacturers and brands, each defining their competi-
COMPETITIVE SCOPE
tive scope differently. BMW, for instance, produces
The second dimension or characteristic of strategies about 1.5 million vehicles a year;12 BMW’s scale is
that has emerged across various frameworks and more than 10 times that of Porsche but still only
been well-established by many strategy experts is about a sixth of Toyota’s. Thus, the competitive scope
competitive scope, that is, the size and breadth of the of a marketing strategy can vary along a continuum
market(s) the strategy means to serve—or target(s). and there is less chance of getting caught in the “un-
Competitive scope may vary in terms of the number profitable middle” with regard to scope than there is
of customers the firm targets, the number of seg- with regard to the basis of competition (i.e., differen-
ments the firm targets, the heterogeneity of those tiation versus cost leadership). Companies that pur-
different customers and segments, and the variety of sue a focus strategy try to serve a well-defined and
needs that the firm endeavors to serve. Therefore, narrow market segment more effectively or effi-
the dimensions and decisions that structure com- ciently than an industry-wide competitor. A niche
petitive scope are the same as those that define strategy is viable when segment-specific needs exist
market segmentation. that an industry-wide supplier is not able to meet or
Unlike the basis of competition, which we’ve not interested in meeting.
argued above is best understood as a distinction be- Is a Cost Focus Viable? Because of the close as-
tween two mutually-exclusive alternatives, competi- sociation between cost advantage and scale, a combi-
tive scope can be thought of as a continuum covering nation of cost leadership and a niche scope is diffi-
a range of viable alternatives. That is, some firms cult, but probably not impossible. In some
serve mass markets with standardized offerings, markets—including automobiles—the cost leader
some firms even target the whole world as a single actually offers an augmented product. The leading
market (these are called “global strategies”), while “economy car” manufacturers, such as Honda,
others serve very small markets or “niches” with Toyota, and General Motor’s Chevrolet, offer prod-
highly customized, value-added offerings, and still ucts emphasizing price with practical functionality,
others carve out any number of intermediate com- but those products are also highly reliable and do
petitive scopes (Figure 2). offer elements of style and comfort beyond the “bare
230
minimum.” This leaves the extreme no-frills and ab- prefer to “upgrade” to a (very low-cost and bare-
solute-low-cost market space under served. In India, bones) car. Nevertheless, the far more usual sort of
the automobile manufacturer Tata has introduced niche strategy offers differentiation tailored to a
the Nano, “the world’s cheapest car.” The Nano has a small but profitable segment’s needs. It is essential
35-horsepower, two-cylinder gas engine and is priced that segment-specific needs exist, and that the
starting at 100,000 rupees (the equivalent of about focused company has the necessary skills and compe-
$2,200 or :1,500).13 This vehicle is targeted to a tences to satisfy them. Otherwise, industry-wide com-
niche of customers in developing economies who use petitors can outperform the focused, niche offering
motorcycles as basic transportation but who would due to cost advantages.
Summary
By combining two generally exclusive strategies, product These are meant to be gross generalizations; the “over
differentiation or cost leadership, with the strategy’s simplification” is intentional, and it is clear that there are
scope—the range of alternatives from a broad, mass target countless ways in which specific strategies can be different
market to a narrow, niche target market—three competitive within these rudimentary but comprehensive buckets.
strategies emerge (see Figure 3): cost leadership, differentia- Nevertheless, these distinctions are useful, as they create a
tion, or niche/customer-intimacy. Generally a niche or fo- valuable structure to initiate a high-level understanding of
cused strategy is reserved for a combination of narrow the breadth of strategies that may be created in a market-
focus and differentiation due to the strong connection be- place and the considerations that go with certain particular
tween cost leadership and scale, but some niche-cost (or strategic orientations.
cost focus) strategies have been successful. Figure 3 clarifies
these strategic alternatives.
Product/Brand
Mass
Leadership
Product
Differentiation
Niche/
Narrow
Customer intimacy
Basis of
Competition
Mass Cost
Leadership
Price
Narrow Cost
Focus
FIGURE 3 Generic Strategies
231
Marr, Bernard. Strategic Management Leveraging and Treacy, Michael and Fred Wiersema. The Discipline of
Measuring Your Intangible Value Drivers. Burlington, Market Leaders: Choose Your Customers, Narrow Your
MA: Butterworth-Heinemann, 2006. Focus, Dominate Your Market. New York: Perseus
Porter, Michael E. “What Is Strategy?” Harvard Business Books, HarperCollins Publishers, 1995.
Review (November–December, 1996): 61–78.
Porter, Michael E. Competitive Strategy: Techniques for
Analyzing Industries and Competitors. New York: The
Free Press, 1980.
Endnotes
1. See, for example, Michael Treacy and Fred Wiersema, Conceptual Model of Service Quality and Its
The Discipline of Market Leaders: Choose Your Implications for Future Research,” Journal of
Customers, Narrow Your Focus, Dominate Your Market Marketing 49 (Fall 1985): 41–50.
(New York: Perseus Books, HarperCollins Publishers, 6. C. A. O’Reilly III and Michael L. Tushman, “The
1995); Michael E. Porter, “What Is Strategy?” Harvard Ambidextrous Organization,” Harvard Business
Business Review (November–December 1996): Review (April 2004): 74–81.
61–78. And Michael E. Porter, Competitive Strategy: 7. Adapted from Jay B. Barney and William S. Hesterly,
Techniques for Analyzing Industries and Competitors Strategic Management and Competitive Advantage,
(New York: The Free Press, 1980). (Upper Saddle River, New Jersey: Pearson Education,
2. Porter, “What Is strategy?” 2006).
3. Adapted from David A. Garvin, “What Does 8. Gerry Johnson, Kevan Scholes, and Richard
‘Product Quality’ Really Mean?” MIT Sloan Whittington, Exploring Corporate Strategy. Text &
Management Review 26, no. 1 (Fall 1984); David A. cases. (Harlow, England: Prentice Hall, 2008).
Garvin, “Competing on the Eight Dimensions of 9. Porter, “Competitive Strategy.”
Quality,” Harvard Business Review 65, no. 6 10. See, for example, Jeffery K. Liker, The Toyota Way: 14
(November–December, 1987); and Philip Kotler Management Principles from the World’s Greatest
and Kevin Lage Keller, A Framework for Marketing Manufacturer (New York: McGraw-Hill, 2004).
Management, 4th ed. (Upper Saddle River, NJ: 11. Source: International Organization of Motor
Pearson/Prentice Hall, 2009). Vehicle Manufacturers, World Motor Vehicle
4. From Jennifer Lynn Aaker, “Dimensions of Brand Production (2008 Report), http://oica.net/wp-con-
Personality,” Journal of Marketing Research 8 (1997): tent/uploads/world-ranking-2008.pdf. Last accessed
347–356. June 25th, 2010
5. A. Parasuraman, V. A. Zeithaml, and L. L. Berry, 12. Source: Ibid.
“SERVQUAL: A Multiple-item Scale for Measuring 13. See, for example, Heather Timmons, “A Tiny Car Is
Consumer Perceptions of Service Quality, ” Journal the Stuff of 4-Wheel Dreams for Millions of Drivers
of Retailing 64, no. 1, (Spring 1988), 12-40; A. in India,” The New York Times, March 23, 2009, B4.
Parasuraman, V. A. Zeithaml, and L. L. Berry, “A
232
Generic Strategies—The
Value Map
“Value” can be defined in many ways, but in marketing strategy it refers to customer
perceptions that weigh or combine what the customer gets (the benefits or “perform-
ance” the customer receives) adjusted for what the customer gives (the costs, especially
price, given in exchange for those benefits). That is, it is a ratio of the benefits divided
by the price:
“Get”
Value =
“Give”
The important thing is not how the firm or the marketing manager thinks about this
equation, but how the customers think about it, and how they think about it relative to
other offerings in the marketplace. Different customers and different segments of cus-
tomers will value various benefits differently; for example, families usually think safety
is very important in making a car purchase while other segments, such as young profes-
sionals, may value acceleration or comfort more highly. At the same time, although
what the customer “gives” may be mostly about price, there are other costs, such as time
and effort (convenience or inconvenience, required assembly, expected maintenance,
and the like), and those are also part of the perceived price or “give” to the customer.
Thus, what “value” means in a strategic context can be elaborated to:
g[(Relative Benefits)*(Importance Weight)]
Value =
g(Relative Price + Other Costs)
Customers understand that they can get more if they’re willing to give more, and
various alternatives in any market almost always offer varying degrees of benefits (per-
formance or quality) at different price points. Customers’ perceptions of value can be
plotted into a two-dimensional space, give (relative price) versus get (relative performance/
benefits), and there will be a segment-specific line or “frontier” along which customers
can see fair tradeoffs between give and get. Figure 1 is a “value map” defined by those
two dimensions—relative price and relative performance or quality—and shows a hy-
pothetical “fair-value frontier.”
For example, in the flat screen TV market, any customer knows they can buy a
Funai, a Sony, a JVC, a Loewe and so on, as graphed in Figure 2. While some cus-
tomers may choose a Funai, they understand that they could pay more and get more
with another alternative. Similarly, Sony buyers know they could pay less and get less
with either a Panasonic, or a Funai—or pay more and get a Metz. And so on. Thus,
there is a frontier or equilibrium boundary along which customers choose fair value; a
233
Generic Strategies—The Value Map
market had been offering for the same price or

charges less for the same performance; this is where
innovations often enter the market, by finding a way
to deliver something more or a way to charge less.
Relative Cost (Price)
The value frontier is the maximum perform-

ance or quality currently feasible at a given cost to the
r
tie
on
customer. Southwest Airlines created a new value
Fr
e
proposition for airline customers; IKEA created a

u
al
rV
new value proposition with lower-priced knock-

i
Fa
down furniture; Dell Computer did the same for

PCs; and Wal-Mart did likewise for the world of re-
tailing. In its own manner, each of these companies
found a way to deliver superior performance at a
Relative Performance/Quality lower price than its competitors. In particular,
Southwest Airlines extended the value frontier at the
FIGURE 1 The Value Map and Value Frontier or Fair
low end of the airline industry and dramatically ex-
Value Zone1 panded demand for its flights. In contrast, Dell took
advantage of the commoditization of the PC busi-
ness to establish a new value frontier by selling prod-
position above or to the left of that frontier (toward
ucts directly to the customers, thus stripping out
the “northwest”) reflects an inferior value—the cus-
middleman costs that delivered few benefits to cus-
tomer could get more performance for the same
tomers. Finally, Wal-Mart led mass retailers in the
price or pay less for the given performance. Only the
development of logistics, systems, and supply chain
constrained or poorly informed customers would
capabilities that allowed it to sell national brands for
willingly purchase a brand in this area, and that con-
less than its competitors, thereby pushing the value
dition may not last for long. Anything toward the
frontier and eventually becoming the largest retailer
southeast is a superior value—it offers more than the
in the world. But what exactly is a value frontier, and
how is this concept useful to marketers?
The concept of the value frontier is a powerful
Flatscreen TVs (32 inches) tool for analysis and strategy formulation. It can be
Price used to assess the value products or services create
Loewe for the customer. This analysis is vital to marketing
strategists, because value delivered to customers di-
rectly influences market share and profitability. A
customer value map is also useful in that it can assist
Metz marketers in developing clear and solid marketing
strategies.
Pioneer
Humax
JVC THE VALUE MAP AND CUSTOMER
Sony
Panasonic
VALUE ANALYSIS
The pioneers of customer value analysis—Bradley T.
Funai Gale and Robert D. Buzzell3—carried out extensive
Quality
research to measure the impact that customer value
has on market share and profitability using the PIMS
(Profit Impact of Market Strategies)4 database. PIMS
FIGURE 2 Value Map for Flat Screen TVs2 contains data on more than 3,000 business units
234
from about 200 companies. To analyze the role of customer value. These products will gain market
customer value in company success, Gale and Buzzell share and earn a high return. As shown in the Figure
created a two-dimensional matrix and positioned 3, four basic strategies can be derived from this cus-
each strategic business unit on this matrix based on tomer value map: the superior customer value strat-
the dimensions of “relative price” (price compared to egy, the premium strategy, the economy strategy, and
competitors) and “relative quality” (quality compared the inferior customer value strategy.
to competitors). Gale and Buzzell then determined
the average profitability (return on investment, or
The Superior Customer Value Strategy
ROI, before interest and taxes) of the strategic
business units in the four quadrants of the matrix The superior customer value strategy is a combina-
(Figure 3). tion of Michael Porter’s cost leadership strategy and
The fair value line in Figure 1 indicates the his differentiation strategy. With this strategy, the
points at which quality is balanced against price. Any goal is to offer a product that not only performs bet-
product positioned to the left of the fair value line ter (i.e., offers higher quality, better brand image,
delivers low customer value. This product is either better service, etc.) than those offered by competi-
too expensive for its level of quality, or its quality is tors, but one that is also priced below the competi-
too low for its given price. Product positioned on this tors’ offerings. This is a particularly difficult position
side of the line lose market share, which means that to achieve, because it requires both a cost advantage
low profitability will follow. In contrast, any product and a differentiation advantage. However, if a com-
on the right side of the fair value line creates high pany succeeds in enacting this strategy, it is rewarded
Fair Value
High Line
Strategy: Inferior Strategy: Premium

Customer Value (Differentiation)
Profitability: Profitability:
ROI = 14% ROI = 30%
Market Share: Market Share:
Strong Decline Slight
(Industry Average)
Growth
Relative
Price
1.0
Strategy: Strategy:
Economy Superior
(Cost leadership) Customer Value
Profitability: Profitability:
ROI = 18% ROI = 29%
Market Share: Market Share:
Constant Strong Growth
Low
Low 1.0 High
(Industry Average)
Relative Quality
FIGURE 3 Strategies and Results within the Value Map5
235
with a strong increase in market share and, in turn, Indeed, studies show that in the long run market
high profitability—on average, a 29 percent ROI (i.e., shares remain unchanged, because competitors re-
return on investment before interest and taxes). spond with price reductions to recover lost market
Inditex, the parent company of highly successful share.
apparel retailer Zara, has become the world’s largest Dell Computer successfully exploited a cost
specialty fashion chain by creating superior customer leadership strategy for many years to become the
value. Inditex can reportedly take a new fashion idea market share leader in PCs. Later, the merger of HP
from concept to finished garment and distribute it to and Compaq allowed HP to regain market share. In
over 1,000 stores in about two weeks—this is truly fast contrast, Wal-Mart has successfully adopted a cost
fashion, as well as a significant differentiation advan- leadership strategy over the years to deliver its
tage. Moreover, Inditex does this at very competitive economy strategy to consumers and become—and
prices due to its vertically integrated manufacturing remain—the largest retailer in the world.
and distribution system.
The Inferior Customer Value Strategy
The Premium Strategy
Products positioned in the inferior customer value
The premium strategy comes close to the differentia- quadrant of the value frontier will not be able to con-
tion strategy—with one important difference. tribute to a company’s success unless the company
Specifically, it requires that a company is able to differ- has a monopoly, customers cannot switch to another
entiate itself or its products in terms of quality, inno- product, or there is little market transparency and
vation, service, brand image, etc., and that customers customers are not aware of better alternatives. This
are willing to pay a price premium for superior position usually is the worst in terms of market share
product performance. Products that are sold via this and profitability; in fact, a strong loss of market share
strategy on average earn a 30 percent ROI and are and a low ROI (on average, 14 %) are the typical con-
able to slightly increase market share. sequences of this positioning. It might be argued that
One can easily think of many luxury products the North American automobile manufacturers got
that employ this strategy, including Rolex watches, in trouble by offering inferior customer value for
Bentley automobiles, and Louis Vuitton handbags. decades, with the result being a strong customer bias
However, this strategy isn’t just limited to luxury toward imports that led to those firms’ difficulties in
goods. Indeed, there are many other examples of the first decade of this Millennium; Japanese brands
both consumer and industrial goods and services for had found ways to deliver greater reliability at the
which companies offer “good,” “better,” and “best” same price, and European brands were delivering
products—with “the best” generally representing an higher performance and more desirable image and
exhibition of the premium strategy. prestige for a higher price; the value frontier had
shifted to the right and American brands were slow
The Economy Strategy to adapt, thereby getting stuck in the “Northwest.”
Companies that position their products using the
economy strategy compete on price, primarily by fo- APPLICATION OF CUSTOMER
cusing on cost leadership. Although the quality of
VALUE ANALYSIS
these products is balanced against their price, the av-
erage ROI using this strategy is only 18 percent. The A customer value analysis serves two purposes. First,
reason for this low ROI is simple: With the economy it can be useful in the formulation of market data-
strategy, price plays a dominant role, so price wars based strategies, which are preferable to vague defini-
are a permanent threat to profitability. In other tions or blurry descriptions of strategies. Second, this
words, if companies want to increase market share, type of analysis helps identify clear measures to imple-
they usually do so by lowering the price—but their ment strategies. In other words, customer value analy-
competitors often follow suit shortly thereafter. sis is a simple and straightforward tool to translate
236
strategy into action. However, in order for an analysis For the purposes of this example, we’ll focus mid-
to be successful, the marketer must have clear an- level laptop computers, because they appeal to a
swers to the following questions, ideally based on broad, “all-round” segment.
market research data:
1. What is our target market? STEP 2: IDENTIFYING COMPETITORS. The second
2. Who are our competitors in the target market? step of the strategy formulation process involves
3. What are the customers’ buying criteria? identifying competitors within the market segment.
4. How important is each of these criteria? For this task, the concept of strategic groups can be
5. How do customers evaluate our product and particularly helpful. A strategic group is a group of
the competitors’ products on the basis of these companies within an industry that pursue similar
buying criteria? competitive strategies and have similar characteris-
6. What are our prices and those of the competitors? tics (e.g., size) and competences. These companies,
7. What is the customers’ price sensitivity? therefore, offer similar products to similar customers
and are in strong competition with one another. For
Strategy formulation based on the value fron- our segment, we identified six major competitors:
tier concept can be systematically accomplished Samsung, Toshiba, Dell, IBM, HP, and Fujitsu
using a number of single analytical tools over eight Siemens (see Figure 4).
distinct steps of analysis. These steps are as follows
• Step 1: Definition of the target market STEP 3: IDENTIFYING AND ASSESSING BUYING
• Step 2: Identification of competitors CRITERIA. Next comes a particularly crucial step in
• Step 3: Identification of customers’ buying cri- customer analysis: identification of the customers’
teria and their relative importance buying criteria and their relative weights. This step
• Step 4: Assessment of product performance usually requires market research in order to formu-
and price late a clear understanding what customers want, how
• Step 5: Calculation of relative quality and rela- they decide, and what is more (or less) important to
tive price them. Ideally, qualitative market research initially
• Step 6: Estimation of customers’ price sensitivity identifies the buying criteria (attributes). Then, by
• Step 7: Creation of the customer value map way of a subsequent quantitative, representative
and formulation of strategies study, both the relative importance of these criteria
• Step 8: Definition of an action plan using im- and competitors’ performance on these criteria are
portance-performance analysis measured. There are several ways to assess the rela-
tive importance of these attributes, including:
Figure 4 also contains a worksheet that can be used
for this purpose. Now, let’s take a closer look at what • Conjoint analysis (a research technique that
each of the eight aforementioned steps entails, refer- identifies customer preferences when attrib-
ring to Figure 4 as we proceed. utes are considered simultaneously and inter-
dependently);
STEP 1: DEFINING THE TARGET MARKET. A good • Rating scales (e.g., “How important is the bat-
customer value analysis begins with the definition of tery of a laptop to you?”; 1 ⫽ not at all impor-
market segments. This is a critical step and must be tant, 5 ⫽ very important);
done carefully, because buying criteria and price sen- • Rank orders (“Please rank from 1 to 6 the fol-
sitivity can differ significantly between segments. For lowing characteristics of laptop computers [1 is
instance, for sports car buyers (e.g., Porsche pur- most important and 6 is least important]”); and
chasers), characteristics such as engine power, accel- • Constant sum scales (“Please divide 100 points
eration, and brand image are typically important, among the following characteristics so the divi-
whereas for family car buyers, traits like fuel con- sion reflects the relative importance of each char-
sumption, space, and price are likely more important. acteristic to you in the selection of a laptop.”)
237
238
Customer Value Map
Product: Laptops
Segment: Middle-class, all round usage
Dell Inspiron 8600 HP Pavillon zt3020 Toshiba Satellite Samsung P30 IBM R40 TR4BDGGE Fujitsu Siemens
p10-554 AMILO P4
Performance Weighted Performance Weighted Performance Weighted Performance Weighted Performance Weighted Performance Weighted
Buying Criteria (non price) Weight (1-5) Score (1-5) Score (1-5) Score (1-5) Score (1-5) Score (1-5) Score
Performance 25 3 75 3 75 4 100 3 75 3 75 4 100

Handling 20 4 80 4 80 4 80 4 80 4 80 3 60
Screen 15 4 60 4 60 4 60 4 60 4 60 3 45
Versatility in use 10 4 40 4 40 3 30 3 30 2 20 3 30
Workmanship 5 4 20 4 20 4 20 4 20 4 20 4 20
Battery 10 4 40 4 40 3 30 4 40 4 40 2 20
Brand Image 15 2 30 4 60 1 15 1 15 5 75 4 60
100
Weighted Score 345,00 375,00 335,00 320,00 370,00 335,00

Relative Quality 1,00 1,08 0,97 0,92 1,07 0,97
Price 1500,00 1800,00 1600,00 1600,00 1500,00 1800,00
Relative Price 0,92 1,10 0,98 0,98 0,92 1,10
Weights
Quality 40
Price 60
Sum 100
Relative price Relative Quality

Dell 0,92 1,00
HP 1,10 1,08
Toshiba 0,98 0,97
Samsung 0,98 0,92
IBM 0,92 1,07
Fujitsu Siemens 1,10 0,97
FIGURE 4 Worksheet for Customer Value Analysis

STEP 4: ASSESSING PRODUCT PERFORMANCE Therefore, a quality ratio and a price ratio are calcu-
AND PRICE. Product performance is best assessed lated. These ratios represent a product’s quality score
using a rating scale (e.g., from 1 to 5, where 5 is best). and price compared to the average of all products’
In our example above (Figure 4), data on buying cri- quality scores and prices. In our example (Figure 5),
teria and their relative weight, as well as on the per- HP’s relative quality of 1.08 means that the quality is 8
formance of the single competing products, were percent higher than the average quality of the prod-
taken from secondary market research on a European ucts, and its relative price of 1.10 means that the HP
market.6 laptop costs 10 percent more than average.
The second part of Step 4 is price assessment.
Prices usually are easily available. In the case of com- STEP 6: ESTIMATING PRICE SENSITIVITY.
plex price structures (e.g., bank services, supermarkets) Customers’ price sensitivity can simply be measured
instead of using actual prices, one can also estimate using a constant sum scale and a question similar to
price levels (e.g., our price ⫽ 100, competitor’s price the following: “Please indicate how much weight you
level ⫽ ?). put on quality and how much weight you put on
price in the selection of a laptop. Please divide 100
STEP 5: CALCULATING RELATIVE QUALITY AND points between quality and price.” In our example,
PRICE. Next, in order to calculate the quality score let’s assume that the customers are rather price sensi-
of each competing product, the performance rating of tive. Thus, they place 40 percent of the weight of
each attribute must be multiplied by the relative weight their buying decision on quality and 60 percent on
of that attribute, and the resulting values must be price. Here—and in all cases—the slope of the fair
added together. By themselves, the absolute individual value line will be equal to the percentage of the deci-
quality scores and prices are not meaningful—they sion based on quality divided by the percentage of
have to be compared to those of the competitors. the decision based on price.
1.15
Fujitsu Siemens HP
1.10
1.05 Fair Value

Relative Price
Line
1.00 Toshiba
Samsung
.95
Dell IBM
.90
.90 .95 1.00 1.05 1.10 1.15

Relative Quality
FIGURE 5 The Customer Value Map
239
STEP 7: CREATING THE CUSTOMER VALUE MAP Now the customer value map can be created
AND FORMULATING STRATEGIES. At this point, and strategies can be derived. In our example, Fujitsu
the relative quality and relative price of each product Siemens has a clear disadvantage, because its quality
can be used to create the customer value map is too low and its price too high. In contrast, IBM has
(Figure 5). On this map, a “1” on each dimension in- the most favorable position (i.e., it offers the highest
dicates the average quality and average price of all customer value), followed by Dell. In this case, if, for
products. As previously mentioned, the fair value example, Toshiba wanted to increase its market
line indicates the points at which quality is balanced share, it would have three options: (1) lower prices,
against price. Products positioned to the left of the (2) increase quality, or (3) carry out a combination
fair value line offer lower customer value, whereas of price reduction and quality improvement.
those to the right of the line offer higher value. A flat
fair-value line represents price-sensitive customers. STEP 8: DEFINING AN ACTION PLAN. The final
If, for example, the price is increased by 10 percent, step of customer value analysis involves defining an
quality has to be increased by more than 10 percent, action plan. One especially useful tool for doing this is
to, say, 20 percent, in order for the customer to con- the importance-performance-analysis method.7 For
tinue to buy that product. When customers have low example, if Toshiba’s strategy is to increase quality and
price sensitivity, the fair-value line is steep. Here, a position itself as the quality leader in the industry, it
low increase of quality will allow a disproportion- must determine how to enact this strategy. To do so,
ately high increase of price. Toshiba should compare its product’s performance
3
Overkill? Keep Up the Good Work!
(Performance of Own Product Performance of the
Versatility Performance
Strongest Competitor‘s Product)
1
Workmanship Screen Handling

0
Battery
−1
.−2
.−3
Brand Image
Low priority Concentrate here!
5 10 15 20 25 30
Importance
FIGURE 6 Importance-Performance-Analysis
240
attribute by attribute with that of its strongest com- • Quadrant 3 (low importance –high perform-
petitor (IBM). Then, a matrix with attribute impor- ance): A higher performance on unimportant
tance on the x-axis and attribute performance attributes can represent a possible overkill. If
(compared to IBM) on the y-axis can be created. For costs need to be reduced, these are the best
the y-axis in our example (Figure 5), we use relative candidates to cut expenses.
performance (Toshiba’s performance score minus • Quadrant 4 (low importance –low perform-
IBM’s performance score). Four quadrants with the ance): Actions have low priority here, as these
following implications are, therefore, identified: disadvantages are not very relevant.
• Quadrant 1 (high importance –high perform- In our example, Toshiba’s priority should be to in-
ance): These product characteristics or attrib- crease its brand image, which will have the strongest
utes (such as performance in Figure 4) are the effect, followed by improving its products “handling”
competitive advantages. A company should and screen.
keep up the good work here. After this final step, the customer value analy-
• Quadrant 2 (high importance –low perform- sis is complete. Based on market-research data, a
ance): These product characteristics or attrib- strategy has been formulated, and an action plan has
utes are the “burning fires”. A company should been derived.
take immediate action here.
Summary
Value mapping is a useful tool that allows marketing strate- tion of competitors; the identification of customers’ buy-
gists to define the relative positions of industry competi- ing criteria and their relative importance; an assessment of
tors on performance or quality, as well as on cost. The product performance and price; the calculation of relative
value frontier is the maximum performance or quality cur- quality and relative price; the estimation of customers’
rently feasible at a given cost to the customer. Successful price sensitivity; the creation of the customer value map
strategists attempt to find or create unique positions on the and formulation of strategies; and the definition of an ac-
value frontier. The process by which this is achieved in- tion plan using importance-performance-analysis.
cludes the definition of the target market; the identifica-
Gale, Bradley T. Managing Customer Value. New York: Free Buzzell, Robert D., and Bradley T. Gale The PIMS
Press, 1994. Principles. Linking Strategy to Performance. New York:
The Free Press, 1987.
Endnotes
1. Bradley T. Gale, Managing Customer Value (New 4. Buzzell and Gale, The PIMS Principles.
York: Free Press, 1994). 5. Adapted from Buzzell and Gale, The PIMS
2. Based on N. N. “TV-Geräte im Test,” Konsument 6 Principles; and Gale, Managing Customer Value.
(2009). Also see Bradley T. Gale, Managing Customer 6. Sources: “Notebooks: Viel Leistung um wenig Geld,”
Value (New York: Free Press, 1994). Stern Markenprofile 11 (2004); Konsument 4 (2004).
3. R. D. Buzzell, and B. T. Gale, The PIMS Principles. 7. J. A. Martilla, and J. C. James, “Importance-
Linking Strategy to Performance (New York et al.: The Performance Analysis,” Journal of Marketing 41, no. 1
Free Press, 1987). B. T. Gale, Managing Customer (1977): 77–79.
Value (New York, Free Press, 1994).
241
242
Product-Market Growth
Strategies
243
Product-Market Growth
Strategies
Most managers are wired to pursue growth. Even if it were not part of the innate com-
petitiveness of free-enterprise managers and markets, growth is an important strategic
objective. In fact, it is imperative for most firms for three reasons:
1. The only way to increase stock price, and thus shareholder value, is to grow faster
in earnings and cash flows than shareholders expect. Current share prices already
reflect expected growth; the only way to increase share prices is to exceed those
growth expectations;
2. Growth equates to market share and scale; therefore, lower growth than the com-
petition equates to exacerbating cost disadvantages as competitors gain experi-
ence and economies of scale; and
3. Even firms that might choose to forego growth must, nevertheless, continuously
pursue new customers and new markets for its products simply to maintain
sales volume. No company retains 100 percent of its customer base; therefore,
new customers and new products are necessary to offset customer defections
and attrition.
Of course, not all companies are always growing their sales and some may choose, at
least for the short term, to forego growth. Later in this note we will briefly discuss non-
growth strategies—“maintenance” and “retrenchment” strategies—but, for the reasons
listed, those are anomalies. Most firms aspire to growth in sales, revenues, and profits
for growth’s sake and/or in response to the pressures articulated above.
The question, then, is how a company or a strategic business unit can achieve that
vital growth? Professor H. Igor Ansoff proposed a simple, logical, and useful matrix to
organize possible answers to this question. Logically, at any given time a firm is market-
ing its existing products to its existing markets. That’s just the way it is, by definition. To
grow, then, the firm must sell more of the same product to those same customers, sell
its existing products to new customers, sell new products to existing customers, or sell
new products to new customers. By combining those two dimensions, products (exist-
ing versus new products) and markets (existing versus new markets), the Ansoff Matrix
defines four distinct growth strategies: market penetration, product development, mar-
ket development, and diversification, as shown in Figure 1. These four growth strategies
are described in more detail in the following sections.
244
Generic Strategies—Product-Market Growth Strategies
• Increase Quantity Used. Another option to in-

crease sales of an existing product to existing
customers is to increase the quantity used.
New
Market Amazon.com, for example, offers free shipping

Diversification
Development
for most of its products if the total purchase is
sufficient ( : 15 in Germany; $25 in the United
Markets
States), and reminds customers of how much

more they’d have to spend to get the free ship-
ping. This policy increases sales, because many
customers who would have bought a single item
Existing
Market Product for : 15 or $25 or less decide to add another

Penetration Development
item to their “cart” to save on the shipping costs.
• Convert Nonbuyers. In any market there are
customers that, for one reason or another, are
Existing New nonusers of a product. If a company finds out the
Products reasons for this, it can take measures to convert
these customers. In many European countries
FIGURE 1 The Ansoff Product/Market Growth the credit-card penetration rate is lower than in
Matrix1
the United States. An Internet retailer that took
payments only with credit cards would lose cus-
MARKET PENETRATION tomers who didn’t have cards, so Amazon.com
has facilitated and promoted other payment
The easiest and most promising way to grow is to in-
methods, such as bank transfer after receipt of
crease sales of existing products in existing markets. As
the product, to customers in central Europe.
long as there is still some growth potential in existing
markets, a company should prioritize this strategy. The • New Applications. Sales can also be increased
when customers are shown new applications for
company presumably has market knowledge, a devel-
existing products. Barilla, the Italian producer
oped and proven product, the necessary resources, and
of pasta, offers a wide variety of recipes on the
access to distribution channels. Customers know the
back of each package of pasta to stimulate its
brand, are familiar with the product and are, therefore,
customers to consume more pasta. Danone in-
usually easier to stimulate to buy than new customers
creased sales of its brand “Fruchtzwerge” in
in a new market. Empirical studies indicate that “pene-
Germany, a popular curd cheese product with
tration” strategies have the highest success rate (50%)
fruit targeted to children, by showing in the TV
and require the lowest amount of resources of the four
ads a new application in summer. When
growth strategies2. There are several options to grow
“Fruchtzwerge” was put into the freezer, chil-
via market penetration:3
dren could make their own tasty ice cream of it.
• Increase Frequency of Use. In this case, a com- Another example is the old Italian aperitif
pany tries to persuade its customers to use its Aperol introduced in 1911. It used to be a regu-
products more often. Diner’s Club, for example, lar aperitif sold mostly in northeastern Italy
offers its credit card holders a rewards program. with a modest market share until a new product
For each dollar charged, the customer earns a re- application was invented and promoted: Aperol
ward point, which then can be redeemed for a Spritz, white wine with Aperol and soda water,
wide range of options, from frequent-flyer miles became a refreshing orange flavor and low-alco-
to brand-name merchandise to financial re- hol cocktail and sales took off with yearly
wards. Hence, customers are motivated to use the growth rates up to 70 percent in some countries.
credit card more often, instead of cash or instead • Convert Lost Customers. The average company
of a competitor’s card the customer might own. has a customer turnover of 20 to 40 percent per
245
year. A study by Marketing Metrics shows that knowledge. Stimulated by Starbucks success,
on average there is a success probability of 60 McDonald’s decided to add McCafé and to
to 70 percent to successfully sell again to exist- offer its customers coffees and drinks. By si-
ing customers, a 20 to 40 percent probability of multaneously using its brand name, its experi-
successfully selling to lost customers, and only ence in designing efficient processes, and its
a 5 to 20 percent probability to win new cus- access to the existing customers base, it re-
tomers. A mobile phone operator started to duced the risk of new product development
contact lost customers to find out the reason and identified a new avenue of growth.
why they left the provider and tailored special • Product Line-Extensions. When a company
offers to win them back; the success rate was introduces under its successful brand name in
between 15 and 20 percent. a given product category new flavors, forms,
• Convert Competitor’s Customers. This, usu- colors, package sizes, etc., it intends to grow via
ally, is the most difficult way to grow as a com- line-extensions. Red Bull, the Austrian energy-
pany needs either a clear price advantage or a drink producer introduced Red Bull Sugarfree
clear differentiation advantage. However, it can to address a new market segment. In addition
prove to be a successful strategy. A vendor of to the Porsche Cayenne, Cayenne S, and
Enterprise Resource Planning (ERP) software Cayenne Turbo, the German car manufacturer
realized that many small and medium-sized introduced the new model Cayenne GTS to ad-
companies were dissatisfied with their ERP dress the segment of SUV-Buyers who want to
software and started to address them. As this have a very sporty SUV, with fast acceleration
company was very close to the market it could and higher top-track speed similar to the
easily find out which of the companies were Turbo, but at a lower price.
dissatisfied and why. Using this information • Cross Selling. Cross selling in most cases offers
it could target them and could turn these very attractive opportunities for growth. Cross
prospects, relatively easily, into customers. selling involves selling new products or services
to its existing customers. Banks, for an instance,
use cross-selling very systematically to increase
PRODUCT DEVELOPMENT sales by offering their customers services they
have not used before. Amazon.com uses cross-
To introduce modified, improved, or new products
selling when it tries to sell CDs or any other
on existing markets is the second successful strategy
product to customers who have been buying
with an average success rate of 33 percent. However,
only books so far. Cross-selling can be a very
it takes on average eight times more resources than
successful growth strategy when the customers
the market penetration strategy.
are satisfied with the existing products and the
• Product Improvements. Adding new product relationship and trust their vendor.
features (e.g., digital camera to a cell phone) or
improving product performance (e.g., fuel
MARKET DEVELOPMENT
consumption of a car through the hybrid tech-
nology) is a typical strategy in a highly com- The third growth strategy is market development;
petitive market that came into its maturity that is, expanding sales of existing products to new
phase of the product lifecycle. This way addi- geographic markets (e.g., when Amazon.com entered
tional sales can be generated through a better China) or to new segments (e.g., when Amazon.com
differentiation of the product. targeted business-to-business customers). This strat-
• Product Innovations. Synergies can be ex- egy requires building brand awareness and brand
ploited when a company introduces a new image, accessing new distribution channels, con-
product targeted to the existing customer base. fronting new competitors, and often formulating new
In this case it leverages its brand equity and marketing strategies. Data show that, in comparison
takes advantage of its market access and market to market penetration, market development requires
246
four times as much investment and the probability of Existing Products New Products
success is only, on average, approximately 20 percent. Market Penetration: Product Development:
• Increase Frequency of Use • Product Improvements
Exisitng Markets
• Increase Quantity Used • Product Innovations
DIVERSIFICATION • Convert Non-Buyers • Product-Line Extensions
• New Applications • Cross Selling
Taking a new product to a new market is the strategy • Convert Lost Customers
with the highest risk. It has the lowest probability of • Convert Competitor‘s
Customers
success (on average 5%) and needs the highest Probability of Effort: Probability of Effort:
amount of resources (12 to 14 times as much as the Success: 100% Success: 800%
50% 33%
market penetration strategy). There are different
ways of diversification. Market Development: Diversification:
• Expand Geographically • Related Diversification
• Target New Segments • Unrelated Diversification
• Related Diversification. In a related diversifica-
New Markets
• Forward Integration
tion a company enters a new market with a new • Backward Integration
product attaining synergies by sharing assets or
competencies across businesses. Synergies can be
exploited by entering new markets with new Probability of Effort: Probability of Effort:
products using a brand name (e.g., Richard Success: 400% Success: 1200%-1400%
20% 5%
Branson’s Virgin Atlantic Airline, Virgin
Records, Virgin Mobile UK, Virgin Express; not FIGURE 2 Strategic Planning within the Ansoff
all the ventures proved to be successful), market- Matrix4
ing skills, manufacturing skills, R&D skills, or
taking advantage of economies of scale. a company can develop a new product for the existing
• Unrelated Diversification. In an unrelated di- market, which it already knows, and in which it has
versification a company enters a new market brand image and access to distribution channels. In
with a new product not related to the existing the next step, it can take the product that has been suc-
product markets. In this case now synergies cessfully introduced in the existing market to a new
can be exploited and the venture is very risky market. Alternatively, it could introduce an existing
as the company has no market knowledge and product to a new market to gain market knowledge,
no product expertise. create brand awareness and brand image, get access to
• Forward and Backward Integration. Vertical distribution channels, and then develop a new prod-
integration is another potential growth strat- uct for this market. Thus, it does not go directly from
egy. Forward integration occurs when a com- penetration to diversification, but reduces the risk of
pany decides to move downstream the product diversification by making a detour via one or both of
flow (e.g., when it acquires retailers); backward the other growth strategies. This, however, has to be
integration means that a company moves up- planned carefully and with a long-term perspective.
wards (e.g., when it acquires a supplier).
ADJACENCIES AND GROWING FROM
THE “Z” STRATEGY “THE CORE”
Small firms and companies in mature industries Growth into either a new market or with a new prod-
often consider diversification as their only possible uct is less risky than diversification but that doesn’t
growth strategy. Especially when they missed to plan answer the question of what new market or new
their growth strategically, they can find themselves in product to target for growth. How should new mar-
a situation where they need a new product and a new kets or new products be selected? A basic framework
market at the same time. This, as Figure 2 shows, is a for answering that question is the notion of “adja-
high risk strategy. The risk of diversification can be cencies.” Prominent strategy consultant and author
reduced when a company plans its growth across Chris Zook has elaborated on and clarified this idea,
time. Before entering a new market with a new product, arguing that firms should identify their “core,” their
247
Forward
Local Integration
Backward
Integration
New New
Global Value Chain Sell Capability
Geographies
Expansion Activities Outside
Internet New-to-the-World
Needs
New New
Distribution Core New Substitues
Channels Businesses
Indirect New Models
New New
Microsegmentation Customer Next Generation
Products
of current segments Segments
New to
the World Support services
Unpenetrated
Segments New Complements
Segments
FIGURE 3 Building from the Core and Identifying Adjacencies8
essential, enduring, and defensible strengths, and grow along any of six paths: new geographies, new value
by carefully defining that core and considering the dis- chain activities, new channels, new customer segments,
tance or “steps” that any growth opportunity lies from new products, or new businesses (Figure 3). This six-
it.5 Of course, the first requirement in considering op- strategy scheme corresponds closely with Ansoff ’s
portunities with regard to their relationship to the original two-dimensional summary: new geographies,
firm’s core is to define that core rigorously and accu- new channels, and new customer segments are mostly
rately. The company’s core can be seen as its competi- about “new markets” (although new customer seg-
tive advantages and market strengths: its most prof- ments also includes what Ansoff labeled as market
itable customers, its key sources of differentiation, its penetration in the form of increased sales to existing
core competencies, its most important products and customers via “microsegmentation” of current seg-
the sources of profits (“profit pools”), its relationships ments), new products is simply product development,
with channels and other collaborators, its organiza- and new businesses and new value-chain activities are
tional culture, and any other assets such as patents, diversification. Zook studied 181 randomly selected
brands, or access to scarce resources that contribute to adjacency moves by major corporations and found
those core strengths.6 Focus, that is understanding, that for growth initiatives that were one step from the
protecting, and nurturing a strategic core is essential core, the success rate was 37 percent, for two-step
to success; Zook and his colleagues at Bain and moves it was 28 percent, and for three-steps it was less
Company studied data on more than 1,800 companies than 10 percent.7
in seven countries with greater than $500 million in
revenues and found that of the companies that could
NONGROWTH STRATEGIES
be described as “sustained value creators,” those that
had earned their cost of capital and realized growth of Most companies aspire to growth both for the inherent
5.5 percent or higher over the most recent decade, benefits of increased revenues and profits and in re-
78 percent had a single strong core and strong market sponse to pressures, including investor demands, the
leadership (relative market share of greater than 1.2). need to achieve scale and its benefits, and the need to at
Once the firm has clarified its core strengths it least replace defecting customers, as discussed at the
should look for opportunities that build upon those start of this note. Nevertheless, there are firms and situ-
strengths (that is, opportunities that are adjacent to its ations for which growth is an unrealistic objective.
core). According to Zook, adjacencies can be found Economic and competitive conditions may dictate, at
248
least for certain periods, adopting a “damage control” deliberately, rather than reactively, and concentrating
strategy. Marketing strategy has long drawn on ideas on the most defensible market position, the most
about strategy from military and warfare strategists,9 attractive customers, and the most resilient core
and a core idea in marketing as warfare is that there are strengths is necessary in times of defense and retrench-
times to act defensively. Defensive marketing strategies ment (operationally, retrenchment also generally en-
that are appropriate in times of low or no growth (or tails cost and asset reductions). One particular tactic is,
even decline) emphasize the need to identify the “high generally, to avoid the temptation of retaining market
ground,” the place where the firm has the most size by discounting and degrading product quality.
strength and the most likelihood of weathering the Discounting inferior products to maintain top-line
battle (with the intention, presumably, to “live to fight sales can be a ‘no win’ situation, which fails to provide
again another day” or resume growth in the future). profits in the short term, dissatisfies customers and de-
Which customers are most attractive (loyal, profitable) grades the brand, and incites price wars and leads to
and which strengths are most durable? Contracting pan-industry decline in the long run.
Summary
Growth is a pervasive objective in strategic marketing. strategies are not all equally attractive or sound—the fur-
There are only a certain number of ways to grow—market ther from the firm’s “core” strengths the growth initiative
penetration, product development, market development, reaches, the less likely it is to succeed. Identifying the core
and diversification. Each of these is described in some de- and building upon it is effective both in identifying oppor-
tail in this note, along with a selected set of specific tactics tunities for growth and in identifying defensible positions
for pursuing each general growth strategy. These growth in times of retreat or retrenchment.
Aaker, David A. Strategic Market Management, 7th ed. Zook, Chris with James Allen. Profit from the Core: Growth
Hoboken. NJ: John Wiley & Sons, 2005. Strategy in an Era of Turbulence. Boston, MA: Harvard
Ansoff, H. Igor. “Strategies for diversification.” Harvard Business School Publishing, 2001.
Business Review (September–October, 1957), 113–24. Zook, Chris. Beyond the Core: Expand Your Market without
Becker, Jochen. Marketing-Konzeption. München: Vahlen Abandoning Your Roots. Boston, MA: Harvard Business
Verlag, 2009. School Publishing, 2004.
Endnotes
1. Figure is from H. Igor Ansoff, “Strategies for Market without Abandoning Your Roots (Boston,
Diversification,” Harvard Business Review 35, no. 5 MA: Harvard Business School Publishing, 2004).
(September–October, 1957): 113–124; Figure is at 6. See Chris Zook, “Finding Your Next CORE
p. 114. Business: What if You’ve Taken Your Core As Far As
2. Jochen Becker, Marketing-Konzeption (München: It Can Go?” Harvard Business Review 85, no. 4 (April
Vahlen Verlag, 2009). 2007): 66–75 (with regard to defining the core, see
3. Ibid. especially page 68–69); and Chris Zook with James
4. Adapted from: H. Igor Ansoff, “Strategies for Allen, Profit from the Core, see especially page 13–17.
Diversification,” Harvard Business Review 7. Chris Zook, Beyond the Core, page 88 (his Figure 3-1).
(September–October, 1957): 113–24. Statistics on 8. Chris Zook with James Allen, Profit from the Core,
the probability of success and the effort relative to page 74.
market penetration (set as 100%) are from Becker, 9. See, for example, Philip Kotler and Ravi Singh,
Marketing-Konzeption. “Marketing Warfare in the 1980s,” Journal of
5. Chris Zook and James Allen, Profit from the Core: Business Strategy 1, no. 3 (Winter 1981): 30–41; and
Growth Strategy in an Era of Turbulence (Boston, Al Ries and Jack Trout, Marketing Warfare, 20th an-
MA: Harvard Business School Publishing, 2001); niversary ed. (New York: McGraw Hill, 2006).
and Chris Zook, Beyond the Core: Expand Your
249
250
Specific Marketing
Strategies
251
Specific Marketing
Strategies
Porter’s framework of the “generic strategies” (cost leadership, differentiation, focus)1
describes the most basic forms of a competitive strategy. A second framework, the
“value frontier”2 provides a structure to organize the ways that companies can compete
based on relative price and relative quality. And, a third framework, “Ansoff ’s matrix”3
shows how companies can systematically identify growth opportunities. These frame-
works apply to generic strategies. Within these broad generic strategies, innumerable
more specific options are available—and every firm will cobble together its own unique
strategy as a combination of the characteristics presented in these general frameworks.
These specific marketing strategies describe how companies can compete regarding
timing, internationalizing, attacking, and defending.
TIMING
With regard to new products, services, technologies, or business models, a company can
be either the first to market, capturing the first-mover advantage, or the follower, trying
to learn from the first entrant and to imitate or even improve. The choice between a
first-mover and a follower strategy is very difficult, as both strategies have particular
advantages and disadvantages (see Table 1).4
The first mover often assumes a monopolistic position, and—at least theoretically—
can charge price premiums. The first mover could also decide to enter with relatively
low prices to gain market share. In that case, the first mover will benefit from experi-
ence-curve effects and scale economies. Another advantage of being a first mover is the
access to critical resources, skilled labor, distribution channels, locations, and the like.
Often, first movers can build a dominant brand and can create market entry barriers by
establishing customer switching costs (e.g., contractual agreements or loyalty pro-
grams) or by setting new standards.
The first mover, of course, bears the full costs and the risks of the innovation, and
has to educate the market, teach customers the new technology, deal with possible reg-
ulatory issues, and so forth. A follower, therefore, can “free ride” and learn from the first
mover’s mistakes. It has been estimated that the costs of imitation typically are only
65 percent of the cost of innovation5. However, if the first mover can establish market
entry barriers, and take the most attractive market positions and segments, a follower
will find it very difficult to build market share.
252
Specific Marketing Strategies
TABLE 1 First-Mover versus Follower Strategy
First-Mover Advantages
Being first to market with a new product, service, • Being monopolistic
business model, or technology • Charging price premiums
• Experience curve effects
• Scale economies
• Preemption of scarce resources
• Reputation
• Creating customer switching costs
• Setting new standards disadvantages
• Development costs
• Market education costs
• Risk of failure
Follower Advantages
Entering a market as a follower with either an • Free-riding
improved or lower priced version • Learning disadvantages
• Market entry barriers
• Most attractive market position already taken
• Most attractive customer segments already taken
INTERNATIONALIZATION products or technologies quickly and efficiently, and

to effectively control what foreign subsidiaries do
When a company internationalizes, it has four op- and how they implement the strategy. The Body
tions (see Table 2):6 Shop grew from a single store in the United Kingdom
1. Build an international strategy; in 1978 to include more than 2,400 stores in 61 coun-
2. Build a multinational strategy; tries. The founder, Anita Roddick, established the
3. Build a global strategy; or company with a core value of non-animal tested cos-
4. Build a combination of the above or a transna- metic products. The marketing of that claim and
tional strategy. other social and environmental causes proved to
have international appeal. The company’s name is
An internationalizing firm can take products now The Body Shop International plc.
developed for its home market and sell them abroad A second approach is the multinational strat-
without adaptation to the foreign market. This ap- egy. This approach, in which tailored strategies and
proach is what many call an international strategy. marketing mixes are developed for different coun-
This usually works only if foreign markets are not tries or regional markets, is appropriate if those mar-
too different than the domestic market with regards kets are significantly different from the domestic
to things like needs, tastes, consumer behavior, and market and/or from each other. Multinational strate-
competitors. A completely standardized approach gies (which could really be labeled “multimix” strate-
has the advantage of higher scale economies, world- gies) are appropriate when local conditions (context
wide consistent brand image, and quality. The orga- factors such as regulations, culture, or climate),
nizational structure associated with this strategy is competitors, or market structures (e.g., distribution
very simple, as all important functions are central- systems and industry structures) require an adapted
ized. With this approach it is also easier to transfer strategy and a customized marketing mix. This
253
TABLE 2 Approaches to Internationalization
International Advantages
Products are developed for the domestic • Scale economies
market and sold abroad with no alteration • Consistency in brands and offerings
• Ability to transfer products quickly and efficiently
• Simple organization
• Effective control
Disadvantages
• Differences in customer needs, markets, and competition
ignored
• Full potential of foreign market not exploited
Multinational Advantages
Each foreign market develops customized • Full adaptation to and exploitation of local market
strategies and offerings to fully adapt to the Disadvantages
local requirements
• High product development and marketing costs
• Little economies of scale
• No consistent brand image, quality, etc.
• Duplication of efforts
• Little control over subsidiaries
Global Advantages
Products are developed for the global market • Same as for international strategy, plus product developed
and companies sell “the same thing, the same for a global segment with the same needs everywhere
way, everywhere”7 • Centralized control and decision making
Disadvantages
• Assumes that national tastes and preferences are similar,
and markets are homogenized
Transnational Advantages
As much standardization as possible, as much • Combines advantages of global and multinational strategy
adaptation as necessary Disadvantages
• Leads to complex organizational structures and a high
need of coordination
adaptation of strategies and marketing programs to occur when a single brand is positioned differently
meet local conditions is intended to maximize sales or given different meanings across markets. Market
in each market, but will also increase costs, including boundaries are porous and customers often purchase
not only the specific costs of adaptation (changes to product and are exposed to brand messages across
product specifications, foregone scale effects when markets; therefore, positioning a brand differently in
production runs are shortened, and the costs of different markets may lead to customer confusion
adapting packaging, advertising messages, and sup- and consequently to dilatation of the brand’s equity.
port materials to local markets) but also the costs of Nestlé is a good example of a multinational strategy.
redundancies in R&D, new product development, Only about 2 percent of Nestlé’s sales are in its home
and marketing mix development as each country market of Switzerland, while it employs nearly
“reinvents the wheel.” Another risk of multinational 300,000 people and has more than 500 factories in
strategies is confusion in brand building that may nearly 100 countries. Nestlé’s extremely successful
254
multinational strategy includes developing adapted Mac in Mumbai—instead it is a mutton substitute

products and marketing mixes to local conditions (lobster is readily available and a local favorite in the
around the world–often via the purchase of local State of Maine, especially with the considerable
companies and brands. When products are devel- tourist trade while the cow is considered sacred in
oped for the global market (as opposed to for a local Hinduism, the primary Indian religion). Thus, while
market and later sold internationally) and compa- much of McDonald’s menu is the standardized re-
nies sell “the same thing, the same way, everywhere,”8 gardless of location, certain items are added or sub-
a company adopts a global strategy. It is based on the tracted according to local tastes.
observation that a global segment of customers with
the same needs exists worldwide. This segment is ad-
MARKET ENTRY STRATEGIES
dressed and a worldwide standardized product and
marketing concept is developed. The advantage is When entering international markets, company ex-
full exploitation of scale economies, consistent brand ecutives must decide how many resources to commit,
image and quality, and centralized control. Most and how much control they want to have over their
companies that adopt this approach, however, realize foreign activities. Resource commitment and control
that differences in culture, consumer behavior, are both associated with risks and profits. Basically,
needs, preferences etc. still exist, and that a com- five entry modes with specific advantages and disad-
pletely standardized approach has a high likelihood vantages exist 9(see Table 3):
of failure. However, a company like Boeing has had a
1. Exporting;
global strategy for years. The venerable 747 jetliner
2. Licensing;
was, from its conceptualization and design, thought
3. Franchising;
of as a global product. While many components of
4. Joint Ventures; or
the plane are made around the world, the plane’s as-
5. Direct Investment.
sembly and control are centralized in the United
States. Subsequently, that is also true of the 777 and Many companies start their first international
soon to be produced 787 “Dreamliner.” activities with exports before they commit more re-
The transnational strategy has emerged in resources to foreign markets. Indirect exporting through
cent years because many international companies independent intermediaries and direct exporting
discovered that neither complete standardization nor through a home-based export department, foreign
full adaptation is successful as a strategy. The subsidiary, sales representatives or agents, entails lim-
transnational strategists adhere to the principle “as ited risks. Limited resources are needed, and, there-
much standardization as possible, as much adapta- fore, this approach is very flexible. At any time, the
tion as necessary.” They try to combine the benefits company can intensify or limit its engagement with-
of a multinational and global strategy. They develop out any major investments or losses. Exporting, how-
a core product or marketing concept with standard- ever, is not suitable for every product, especially when
ized core components or modules, which than can be high levels of service are needed. The exporter usually
adapted to local needs. This way they can exploit has no direct contact to the final customer and there-
scale economies and customization advantages at the fore will find it difficult to learn about needs and
same time. This combination or transnational strat- wants to adapt the product accordingly. Furthermore,
egy, of course, requires much coordination between the company fully bears the exchange rate risk.
all the subsidiaries and the headquarters, and can Licensing is another entry strategy with lim-
lead to complex and sometimes bureaucratic organi- ited risk and resource commitment. The licensor
zational structures. grants the right to use intellectual property (e.g.,
McDonald’s International employs a transna- patents) or to manufacture and sell a company’s
tional strategy that allows them to simultaneously product in a specified market against a royalty.
standardize their operations while adapting to local Disney, for example, licenses its trademark and logos
tastes and customs. For, example, a McDonald’s cus- to manufacture apparel, toys, etc., for worldwide
tomer can get a lobster roll in Maine, but not a Big sales. The licensor benefits from the licensee’s market
255
TABLE 3 Market Entry Strategies
Exporting Advantages
Indirect—through independent intermediaries • Low risk
Direct—through home-based export • Few resources needed
department, foreign subsidiary, sales
• Little organizational complexity
representatives, or agents
Disadvantages
• Not suitable for complex products that need high levels
of service
• No customer contact when indirect export
• Low exploitation of foreign market
• Exchange rate risks
Licensing Advantages
Issuing a license to a foreign company • Low risk and few resources needed
to use a process, trademark, patent, or product • Allows quick entry in many markets simultaneously
• Licensee’s knowledge of local market
Disadvantages
• Little control over activities of licensor
• Might create and educate a future competitor
• Low profits
Franchising Advantages
Offering a complete brand concept and • Same as licensing, however higher control over fran-
operating system to a franchisee against chisee
a fee • Economies of scale through standardization
• Franchisee’s knowledge of local market
Disadvantages
• Only for products and concepts that can be standardized
• Control of franchisee necessary
Joint Ventures Advantages
Joint venture with a local investor with shared • Pooling of competences (e.g., market access, technology)
ownership and control • Lower risk and capital needed as for fully owned
subsidiaries
• In many countries local partner required
Disadvantages
• High conflict potential regarding strategy, reinvestment,
etc.
Direct investment Advantages
Direct ownership of a foreign production or • Full control
assembly plant • Good relationships and better image with local authorities
due to job creation
Disadvantages
• Highest risks
• High resource commitment
256
knowledge and market access. As few resources are thorities and image due to the jobs created and the
needed, this approach allows for a quick entry into investments made. Japanese automakers Nissan,
many foreign markets at the same time. The major Toyota, and Honda have all established U.S. assembly
drawback of this strategy is the limited control over and marketing organizations. Likewise, IBM has
the licensor, relatively low profits (typically a 2%–5 % company owned manufacturing facilities in more
royalty), and the risk that the licensor might become than 10 international countries.
a potential competitor after termination of the
licensing contract.
The difference between licensing and franchis- OFFENSIVE AND DEFENSIVE
ing lies in the offering of a complete brand concept STRATEGIES
and operating system to the franchisee. Franchising
Military science has proved to be very fruitful source
is very common in the fast food business. The fran-
for business strategists as many of its insights can be
chisor provides training, marketing programs, and
transferred to a business context. Business strategists
the whole business system against a lump-sum pay-
and marketers have developed some concepts that de-
ment and a royalty fee. The advantages are similar to
scribe how companies can “attack” their competitors
licensing. This market entry strategy usually works
or how they can defend themselves against the “aggres-
only for standardizable business systems and prod-
sor.”10 Table 4 describes the characteristics for these
ucts. McDonald’s, Dominos Pizza, and 7-Eleven
strategies. Offensive or “attacking” strategies include:
Stores all employ franchise models. In most franchise
relationships, the franchisor and the franchisee have 1. The frontal attack, where a challenger tries to
a contractual relationship where the franchisor pro- find a way to achieve an exploitable advantage
vides the franchisee with certain benefits described over its target competitor. The “attacking”
above but also has the right to enforce certain stan- company can do so by massing its forces
dards on the franchisee. It is a bit like a parent–child (which may include lower prices, new features,
relationship. On the other hand, a joint venture, the higher quality, or superior technology) against
next concept, is more of a marriage of equals. the strengths of the competitor. For example,
A joint venture with a local investor with Wal-Mart employed the capabilities (systems,
shared ownership and control is a desired option if logistics, and supply chain) it had developed
the host country does not allow full ownership of a serving rural USA customers to attack a much
subsidiary by a foreign company. It is also desirable if larger Kmart in the metropolitan areas of the
competences, resources, or market access are miss- country with “everyday low prices” and even-
ing, and a local partner is needed. In many cases that tually won the war of the major discounters.
local partner provides market access and the interna- 2. The flanking attack is executed by attacking
tional partner contributes technology and know-how. segments and/or by addressing needs the
While this strategy allows the pooling of competencies competitor neglects. Often, the needs of later
and resources and promotes risk sharing, many joint adopting segments are different from early
ventures fail because of differences in culture, strate- adopters that were targeted by the first mover.
gic priorities, and conflicts regarding reinvestment The flank attacker focuses not on the estab-
or repatriation of profits. Joint ventures are often lished competitor’s strengths but on his or her
common in the oil and gas industry as well as the areas of weakness. Flank attacks work well
automotive industry. The next level in market entry when the incumbent is unwilling or unable to
is full ownership. respond. Gillette, the long time market leader
Full ownership of a foreign production or as- in the razor and blade business was surprised
sembly plant implies the highest level of resource when Bic introduced the disposable razor, a
commitment, risk, control, and profit potential, but clear flank attack that appealed to an emerging
also the lowest level of flexibility. Foreign direct in- market segment and which the incumbent,
vestment also improves relationships with local au- Gillette, was reluctant to respond to initially.
257
TABLE 4 Offensive Strategies
Frontal attack • Must have a clear advantage (price, quality, financial

Massing one’s forces against the strengths strength, etc.), i.e., 3:1 advantage
of the competitor • Competitor should not be able to retaliate
Flanking • Concentration of forces on competitor’s weaknesses
Attacking segments or addressing needs • Find segments that are not served well and develop them
that are neglected by the competitor into strong segments
Encirclement • Must have enough resources for a frontal attack in several
Attacking at several fronts simultaneously segments where competitor has weaknesses
• The encirclement must be comprehensive enough to
overwhelm the competition
Bypass • Unserved or neglected markets must be found
Gain strength in unserved markets to • They must allow to gain strength (develop and refine
attack later product, create brand awareness, gain financial
strength, etc.)
• These strengths must be transferrable to competitor’s core
market for an attack
Guerrilla • Find several weakly defended markets
Minor attacks on multiple fronts to • Have enough resources to attack these “blind” spots
demoralize competitor • Be able to demoralize competitor to eventually prepare for a
massive attack
3. The aggressor can attack on several fronts si- each case, the new market leader used new tech-
multaneously, which is known as encirclement. nology to overtake the former market leader.
Here, the plan is to surround the enemy with a 5. Finally, guerrilla warfare means that the ag-
variety of offerings directed at undeveloped seg- gressor launches many minor attacks at multi-
ments of the market. Samsung has employed ple fronts to demoralize the competitor and to
this strategy to become the worldwide leader in eventually prepare for a massive attack.
flat-panel television sets. The company offers a Southwest Airlines may be the ultimate guerrilla
full range of both LCD (liquid crystal display) warrior. Beginning in Texas with the
and plasma models, along with conventional Dallas/Houston/San Antonio markets, the
sets. It passed Sony in 2006 to become the in- low-cost carrier has slowly but surely attacked
dustry leader. The company focused on design, city-pair markets and entrenched airline lead-
supplier relationships, and retail partners.11 ers (beginning with American and Branniff) to
4. The Bypass Strategy amounts to skipping over become the most valuable U.S. airline.
an adversary to attack elsewhere either through
The attacked company has a number of op-
diversification into unrelated products or new
tions available to defend itself. Table 5 lists the char-
geographies, or by leapfrogging into new tech-
acteristics of these strategies. They include:
nologies. The video game industry has been re-
plete with technological leapfrogging, first by 1. Building a “fort” around the product (position).
Nintendo leaping over Atari with next genera- Anheuser Busch (AB) dominated the U.S. beer
tion technology, then by Sega Genesis leapfrog- market for decades and built a fort around its
ging over Nintendo, then by Sony’s Playstation domestic position. In the end, it failed to see the
leapfrogging Sega, and most recently the international threat that emerged and eventu-
Nintendo Wii leapfrogging the Playstation.12 In ally led to its acquisition by In Bev, the Belgian
258
TABLE 5 Defensive Strategies
Position • All resources are used to defend the current product

Building a “fort” around the current product • A “fortification” is built
• It is very risky to put all eggs into one basket (or behind the
walls of one fort)
Mobile • Defend current product
Diversify into new products and or markets to • Exploit current strengths to diversify into new domains
launch retaliatory strikes (products and or markets)
• Defend or attack out of these new domains
Preemptive • Weaken competitor before he attacks
Defending by attacking
Flank positioning • Identify points of weaknesses
Develop defenders for uncertain eventualities • Develop defenders for potential attack
Counteroffensive • Use all resources and strengths to attack competitor
Directly attacking aggressor frontally or at selected points of weaknesses
Strategic withdrawal • Define unimportant segments and withdraw
Withdraw from unimportant segments to • Cumulate and concentrate resources on core products or
concentrate resources for a counterattack segments
• Counterattack out of core
powerhouse. It (AB) more or less had all its eggs 4. Preventively developing defenders for poten-
in one basket—the United States—when the tial attack (flank positioning). Here the idea is
business was becoming a global game. to protect yourself by developing additional
2. Diversification into new products and markets entries to cover weaknesses in the original
to launch retaliatory strikes (mobile). The mo- offering. For example, Toyota’s development
bile defense amounts to creating a moving tar- of the high-quality and high-priced Lexus
get that is hard for a competitor to attack. After brand has often been referred to as the com-
saturating the US toy market, Toys- R -Us took pany’s attempt to defend itself in the prestige
its product (the toy supermarket) to new segment—its exposed flank.
markets—first Canada, then Europe, then Asia. 5. Counter attacking is often the response of a
Later it developed a new product, Kids- R -Us, market leader when attacked. Examples would
and later Babies- R -Us. include significant price cuts, major promo-
3. Weakening the competitor before it attacks tional activities, product line improvements
(preemptive). In effect, the aim of this strategy and extensions, and the like. Sometimes the
is to attack an aggressive competitor by block- result becomes a price war. In the Christmas
ing its anticipated move before the competitor season of 2009, Wal-Mart lowered its prices on
can mount its attack. A widely known example the most popular books, and, later, DVDs,
of such a preemption can be found in the soft- prompting Amazon.com and Target to
ware industry’s practice of announcing new counter attack with even lower prices. Wal-
products well in advance of their actual (if Mart then counter attacked them and the
ever) production thereby causing many cus- price war was on.13
tomers of competitors existing products to wait 6. Strategic withdrawal amounts to giving up an
for the anticipated new product. This practice untenable position and freeing up the resources
has been referred to as offering “vaporware.” that had been deployed there to be used else-
259
where. For example, after more than a decade of Metro, that could match or beat Wal-Mart at their
trying unsuccessfully to build a strong position in own game of lowest prices. Wal-Mart decided to
Germany, Wal-Mart, the world’s largest retailer, redeploy those resources committed to Germany
gave up and withdrew from the market. The in other countries where its prospects appeared
company realized that the German retail business to be better. Likewise, IBM withdrew from the
was very established, very entrenched, and allow-margin personal-computer business in order
ready had many players such as Aldi, Lidl, and to redeploy its resources in more profitable areas.
Summary
These specific marketing strategies (timing, international, Each of these individual strategies has advantages and dis-
entry modes, offensive and defensive—the last two being advantages, and some of them have very clear require-
military strategies, too) help to make consistent decisions ments that must be fulfilled. Decisions to pursue any of
and define patterns of actions that allow pursuit of long- them must be made in light of the general marketing ob-
term goals and the implementation of a general strategy. jectives and strategy.
Ansoff, H. Igor. Strategies for diversification. Harvard Kotler, P. & Singh, R. (1980) Marketing Warfare in the
Business Review (1957): 113–124. 1980s. The Journal of Business Strategy, 1, 30–41.
Cavusgil, S. T., G. A. Knight, and J. R. Riesenberger. Levitt, T. The Globalization of Markets. Harvard Business
International Business. Strategy, Management and the New Review (1983): 92–102.
Realities. Upper Saddle River, NJ: Prentice Hall, 2008. Porter, Michael. E. Competitive Advantage: Creating and
Gale, B. T. Managing Customer Value, New York, 1994. Sustaining Superior Performance, (New York, Free Press,
Johnson, G., K. Scholes, and R. Whittington, Exploring cor- 1985).
porate strategy. Text & cases, Harlow, England: Prentice
Hall, 2008.
Endnotes
1. Michael. E. Porter, Competitive Advantage: Creating 8. T. Levitt, “The Globalization of Markets,” Harvard
and Sustaining Superior Performance (New York: Business Review (1983): 92–102.
Free Press, 1985. 9. S. T. Cavusgil, G. A.Knight, and J. R. Riesenberger,
2. B. T. Gale, Managing Customer Value (New York, International Business. Strategy, Management and
1994). the New Realities (Upper Saddle River, NJ: Prentice
3. H. Igor Ansoff, “Strategies for Diversification,” Hall, 2008).
Harvard Business Review (1957): 113–124. 10. P. Kotler, and R. Singh, “Marketing Warfare in the
4. G. Johnson, K. Scholes, and R. Whittington, 1980s,” The Journal of Business Strategy 1 (1980):
Exploring Corporate Strategy. Text & Cases (Harlow, 30–41.
England: Prentice Hall, 2008). 11. “Samsung Edges Out TV Rivals,” The Wall Street
5. Ibid. Journal, February 17, 2010, page B4.
6. C. A. Bartlett, S. Ghoshal, and J. Birkinshaw, 12. “Changing the Game,” The Economist Technology
Transnational Management (Boston: McGraw Hill Quarterly (December 6, 2003): 16.
Irwin, 2004). 13. www.msnbc.msn.com/id/33721415/ns/business-
7. Ibid. retail/. Last accessed June 25, 2010.
260
Market Segmentation
When addressing the market and developing a value proposition and marketing mix, a
company has basically two options: mass marketing or segmented marketing. Mass
marketing is a strategy that treats all customers as if they are the same—or at least treats
all customers very similarly—with a standardized mix. This is a “one-size-fits-all” ap-
proach, with the same product, the same price, the same communications and sales ef-
fort, and the same distribution offered to all markets. Mass marketing is based on the
desire to achieve scale effects (i.e., economies of scale, learning curve effects, and syner-
gies) and preserve organizational simplicity and control. Within domestic markets,
such as the United States or the European Union, many companies pursue mass strate-
gies. Coca-Cola, for example, is often held up as the exemplary “mass marketer”:
Everybody drinks Coke, everybody’s Coke is the same, everybody sees the same brand
messages for Coke, and everybody finds Coke in the same places.
Nevertheless, for most companies, the world is not so simple. In fact, in the ma-
jority of markets, there are opportunities to gain advantage by adapting offerings to
customer differences. Customers vary in their needs, tastes, preferences, and buying be-
havior. As a consequence, markets can be divided into homogeneous segments of cus-
tomers with similar needs and behavior, with each segment clearly differing from the
others. Adopting this approach allows a company to focus on the most promising mar-
ket segments, tailor its offers to their needs and preferences, and to more effectively de-
sign and coordinate individual marketing activities to a specific target group.
In fact, even Coca-Cola’s “mass marketing” strategy is more complex than it seems
on first appraisal. At one time, the company’s standardized offering was simple: Coke
came only in six-ounce bottles and fountain syrup, and there were no alternative formu-
lations. Over time, however, Coke’s product lines proliferated, and currently, customers
can choose from not only “regular” Coke but also Diet Coke, Coke Zero, Caffeine-free
Coke, Cherry Coke, and Vanilla Coke in a variety of sizes and packages. When you con-
sider Coke’s international markets, adaptations in the company’s so-called “standard-
ized” marketing mix become even more striking. For example, there is a small group of
enthusiastic consumers in the United States who covet Mexican Coca-Cola. The
Mexican version of Coke is made with sugar instead of corn syrup and, therefore, tastes
261
Market Segmentation
Segmentation Based on Benefit Segmentation

Observable Customer
Characteristics
1. Analysis of Observable 1. Analysis of Customers’

Customer Characteristics Benefits Sought
2. Creation of Homogeneous 2. Creation of Homogeneous

Segments Based on Segments Based on Benefits
Customer Characteristics
3. Development of Segment 3. Development of Segment

Profiles Based on Benefits Profiles Based on Observable
Sought by These Segments Customer Characteristics
FIGURE 1 Basic Segmentation Approaches2
different. According to a fan quoted in the New York 6. Develop a tailored marketing mix to reach the
Times, it is “a lot more natural tasting . . . [a] little less target segments
harsh” than the Coke sold in the United States.1
This note addresses only the first three steps.
Thus, for a variety of reasons, including differ-
Targeting, positioning and the marketing mix are de-
ing national commercial conditions, regulations, cul-
scribed in separate notes.
tures, and available ingredients, even iconic Coca-
The overall objective of market segmentation
Cola has adapted its flagship product to local
is to tailor products and services (and the overall
contexts. This example emphasizes the fact that, in
marketing program) to the needs of the individual
almost every market and for almost any marketer,
segments. To do that profitably, all identified seg-
there are substantial opportunities to be uncovered
ments should possess the following characteristics:3
by segmenting markets and developing tailored mar-
keting mixes for distinct segments. • The segment should be internally homoge-
neous. In other words, all customers within a
APPROACHES TO MARKET particular segment must have similar needs
SEGMENTATION and behaviors.
Today, strategists rely upon one of two basic ap-
• The segment should be externally heteroge-
neous. This means that the members of one
proaches when they want to segment a market: either
segment must differ in some way from the
segmentation based on observable customer charac-
members of all other segments.
teristics or segmentation based on underlying needs
and “benefits sought.” (See Figure 1). No matter
• The segment should be accessible. Accessibility
is critical, because without it, a company cannot
which method is used, however, the process of seg-
effectively address, reach, and serve the mem-
mentation entails six essential steps:
bers of a segment.
1. Identify effective segmentation variables • The segment should be measurable. This
2. Group customers into homogenous segments means that marketers must be able to identify
3. Create a detailed profile of the individual and measure the segment’s size, needs, and
segments other characteristics.
4. Select the target segments • The segment should be substantial. Here, the
5. Create a sustainable positioning for the target segment must be big enough to be served at a
segments profit.
262
Market Segmentation
• The segment should be actionable. Finally, if • Geographic variables (e.g., region, city size,
a segment is actionable, then marketers can population density) are the most basic descrip-
tailor programs that serve it both effectively tors of segments. Due to the increasing mobility
and efficiently. of consumers and globalization of markets
(which leads to stronger availability of global
brands and diminishing cultural differences in
SEGMENTATION BASED
many international markets or regions), this
ON OBSERVABLE VARIABLES
category has lost a great deal of its importance
Markets can be segmented based on any number of in market segmentation. In many cases, geo-
observable variables. Tables 1 and 2 give overviews graphic variables are, therefore, combined with
and some examples of variables typically used to seg- other variables to arrive at more meaningful
ment consumer and business markets, respectively. market segmentation.
As demonstrated in the first table, these variables can • Demographic variables (e.g., age, gender,
be broadly classified as geographic, demographic, family life cycle, income) are more powerful in
psychographic, and behavioral. predicting behavior than geographic variables
TABLE 1 Consumer Segmentation Variables
Segmentation Factor Examples of Variables Used Example of Application

Geographic • Geographic region In Austria, a major European tourist
• City size or density (e.g., urban, destination, vacationers are often
suburban, rural) segmented according to their country of
origin (e.g., Italians, Germans,
Scandinavians, Russians), because their
needs, vacations styles, behavior, and so
forth strongly correlate with their nationality.
Demographic • Age Many banks use income and occupation to
• Gender segment their customers for private banking
• Family life cycle services.
• Income
Many producers of baby products segment
• Occupation
the market according to age for products
• Education
such as baby food, toys, safety seats, etc.
• Social Status
Psychographic • Personality traits Some tourist destinations segment markets
• Lifestyle according to the lifestyle of guests (e.g.,
• Attitudes about such factors such culture-interested, sports-interested, family-
as self, family, and society oriented, relaxation-oriented, outdoor-oriented)
Behavioral • User status (nonuser, ex-user, Some mobile phone operators segment the
potential user, first-time user, market using behavioral variables and create
regular user) plans for heavy and light users, frequency
• Intensity of use (heavy versus light and intensity of services used (e.g., phone,
users) SMS), domestic or international calls, etc.
• Urgency, reason, cycle of demand
• Attitude (enthusiastic through
hostile)
• Innovativeness (innovators, early
adopters, early majority, late
majority, laggards)
263
Market Segmentation
TABLE 2 Organizational Segmentation Variables
Segmentation Factor Examples of Variables Used Example of Application

Macro variables • Demographics (size, industry, The Enterprise Resource Planning (ERP)
location) Software market is segmented primarily
• Operating variables (technology, based on company size as it influences:
user/non-user status, capabilities) • Number of users
• Purchasing approaches (single ver- • IT skills
sus multiple sourcing, centralized • Propensity to use ERP
versus decentralized purchasing, • Buying criteria
purchasing criteria) • Customization
• Situational factors (Urgency, order Another frequently used segmentation
sizes, product application) variable for ERP software is industry, because
industry type influences product
requirements.
Micro variables • Personal characteristics (motives, Some banks segment the market of
risk-taking tendencies, loyalty) corporate clients based on their risk-taking
attitude and tailor financial products to
either risk-taking or risk-avoiding customers.
and are included in most market segmentations. and are therefore well-suited to use in market-
However, like geographic variables, they have de- ing strategy.
clined in importance during the last few decades,
because in most cases, they merely describe seg- Table 3 gives an example of market segmenta-
ments and do not actually cause differences in tion in Alpine skiing tourism based on customer
needs and behavior. Especially in developed lifestyles. For each segment, there is a detailed profile of
countries, individuals have needs and adopt be- the customer complete with socio-demographic
havior independent of their demographic char- descriptors, preferred vacation style, preferred ac-
acteristics, and this has led to an increasing tivities, and so on. These types of segment profiles
standardization of consumption modes across are important to marketers when identifying target
social classes, age groups, and so forth. markets and tailoring marketing programs to those
• Psychographic variables (e.g., personality targets.
traits, lifestyle) are often used when geographic Conceptually, there is no difference between
and demographic variables fail to predict segmentation in business-to-business markets
needs and behavior. Psychographic variables (b2b) and in consumer markets; in both cases, the
are tied more directly to attitudes, motivations, logic is the same. However, the criteria that are
and behavior than the aforementioned cate- used can differ greatly. One especially useful ap-
gories of variables. However, their use is more proach to segmenting b2b markets is the nested ap-
difficult because it requires sophisticated mar- proach developed by Bonoma and Shapiro.5 This
ket research techniques. approach is based on the premise that marketers
• Behavioral variables (e.g., user status, inten- should start with macro variables (e.g., demograph-
sity of use) divide customers into homogeneous ics, operating variables, purchasing approaches,
segments based on their consumer behavior, or and situational factors) to find differences, and—
their attitudes toward the use of, and response if no differences are found—they should move on
to, a product. These variables are directly re- to consideration of personal characteristics. Let’s
lated to purchase and consumption behavior consider this approach using Table 4 as an
264
TABLE Lifestyle Market Segmentation in Alpine Skiing Tourism4
Segment 1 Segment 2 Segment 3 Segment 4 Segment 5 Segment 6 Segment 7

“Pleasure “Work “Couch “Family “Committed “The “Culture
Seeker” Oriented” Potato” Oriented” Helper” Inconspicuous” Interested”
Segment Size 12,2% 13,9% 13,5% 14,9% 13,7% 13,3% 18,4%

Lifestyle Enjoying life, fun, Fulfillment in No pleasure Family is the Socially and Living a simple Furthering
variety seeking occupation, seeker, frugal center of politically active and frugal life knowledge,
self centred interest and helping other intellectual,
culture
interested
Socio- 15 to 24 years, 24 to 44 years, 35 to 44 years 35 to 44 years, 55 to 65 years, 24 to 35 years, 15 to 24 and
demographics single, high high education, major part, but married with all types of low education, 55 to 64 years,
school and self employed also 44 and up, children, high employment skilled worker students and
trainees or executives married with education and employees pensioners
children
Winter fun and emphasis on relaxation, relaxation cultural experience, no clear preferred no clear
vacation style entertainment sports and gain new strength staying at home vacation style preferred
relaxation vacation style
Vacation going out, skiing, skiing, going saunas, thermal cross country skiing, not very active going for
activities attending local snowboarding, for walks spas, skiing, ski touring in general walks, relaxing
events, skiing, saunas, eating out going for walks
snowboarding
Vacation 1 vacation/ 2–3 vacations/ 1 vacation/ 4 or more 2 –3 vacations/ no vacation/ 2–3 vacations/
intensity 2–3 short 4 or more short 1 short vacation vacations/ no short vacation either no short 1 short
(vacation/ vacations vacations 2–3 short vacation or vacation
short vacation) vacations 2–3 short vacations
Top five Ski resort Ski resort Ski resort Ski resort Ski resort Ski resort Ski resort
satisfaction (.501**) (.644**) (0,601**) (0,515**) (0,518**) (0,668**) (0,511**)
drivers Shopping Cityscape Cityscape Gastronomic Comfort of Cityscape Cityscape
(correlation (.454**) (.437**) (0,489**) quality accommodation (0,423**) (0,425**)
with overall Cityscape Bad weather Bad weather (0,301**) (0,457**) Entertainment Gastronomic
satisfaction) (.407**) program program Shopping Gastronomic quality (0,404**) quality
Entertainment (.388**) (0,434**) (0,283**) (0,427**) Bad weather (0,382**)
(.373**) Comfort of Landscape Landscape Cityscape program Shopping
Landscape accommodation (0,406**) (0,259**) (0,398**) (0,312**) (0,322**)
(.284**) (.358**) Gastronomic Cityscape Bad weather Landscape Comfort of
Peacefulness of quality (0,223**) program (0,294**) accommodation
destination (0,393**) (0,396**) (0,313**)
(.343**)
265
Market Segmentation
TABLE 4 Segmentation of the European ERP-software market6
Small Business Market Mid-Market Mid-Enterprise Large Enterprise

Size 1-49 employees, 50–499 employees, 500–5,000 >5,000 employees,
< $25m revenue $25–250m revenue employees, >$500m revenue
$250–500m
revenue
Number of 8.7m businesses 1.3m businesses 30,000 1,000 businesses
companies businesses
(Europe)
IT staff One or a few, mostly Small group of Full line of CIO with board
single persons with people, usually not IT staff participation, full line of
multiple responsibilities involved in strategic IT staff
decisions, no
long-term IT strategy
IT skills Modest, learning on Generalists, usually Specialists Highly skilled IT-staff
the job lack of specialization
Buying Ease of use, price Software depth, Software depth, Security, Software
criteria functionality, total functionality, breadth and depth,
cost of ownership total cost of functionality, total cost
ownership of ownership
Customization Generic and less High degree of High degree of High degree of
preference customized ERP system integration integration and integration and
customization customization, ERP
important for
competitive advantage
Competitors Intuit, Sage Exact, Sage, Scala Intentia SAP, Oracle
example. Working from the top to the bottom of SEGMENTATION BASED

the table, the marketer should begin by looking for ON BENEFITS SOUGHT
demographic variables to segment the market. If
this does not work, he or she should next look at As illustrated in the previous section, geographic and
operating variables, and then continue with pur- demographic variables are widely used for market
chasing approaches if there are no discernible dif- segmentation, because they are easy to identify.
ferences in technology, user status, etc. As soon as Psychographic and behavioral variables are more
the marketer finds one appropriate variable, he or relevant to needs and behavior, but they are more
she can then use that variable as the basis for mar- challenging to measure, and segments based on
ket segmentation. these variables are also more difficult to address.
As another example, Table 4 describes the mar- Thus, an alternative approach is that of benefit or
ket segments for ERP-software. Here, firm size ex- benefits-sought segmentation. Benefits-sought seg-
plains most differences between the segments and is mentation begins with the needs and wants that are
the most appropriate variable. In a subsequent step, responsible for and explain differences in consumers’
however, one might look at a second variable—such responses to the marketing mix. Because this ap-
as industry—to refine the market segments even proach uses causal instead of descriptive variables,
further. benefit segmentation identifies more homogeneous
266
Market Segmentation
TABLE 5 An Example of Benefit Segmentation7
The Health The Sensory The

The Worriers Conscious The Sociables Segment Indifferent
Primary benefit Decay Decay Cosmetic, Sensory, flavor Economy, all-in-
sought prevention, prevention brightness of one
sensitive teeth teeth
Demographics Higher Families Young people Children, Men
education, young people
higher income
Price sensitivity Low Medium Low–medium Medium High
Brand loyalty High High–medium High–medium Medium Low
Behavior Heavy users Heavy users Smokers, Prefer Heavy user
coffee and tea spearmint
drinkers toothpaste
Preferred outlet Pharmacy, Drug store, Drug store, Supermarket Supermarket,
dentist supermarket supermarket discounter
Typical brand Rembrandt, Aronal and Macleans, Colgate, Crest Brands on sale
Parodontax Med Elmex, Perlweiss
Sensodyne Med Parodontax,
Sensodyne
Lifestyle Living a Conservative Active Hedonistic Value-oriented
characteristic conscious life
segments. For instance, Table 5 presents a well- 2. Building of segments based on the primary
known example of benefits-sought segmentation of benefits.
toothpaste consumers. The first three steps of the 3. Creation of a detailed customer profile of each
benefits-sought segmentation process are as follows: segment based on observable variables (e.g.,
demographics, behavioral variables).
1. Identification of the benefits sought (in the case
Steps 4 to 6, targeting, positioning, and
of toothpaste, decay prevention, brightness of
the marketing mix are discussed later.
teeth, etc.) and assessment of the importance of
primary benefit(s) to the individual segments.
Summary
Markets are almost never truly homogeneous; customers strategy formation—it entails differentiating relatively ho-
have differing needs and different wants and will, there- mogenous groups of customers (segments) within other-
fore, respond differently to the various elements of the wise relatively heterogeneous markets based on their needs
marketing mix. A basic assumption of marketing is that and wants, on the benefits they seek from a product, and
customers will gravitate toward offerings that are best on observable characteristics such as geographic location,
suited to their own needs and wants. However, customiz- demographic attributes, and lifestyles. The most widely
ing the marketing mix toward distinct needs and wants has used segmentation schemes are segmentation based on ob-
inherent costs—including the cost of adapting the mix and servable customer characteristics or segmentation based
the opportunity cost of foregone economies of scale, to on underlying needs and “benefits sought.” Regardless of
name just a few. Still, the benefits of customization often how it is done, segmentation describes individual seg-
outweigh the costs, and this is where segmentation be- ments and allows companies to target them with adapted
comes important. Segmentation is the essential first step in marketing mixes.
267
Market Segmentation
Bonoma, Thomas V., and Benson P. Shapiro. Segmenting the McDonald, Malcolm, and Ian Dunbar. Market Segmentation:
Industrial Market. Lexington: D. C. Heath and Company, How to Do It, How to Profit from It. Burlington, MA:
1983. Butterworth-Heinemann, 2004.
Kotler, Philip and Kevin L. Keller. Marketing Management,
13th ed. Upper Saddle River, N J: Pearson Education, 2009.
Endnotes
1. Rob Walker, “Consumed-The Cult of Mexican 5. T. V. Bonoma and B. P. Shapiro, Segmenting the
Coca-Cola, The New York Times, 11 October, 2009, Industrial Market (Lexington: D. C. Heath and Co.,
Sunday Magazine, MM22. 1983).
2. Adapted from Pierre-Louis Dubois, Alain Jolibert, and 6. Adapted from SG Cowen Research, European
Hans Mühlbacher, Marketing Management. A Value- Observatory for SME, 2002, no. 2, IDC, Small
Creation Process (Houndmills, Basinstoke, Hampshire Business Survey, 2002, www.erpsoftware360.com.
and New York: Palgrace MacMillan, 2007). Last accessed on June 29, 2010.
3. Philip Kotler and Kevin L. Keller, Marketing 7. Based on Russel J. Haley, “Benefit Segmentation: A
Management, 13th ed. (Upper Saddle River, NJ: Decision-orietned Research Tool,” Journal of
Pearson Education, 2009). Marketing (July 1968): 30–35. Jean-Jacques
4. Adapted from Kurt Matzler, Harald Pechlaner, and Lambin, Market-driven Management (Houndmills,
Gerald Hattenberger, Lifestyle-typologies and Market Basingstoke, Hampshire: Palgrave Macmillan,
Segmentation: The Case of Alpine Skiing Tourism 2007).
(Bolzano: EURAC, 2004).
268
Loyalty-Based
Marketing, Customer
Acquisition, and
Customer Retention
At any given time, a company has a certain “pool” of customers, otherwise known as its
customer base. Not surprisingly, one basic objective of marketing is to grow this pool
by acquiring (i.e., attracting for the first time) and retaining the “right” customers.
Although a firm may have other objectives, and it may wish to attract anywhere from a
very specific to a very broad group of customers, this basic idea of obtaining and
managing a pool of loyal customers will underlie a great deal of the firm’s marketing
activities.
To understand loyalty-based marketing strategies, it is useful to think of a pool of
customers as an actual pool or bucket of water—as long as that bucket that has an in-
flow (faucet) and an outflow (drain). Like water in a bucket, customers can “flow in” or
come to a firm, but they can leave or “leak out” as well. Thus, there are two ways to in-
crease the amount of water in the bucket: increase the inflow (turn up the faucet) or
decrease the outflow (slow the drain and fix the leaks). For the firm, this equates to in-
creasing the customer base by expending effort to attract new customers or by working
to reduce customer loss.
Studies show that it can cost as much as 10 times more to attract a new customer
than to keep an existing customer, and they additionally indicate that a 5 percent in-
crease in customer retention can lead to a 25 percent to 90 percent increase in profitabil-
ity.1 Despite these findings, research has also revealed that firms spend the vast majority
of their effort and marketing resources on customer acquisition; far less money and atten-
tion is dedicated to keeping existing customers. This emphasis is also true in the market-
ing management literature, where the majority of advice focuses on ways to attract new
customers. This imbalance may have shifted somewhat since the mid-1990s, when
loyalty-based marketing strategies first began to gain notice—in fact, industry continues
to pay increased attention to retention and service quality yet today—but there is still a
tendency for marketers to think about customer acquisition first while underappreciating
the potential of existing customers.
269
Loyalty-Based Marketing, Customer Acquisition, and Customer Retention
presumably deliver, but they also buy more, cost less to

THE LOGIC OF LOYALTY
serve, provide referrals, and pay a price premium.
Frederick Reichheld, author and consultant at Bain & Furthermore, loyal customers spread their initial “ac-
Company, has been a leading voice in support of in- quisition cost” across more occasions (see Figure 1).
creased emphasis on customer retention strategies More recent research has tested the proposi-
since the mid-1990s. Reichheld’s book The Loyalty tions that loyal customers drive increased profitabil-
Effect 2 articulated the logic of focusing on customer re- ity, cost less to serve, pay more for the same products,
tention, which goes beyond the hydraulic or “water-in- and “market the company” via referrals. Studies by
the-bucket” analogy offered earlier. According to Professors Werner J. Reinartz and V. Kumar found
Reichheld, companies miss an opportunity to spend that average customer longevity and profits are
marketing dollars effectively when they overemphasize correlated—that is, more profitable firms have more
customer acquisition at the expense of customer reten- loyal customers (longer tenure) and less profitable
tion, because reducing customer defections may be firms have fewer loyal or more transient customers.3
more cost effective than increasing customer attraction In addition, little evidence has supported the ideas
(recruitment) and, just as importantly, because loyal that loyal customers are cheaper to serve or that loyal
customers may actually be better customers than “new customers pay higher prices for given assortments of
customers” or customers who must constantly be “re- products. Finally, still other research has revealed
won.” In fact, Reichheld reported several studies prov- that even though some loyal customers do give fre-
ing that loyal customers are worth more than new quent (and valuable) recommendations, other loyal
customers, and his research linked this higher value to customers do not.
a number of factors. In particular, loyal customers The ambiguous relationship between loyalty
not only provide the base profit that all customers and referrals is clarified by the difference between
270
Price Premium
Referrals
Annual Customer Profit
Cost Savings
Revenue Growth
Base Profit
Acquisition Cost
0 1 2 3 4 5 6 7
Year
FIGURE 1 Why Loyal Customers Are More Profitable4
“attitudinal loyalty” and “behavioral loyalty.” People with good margins and who buy fewer “loss leaders”
who stay with a company or brand may be behav- (products with low or no margin)—is the key to
iorally loyal (and therefore return to the company long-term marketing success. In other words, loyalty
over and over) because of attitudinal loyalty or for is part of the picture, but it’s not the whole picture.
some other, less flattering reason, such as high switch- This logic is directly related to customer lifetime
ing costs, volume discounts, or another source of in- value, or the idea that marketers should estimate how
ertia. In comparison, people who are attitudinally much different segments of customers and different
loyal really like—or perhaps even love—the product customers are worth across their lifetime with the
or brand, and customers who love a product typically firm in order to calculate “customer profitability,”
recommend that product to others. Moreover, these because thinking about the margin from specific
so-called “brand evangelists” or “brand ambassadors” transactions would yield an incomplete picture.
are less price sensitive, more resilient to service fail- Figure 2 presents Reinartz and Kumar’s resulting
ures, and more likely to increase their purchases matrix. As shown in the figure, each type of cus-
across time than people who feel they are “trapped” tomer (organized by loyalty and profitability) re-
with a product. This distinction between attitudinal quires different strategic actions.
and behavioral loyalty is important, because building
attitudinal loyalty is invaluable. The same may or may
BALANCING ACQUISITION
not be true for behavioral loyalty.
AND RETENTION SPENDING
Yet another important finding from recent
studies is that loyalty—or the length of customers’ As previously mentioned, many firms tend to focus
relationships with a product—is not enough to their time and money on acquiring customers
drive profitability on its own. Rather, identifying rather than retaining them; in fact, one study
and attracting customers who are both loyal and found that 95 percent of marketing expenditures
profitable—that is, customers who buy more products are focused on traditional customer acquisition
271
Butterflies True Friends

• Good Fit Between Company’s • Good Fit Between Company’s
Offerings and Customers’ Needs Offerings and Customers’ Needs
• High Profit Potential • High Profit Potential
High Action: Action:

Profitability • Aim to Achieve Transactional • Communicate Consistently but
Satisfaction, not Attitudinal Loyalty not too Often
• Milk the Accounts Only as long as • Build Both Attitudinal and
They are Active Behavioral Loyalty
• Key Challenge is to Cease Investing • Delight These Customers to
Soon Enough Nurture, Defend, and Retain Them
Strangers Barnacles
• Little Fit Between Company’s • Limited Fit Between Company’s
Offering and Customers’ Needs Offerings and Customers’ Needs
• Lowest Profit Potential • Low Profit Potential
Low Action: Action:

Profitability • Make no Investment in These • Measure Both the Size and Share
Relationships of Wallet
• Make Profit on Every Transaction • If Share of Wallet is Low, Focus on
Up-and Cross-Selling
• If Size of Wallet is Small, Impose
Strict Cost Controls
Short-Term Long-Term
Customers Customers
FIGURE 2 Customers Differentiated by Loyalty and Profitability5
activities, whereas only 5 percent are focused on cus- Figure 3 shows that, for a hypothetical firm, in-
tomer retention.6 This suggests that firms are putting creasing retention spending from : 150 to : 200 in-
too much emphasis on attracting new customers, es- creases customer retention from about 67 percent to
pecially in light of the aforementioned logic of cus- 70 percent. The key question, then, is how profitable
tomer loyalty. The solution, however, is not to refocus are those 3 percent of customers who were retained
all marketing dollars on loyalty/retention; rather, by spending the marginal : 50? The answer to this
each firm must find a balance between its acquisition question requires more than just a cost-benefit
and retention efforts. analysis of the marginal retained customers—it also
To understand why this balance is important, requires consideration of whether the return on
consider the following: Although a firm can con- those 3 percent of customers is worth more than the
tinue to spend resources on customer retention and profitability of the new customers that could have
increase loyalty as it spends those dollars (Figure 3), its been acquired with the : 50 if those funds had been
rate of return on that spending will inevitably di- shifted to customer acquisition. In the example
minish as customer loyalty approaches some upper graphed in Figure 3b, the balance of customer life-
limit. Thus, the key drivers of decisions about ex- time value against the cost of retention appears to
penditures on acquisition and retention budgets turn (become negative for margin-retained cus-
should be customer loyalty and the proclivity of tomers) at about : 75 in retention spending; after
various segments to become loyal; customer life- that, the marginal benefits (contribution margins)
time value (CLV); and the overall marketing budget are less than the marginal costs (retention spending).
(i.e., the total budget to be spent on acquisition and Of course, the converse question can and should be
retention). applied to resources spent on customer acquisition:
272
Customer Retention Rate as a Function

of Retention Budget
0.80
0.70
0.60
Retention Rate
0.50
0.40
0.30
0.20
0.10
0.00
0 50 100 150 200
Retention Budget (€'s)
FIGURE 3A Returns on Investments in Customer Retention7
Customer Retention Value (€) as a Function

of Retention Budget
40.0
30.0
20.0
Customer Value
10.0
0.0
−10.0
−20.0
−30.0
0 50 100 150 200
Retention Budget (€'s)
FIGURE 3B Profits on Investments in Customer Retention8
273
Are the new customers acquired with this expendi- But how can a firm determine which types of
ture more valuable than the old customers who customers are “wrong” and work to eliminate them?
would have been retained if these funds had been The matrix presented above (Figure 2: Customers
spent on customer retention? Differentiated by Loyalty and Profitability) is one tool.
This system of interdependent calculations This matrix differentiates among four types of cus-
and decisions is dependent on understanding not tomers based on profitability and loyalty and spells
just CLV, but also different customer lifetime values for out appropriate strategies for each sort of customer:
different customers and customer segments. That is,
the segments attracted with margin acquisition • Low-loyalty/Low-profitability customers
spending and the segments retained with marginal (“strangers”) should lead the firm to avoid, or
retention spending will have different CLVs. at least to carefully reassess “loss–leader” offer-
Marginal acquisition spending might be bringing in ings. Loss-leaders are items priced at or below
new customers with fairly high lifetime values, costs in an effort to build “traffic”; that is,
whereas marginal retention spending may be keep- priced low in order to draw customers to the
ing customers whom it would be better to let go. companies overall assortment, its Web site, or
its stores. If loss leaders aren’t leading cus-
tomers into profitable shopping baskets of
IDENTIFYING THE “RIGHT
products (i.e., if the customers are just “cherry-
CUSTOMERS”
picking” the loss leaders and not buying any
“The customers who glide into your arms for a other, higher-margin products), then the firm
minimal price discount are the same customers who should eliminate the loss leaders.
dance away with someone else at the slightest • High-loyalty/low-profitability customers
enticement” (“barnacles”) present marketers with a trickier
Frederick Reichheld9 situation. Here, the first question is whether
the low profitability is the result of “small wal-
Believe it or not, there are some customers that a lets” (customers with little to spend) or low
firm doesn’t want to attract, retain, or do business “share of wallet” (customers who spend on
with at all—and these aren’t just the usual handful more profitable items elsewhere). In the first
of “pains-in-the-neck.” One such set of “wrong cus- instance, small wallets, the appropriate strategy
tomers” consists of price shoppers. Unless a firm recognizes that customers are purchasing the
has consciously decided that its strategy is cost/ precise assortment of products they need and
price-based (such as Wal-Mart with its impressive that’s likely all they’ll ever purchase. Two viable
logistics and buying-power cost advantages), those strategies with those barnacles are: lower costs
customers who are attracted by a price deal are un- and sell the given, limited assortment prof-
likely to serve the firm’s objectives. After all, the cus- itability; or, avoid these customers altogether.
tomers who are brought in by a price promotion are, On the other hand, if the issue is share of wal-
by definition, most likely to be the same customers let, then the firm is looking at customers who
lured away by competitors’ deals. Moreover, price is are loyal, which is a big part of the battle and
the easiest marketing tactic for competing firms to should make them attractive if not ideal, but
imitate. When one competitor competes on price— who are spreading their purchases across ven-
whether shrewdly or ill-advisedly—the rest of the in- dors. The best strategy in that case is to target a
dustry can quickly follow suit; this is called “wreck- greater share of wallet via “cross-selling” and to
ing the market.” In this situation, one competitor insure that the increased share of wallet is in
leads the industry into price competition, other com- more profitable items (“up-selling”).
petitors respond in kind, and the customers ultimately • Low-loyalty/high-profitability customers (“but-
become accustomed to discounts and “trained” to terflies”) buy full-margin items but, for some
shop for price. reason, are not loyal. A lack of loyalty can be
274
due to inherent attributes of the customers— shopping trip, and might slow service for the
for some reason their need for the firm’s prod- Big Spenders in the regular check-out lines, the
ucts is irregular—or their lack of loyalty can be implication of this segmentation scheme is
due to the manner in which the firm meets that investments in service enhancement
their needs. That is, some customers may only should be targeted at the “best customers,” cus-
experience the need for a company’s products tomers with full shopping carts.10
on an infrequent basis. In those cases there is
little the firm can do (except enjoy the infre- In recent years, American consumer-electronics
quent but profitable sales). On the other hand, retailer Best Buy also implemented a segmentation
some customers may have continuing needs scheme based on this profitability/loyalty frame-
for the products, but, upon meeting those work. The Wall Street Journal described Best Buy’s
needs from the given firm, they may either take thinking about its loyal-but-unprofitable barnacles
their needs elsewhere or forego meeting the (which they called “devils”) as follows:
needs altogether for longer periods. That is, if The devils are the worst customers. They
butterflies are dissatisfied when dealing with buy products, apply for rebates, return
the firm, they may go to the competition or the purchases, then buy them back at re-
exit the market. In those latter cases the butter- turned-merchandise discounts. They
flies represent an opportunity to improve the load up on “loss leaders” . . . then flip the
offering—either by improving the core prod- goods at a profit on eBay. . . .11
uct or by improving the surrounding service
and customer experience—in order to develop On the other hand, Best Buy also developed specific
those customers into “true friends.” strategies for its high-loyalty, high-profitability cus-
• Of course, the best customers of all are high- tomer segments. As described in the Wall Street
loyalty, high-profitability “true friends.” These Journal:
customers should compel the greatest invest- Store clerks receive hours of training in
ment in communications, customer relationship identifying desirable customers according
management (CRM, discussed later in the to their shopping preferences and behav-
note), and service. A great example of a strat- ior. High-income men, referred to inter-
egy that focuses on this customer segment is nally as Barrys, tend to be enthusiasts of
the shift of resources in grocery stores from action movies and cameras. Suburban
“express” lines (where customers with small moms, called Jills, are busy but usually
purchases get the fastest service) toward better willing to talk about helping their fami-
service (more registers, more clerks, and more lies. Male technology enthusiasts, nick-
baggers) for customers in the “regular” check- named Buzzes, are interested in buying
out aisles. One grocery store chain identified and showing off the latest gadgets.12
three large segments of shoppers: light
spenders who spend about $20 a week; those Segmenting based on loyalty and profitability can, as
who spend about $75 a week; and, a segment Best Buy demonstrated, lead to an improved “inven-
who spent about $150 every week. It actually tory of customers.” Loyal and profitable customers are
cost the grocer $3 every time the low spenders the “best customers,” but tailoring marketing mixes to
visited the store; the stores made about $6 for specific profiles of loyalty and profitability can also
every “$75 shopper” visit, and made, on aver- turn less desirable segments into lucrative customer
age, $30 for every visit by a “big spender,” yet bases, can help identify “lost causes”—segments that
the best and fastest checkout service was re- will never be the basis of profitable sales, and also
served for the light spenders. Although reduc- help identify “follies”—unprofitable offerings that
ing “express lane” service might alienate Big appeal to the wrong customers and that never gener-
Spender customers making a Light-Spender ate ancillary, profitable sales.
275
TOOLS OF CUSTOMER LOYALTY: Smart companies target customers who are likely to
IMPROVING CUSTOMER become loyal from the outset; that is, they seek out
SATISFACTION customers likely to end up staying with the firm. Past
experience with similar customers is probably the
“Do what you do so well that they will want to see it best predictor of future experiences with various
again and bring their friends.” sorts of customers. Demographics can also predict
Walt Disney13 future loyalty; older customers, rural customers, cus-
tomers who are not well-educated, and women are
Customer acquisition activities include almost all all more likely to be loyal to a brand. Even the media
advertising, most personal selling (although sales- through which customer-acquisition messages are
people can be redirected toward servicing accounts communicated can predict loyalty. Customers ac-
as well as closing deals), and traditional marketing quired through price deals are least likely to be loyal,
communications, such as public relations and sig- as discussed earlier, but it turns out that there are
nage. In contrast, customer retention tends to in- other cross-medium differences that predict loyalty
volve initiatives that focus on improved service and as well. For example, a major insurance company an-
follow-up, service recovery, product quality, and alyzed its customers based on what media they’d re-
especially customer relationship management (CRM). sponded to when acquired by the company. It turned
One key to choosing from this range of potential out that direct mail customers (i.e., customers ac-
loyalty tactics is to think about the influence various quired via direct mail offering) were least loyal in the
actions will have on customer satisfaction or “de- long term; customers who first saw an ad on televi-
light.” The fundamental way to gain customers’ af- sion were more likely to become loyal; and customers
fection or attitudinal loyalty is to deliver unique acquired through word-of-mouth referrals from
value—something they can’t get elsewhere—and to other customers were the most likely to be loyal in
exceed their expectations. the long run.14
Indeed, customer satisfaction is a central idea
in marketing. According to this view, the purpose of TOOLS OF CUSTOMER LOYALTY:
a firm is to serve the customer, and serving the cus-
CUSTOMER RELATIONSHIP
tomer well will engender customer satisfaction and,
MANAGEMENT
as a result, customer loyalty and recommendations
(word of mouth). Customers form their satisfaction Another tool—or, really, category of tools focused
based on evaluation of how well a product, whether on enhancing customer loyalty and profitability is
it is a good or a service, meets their expectations. If Customer Relationship Management (CRM),
the product fails to meet expectations, customers will which begins with collecting data on customer be-
be dissatisfied—and, depending on their degree of haviors across “touch points”; touch points are the
displeasure, dissatisfied customers can become many and diverse places, ways, and times that cus-
“brand terrorists,” actively denigrating the brand or tomers interact with the firm from contact with a
firm. If the product just meets expectations, cus- salesperson to visiting the website, visiting a
tomers will be minimally satisfied—but minimally salesroom, or calling a helpline. CRM also encom-
satisfied customers are footloose customers, still passes integrating and analyzing those data to de-
shopping for a better experience. Finally, if the prod- rive actionable information or “customer insights.”
uct exceeds expectations, customers will be satisfied Those CRM analyses can include basic statistical
and perhaps delighted—and delighted customers analyses—correlations and cross-tabs, for example—
stay with the firm and sometimes even become to identify relationships or to describe segments,
“brand evangelists.” but CRM can also involve advanced and complex
One interesting issue to consider is the interre- “data mining” analyses usually done by sophisticated
lationship between the details of customer acquisi- experts; the marketing strategist need not become an
tion and the loyalty of the resulting customer pool. expert in data mining to understand its results and to
276
appreciate the value of the insights it generates in systematically tailor new offers to individual customer,
guiding marketing actions. and to provide accurate and timely information on
The actions that can be guided by CRM range customer behavior, reactions to marketing campaigns,
from choosing target segments to customize offerings profitability, and so on to marketing strategists. These
for specific chosen segments and even for specific cus- enhanced relationships should increase profitability
tomers. In the past, and still today in too many organ- and increase loyalty among the customers the firm
izations, a customer might talk with an executive, talk wants. The accumulated data on customers’ needs and
with a salesperson, call in to a support desk, take deliv- profiles become a competitive asset or resource—
ery from a route driver, and have a repair or installa- something the competition doesn’t have and is hard
tion person on site all with the same vendor and never for the competition to recreate quickly. Thus, captur-
have those various contacts integrated into a single ing data across customer touch points and mining
understanding of that customer or that customers’ those data for valuable (profitable to the firm) and val-
needs. The repair person might observe that the cus- ued (appreciated by the customer) insights tend to
tomer uses certain products more than others but capture the customer (i.e., leads to durable and endur-
needs specific add-on options to use them better and ing customer relationships).
with fewer breakdowns. The executive might know Despite CRM’s promise and undeniable logic
that the customer is planning geographic expansion. of capturing and analyzing data on all the various
The salesperson might know that the purchasing ways customers interact with the firm across the
agent makes decisions in isolation and with little feed- breadth and duration of their experience with the
back from users. If all of those insights remain de- firm, early efforts to build CRM databases (data
tached the company may be missing an opportunity warehouses) and to cull those data for useful insights
to customize a solution that will help the customer were expensive and frustrating. This may be partly
grow, reduce frustrating breakdowns and downtime due to the fact that early CRM initiatives were fo-
in their operations, and improve their purchasing cused on the technology—on the hardware and soft-
processes to optimize their buying power and opera- ware required to capture information about contacts
tional efficiency. That is, those disconnected under- and to build the large databases describing those
standings and insights represent lost opportunities. contacts—and also because those data and the in-
Customer data are valuable in adapting and sights they produce were not distributed to all parts
driving the marketing mix—what prices, products, of the organization. That is, early CRM systems fo-
communications, and distribution points should be cused on the technology and not on getting the
targeted at which customers and when—and such information into the right hands at the right time.
data are invaluable in analyzing customers and seg- More recent CRM investments have been more pro-
ments with regard to profitability and loyalty and also ductive, and CRM is now a fundamental part of
in understanding how to target the right segments action-oriented marketing research and loyalty-based
with the right offerings. CRM uses advanced informa- marketing strategies. It is a valuable tool in develop-
tion-management and communication technologies ing customer loyalty and in adjusting the marketing
to track customer information across touch points, to mix to attract the “right customers.”
Summary
The idea that it is often more effective and more efficient to shown that loyal customers are more valuable than short-
invest in retaining current customers rather than to invest term, transitory customers, and analyses have shown that
those same resources in trying to attract (“acquire”) new firms with more loyal customers tend to be more prof-
customers is not revolutionary, but, until fairly recently, it itable. It has also been shown that most firms over-invest in
had been underappreciated in marketing practice and in customer acquisition activities and under-invest in cus-
the managerial marketing-strategy literature. Studies have tomer retention. It is also true that investments in customer
277
retention, like investments in customer acquisition, tend to systems. CRM involves the collection and integration of
produce diminishing marginal returns and at some point data across customer “touch points” and the development
investments in retaining the marginal customer will exceed of deep understandings of the customers at an individual
the value of (profits from) that customer. Customer retention and segment level from those data. CRM allows for im-
tools include enhanced ancillary services—improvements proved targeting of the “right customers” (picking who to
to the services that surround the core product often differ- serve) and the customization of offerings (tailoring or per-
entiate the offering and engender the greatest loyalty—and sonalizing the marketing mix) to maximize customer satis-
also include Customer Relationship Management or CRM faction, customer loyalty, and firm profitability.
Reichheld, Frederick F. The Loyalty Effect: The Hidden Force Greenberg Paul. CRM at the Speed of Light: Essential
Behind Growth, Profits, and Lasting Value. Boston, MA: Customer Strategies for the 21st Century, 3rd ed. New
Harvard Business School Press, 1996. York: McGraw-Hill/Osborne, 2004.
Reichheld, Frederick F. Loyalty Rules! How Today’s Leaders
Build Lasting Relationships. Boston, MA: Harvard
Business School Press, 2001.
Endnotes
1. See Frederick F. Reichheld, The Loyalty Effect Harvard Business Review 74 (July–August, 1996):
(Boston, MA: Harvard Business School Press, 1996); 136–44. This graphic summary of Blattenberg and
also see Frederick F. Reichheld, Loyalty Rules! Deighton’s ideas was created by Southern Methodist
(Boston, MA: Harvard Business School Press, 2001); University Professor Jacquelyn Thomas (personal com-
and Frederick F. Reichheld, “Loyalty-based munication, March 8, 2010).
Management,” Harvard Business Review 71, no. 2 8. Adapted from Blattberg and Deighton, “Manage
(March–April): 64–73. Marketing by the Customer Equity Test.”
2. Ibid. 9. Reichheld, The Loyalty Effect, page 82.
3. See Werner Reinartz, and V. Kumar, “The 10. James A. Tompkins, “Customer Satisfaction and the
Mismanagement of Customer Loyalty.” Harvard Supply Chain,” in The Supply Chain Handbook, ed.
Business Review 80, no. 7 (2002): 86–94; and Werner James A. Tompkins and Dale Harmelink (Raleigh,
J. Reinartz, and V. Kumar, “On the Profitability of NC, Tompkins Press, 2004). 11–18.
Long-Life Customers in a Noncontractual Setting: 11. Quotes are from Gary McWilliams, “At Best Buy,
An Empirical Investigation and Implications for Not All Customers Are Welcome—U.S. Retailer
Marketing,” Journal of Marketing 64, no. 4 (October Tries to Outsmart Dogged Bargain-Hunters, Court
2000): 17–35. Also see Larry Selden and Geoffrey Spenders Like ‘Barrys’ and ‘Jills’,” Wall Street Journal
Colvin, Angel Customers and Demon Customers: (November 11, 2004).
Discover Which is Which and Turbo-Charge Your 12. Ibid.
Stock (New York: Portfolio, Penguin), 2003. 13. As quoted in Rosalie Lober, Run Your Business Like a
4. Reichheld, The Loyalty Effect, page 39. Fortune 100: 7 Principles for boosting profits
5. Werner Reinartz, and V. Kumar, “The (Hoboken, NJ: John Wiley & Sons, 2009), 223.
Mismanagement of Customer Loyalty,” Harvard 14. Peter C. Verhoef, Bas Donkers, “The effect of acqui-
Business Review 80, no. 7 (2002): 93. sition channels on customer loyalty and cross-
6. Martin Christopher, Adrian Payne, David buying,” Journal of Interactive Marketing 19, no. 2
Ballantyne, Relationship Marketing (Woburn, MA: (2005): 31–43. L. O’Brien, and C. Jones, ‘Do
Butterworth-Heinemann, 2001), 58 Rewards Really Create Loyalty?’ Harvard Business
7. Adapted from Robert C. Blattberg and John Deighton, Review 73, no. 3 (1995): 75–82.
“Manage Marketing by the Customer Equity Test,”
278
Customer Lifetime Value
Marketing has been described as “the science and art of finding, retaining, and growing
profitable customers.”1 Rather than focusing on discrete transactions, contemporary
marketing thinking emphasizes the establishment, development and maintenance of
long-term relationships as these usually are more profitable than short-term transac-
tions. Instead of focusing on short term profits, marketers are interested in the long-
term value—the lifetime value—of a customer relationship. The customer lifetime value
is the net present value of future cash flows attributed to the customer relationship.
It is common wisdom that acquiring a new customer costs five to seven times as
much as keeping an existing customer. Satisfied and loyal customers buy more often,
buy higher quantities, recommend the product to their friends and relatives, are less
price sensitive, less responsive to competitor’s offers, and buy also other products from
the company they are satisfied with.2 Frederick Reichheld and W. Earl Sasser found that
a 5 percent increase in the customer retention rate can boost profits by as much as 25 to
85 percent (in terms of net present value) depending upon the industry3. Hence, many
marketing gurus call for “zero defections” in a customer relationship, or 100 percent
loyalty. However, this is neither possible nor wise.
As not every customer relationship is profitable and as not every customer can be
retained, it is crucial to determine their profitability and loyalty.
Hence, companies must focus on two important measures:
1. Customer loyalty: which of our customers are loyal, which are likely to switch to
our competitors?
2. Customer profitability: considering all customer revenues and all customers’
costs, which of our customers are profitable?
MEASURING CUSTOMER LOYALTY

There are several ways to measure customer’s loyalty. The simplest way is to look at cus-
tomer’s repurchase behavior and to assess the retention rate, which represents the num-
ber of customers who repurchase the product or service. The retention rate, however,
measures only “behavioral” loyalty and not “attitudinal” loyalty. Customers might repur-
chase a product not because they are truly loyal, or delighted by its quality, but because
of situational constraints (e.g., there is no alternative), or out of convenience. True loy-
alty exists when customers also hold a favourable attitude towards the product. Hence,
more effective measures of loyalty include measures of satisfaction or delight, or atti-
tudes towards the product or company. Frederick Reichheld found that one of the best
indicators for a company’s growth is the number of customers who actively recommend
the product or service to their friends. By asking the simple question: “How likely is it
279
that you would recommend our company to a friend • Customer batch-level costs (costs associated to
or colleague?” on a 0 to 10 scale, customers can be cate- a group of products sold to a customer (e.g.,
gorized into one of three groups: Promoters (9–10 rat- process orders, delivery), and
ing), Passives (7–8 rating), and Detractors (0–6 rating). • Customer-sustaining costs (costs to support
To calculate the Net Promoter Score—which is a strong individual customers, e.g., customer visits).
indicator of a customer’s attachment to a product or
company—the percentage of Detractors is subtracted Table 1 gives an example. It compares four dif-
from the percentage of Promoters. ferent customers. Whereas customers A, B, and C are
profitable, customer D produces losses to the com-
pany. This customer places more orders with lower
CUSTOMER PROFITABILITY ANALYSIS values, receives more visits and higher delivery costs.
From the analysis it becomes clear what could be
It is crucial to determine the customer’s profitability done to make this customer profitable. The company
by analyzing customer revenues and customer costs. could require the customer to make fewer purchases
The key question is: What are the revenues of each with higher volumes. This would reduce costs of
customer and what are the costs of serving this cus- order taking and delivery costs. Second, it could try
tomer? To answer this question, as many revenue and to reduce customer visits and finally it could also try
cost items as possible must be traced to individual to reduce discounts.
customer. This can be done by using the following
approach:4
CUSTOMER LIFETIME VALUE
Revenues at list selling price
⫺discounts The customer lifetime value is the net present value
of the future cash flows that can be attributed to a
⫽Revenues at actual prices
customer relationship. To compute the customer life-
⫺costs of goods sold time value, we need to know (1) the customer level
⫽Gross margin operating profit per year, (2) the length of the cus-
⫺customer output-unit-level costs tomer relationship, and (3) the appropriate discount
rate. The following formula is used:
⫺customer batch-level costs
t=n rt - ct rt1 - ct1
⫺customer-sustaining costs
a = (1 + i)t = rt0 - ct0 + (1 + i)
⫽customer-level operating profit t=0
rt2 - ct2 rtn - ctn
In the first step, the discounts from the list sell- + + Á +
(1 + i) 2 (1 + i)n
ing price have to be deducted to determine the rev-
enue at actual prices per customer. Then, costs of where:
goods sold (direct costs attributable to the produc- rt ⫽ Expected revenues in year t
tion of the goods sold; they include the materials cost ct ⫽ Expected costs in year t
along with the direct labor costs used to produce the i ⫽ Discountrate
good. Costs of goods sold exclude indirect expenses t ⫽ Year
such as distribution costs and sales force costs) are de- n ⫽ Length of relationship
ducted to compute the gross margin. In the next step,
Table 2 shows the customer lifetime value
customer costs are subtracted from the gross margin
for each customer of our previous analysis, calcu-
to calculate the customer-level operating profit.
lated for a time span of five years. In t0 the company
Customer costs can be divided into three categories5:
had to spend US$ 5,000 to acquire each customer
• Customer output-unit-level costs (costs to sell (e.g., customer visits, free samples, negotiation,
each product to a customer, e.g., product han- opening the account), the discount rate is 10 percent,
dling costs), and it is assumed that the customer-level operating
280
TABLE 1 Customer Profitability Analysis
Customer
A B C D
Units sold 1250 1380 985 728

List selling price 55 55 55 55
Revenues at list prices 68750 75900 54175 40040
Discount 10% 12% 8% 8%
Revenues at actual prices 61875 66792 49841 36836,8
Costs of good sold ($42) 52500 57960 41370 30576
Gross Margin 9375 8832 8471 6260,8
Customer-level operating costs
Order taking (number of orders) 20 24 15 30
$125 per order 2500 3000 1875 3750
Customer visits (number of) 6 5 4 8
$95 per customer visit 570 475 380 760
Delivery (delivery miles) 27 12 5 30
$2 per delivery mile 1080 576 150 1800
Expedited deliveries 2 0 1 2
$300 per delivery 600 0 300 600
Customer level operating profit 4625 4781 5766 -649,2
profit per customer remains the same. Of course, one profitability. A more comprehensive approach is
can try to estimate how the customer revenues and based on the following four components6:
customer costs develop over the time span. Sales can
increase or decrease, cross-selling can be achieved, 1. The core business potential. This refers to the
customer visits can be reduced or need to be in- cash flow from products and services that form
creased, etc. the core of the customer relationship.
2. Cross-selling potential. This refers to the cash
Scoring Models flow from cross-selling, upgrading, a higher
share of wallet.
Customer lifetime value analysis, as presented in the 3. Networking potential. This refers to the cash
previous paragraphs, includes only monetary rev- flow from new customer relationships through
enues and, therefore, may underestimate customer the customer’s word-of-mouth, referrals, etc.
TABLE 2 Customer Lifetime Value Calculations
t0 t1 t2 t3 t4 t5 CLV
Customer A -375,00 4204,55 3822,31 3474,83 3158,94 2871,76 17157,39
Customer B -219,00 4346,36 3951,24 3592,04 3265,49 2968,62 17904,75
Customer C 766,00 5241,82 4765,29 4332,08 3938,26 3580,23 22623,68
Customer D -5649,20 -590,18 -536,53 -487,75 -443,41 -403,10 ⴚ8110,18
Customer acquisition costs of $5000 in t0
281
Customer
Criteria Weight A B C D E F G Remarks
Core business 50% 6 4 6 8 2 10 7 10 = Annual sales volume = USD 100.000

potential 5 = Annual sales volume = USD 50.000
Cross-selling 25% 10 6 6 5 6 4 3 10 = annual cross selling potential =
potential USD 100.000
Networking 15% 8 5 5 ... ... 10 = customer opens doors to additional
potential prospects
Learning 10% 1 3 2 ... 10 = Customer delivers valuable information
potential for new product development, process
improvement, or market
Overall score 100% 57.2 38.75 ... ...
10 = excellent, 0 = not at all attractive
FIGURE 1 Assessing Customers’ Attractiveness with Scoring Models
4. Learning potential. This refers to the cash flow Salespeople usually focus their time and efforts on
from process and product improvements stim- A- and C-Customers. These are the “easiest” cus-
ulated through the customer, market knowl- tomers, as the company already has a high share of
edge provided by the customer, etc. wallet. Doing business with these customers usually
is easy going. Most salespeople avoid B-customers, as
Especially the networking potential and the learning
this is really hard work. They need a lot of time to be
potential are difficult to evaluate. Therefore, scoring
developed, competitors have a stronger position, and
models offer a good alternative (Figure 1). Each of the
they are not easy to acquire. If a company, however,
four components is weighted, and customers’ attrac-
wants to grow, it has to focus on these customers.
tiveness is assessed on a scale from 0 to 10. By multi-
Figure 2 shows a customer portfolio of a specific
plying the individual score of each customer with the
weight and adding these numbers together, a
weighted score is computed that indicates the overall
attractiveness of each customer. B-Customers A-Customers
Customer Attractiveness
The Customer Portfolio Develop! Keep!

(e.g. Size, Growth)
When the customer lifetime value or a score for the 16 12

attractiveness of each customer is calculated, a com-
pany can devise marketing strategies for the cus-
tomers or customer groups7. The portfolio approach D-Customers C-Customers
is very helpful to allocate resources (e.g., time of
Discontinue! Low priority!
salespeople) to the individual customers or groups of
customers to increase the effectiveness of marketing 25 32
initiatives. On the y-axis the customers’ attractiveness
(e.g., size, growth rates) is depicted, and the x-axis rep-
Share-of-Wallet
resents the share of wallet. Four types of customers
can be identified: A-, B-, C- and D-customers. FIGURE 2 Customer portfolio
282
sales region. The numbers indicate the number of discontinued if such relationships are not profitable.
customers in each cell. The following strategies In fact, some companies “fire” customers. ING, a
emerge: A-customers must be kept, B-customers Dutch direct bank, “fires” about 3,600 unprofitable
must be developed, C-customers receive less atten- customers of its 2 million customers every year. This
tion and relationships with D-customers should be saves the bank at least $1 million annually.
Summary
The establishment of profitable, long-term relationships scoring models that also measure nonmonetary revenues
with customers is at the core of modern marketing think- such as word-of-mouth, or knowledge that is created
ing. Hence, customer loyalty is a key objective. However, through a customer relationship.
not every customer relationship is profitable. Therefore, To prioritize marketing activities, a customer portfo-
besides monitoring customer loyalty, the analysis of cus- lio can be a helpful tool. Combining customer attractiveness
tomer profitability is a key issue. It can be measured through (e.g., size, growth) with share-of-wallet in a two-by-two
a customer lifetime value analysis—if all future cash flows matrix, practical implications for customer relationship
that can be attributed to a customer are available—or using management can be derived.
Bhimani, Alnoor, Charles T. Horngren, Srikant M. Datar, Stahl, Heinz K., Kurt Matzler, and Hans H. Hinterhuber.
and George Foster. Management and Cost Accounting. “Linking Customer Lifetime Value with Shareholder
Edinburgh Gate: Pearson Education Limited, 2008. Value.” Industrial Marketing Management 32, no. 4
Ofek, Elie (2002), “Customer Profitability and Lifetime (2003): 267–279.
Value,” Harvard Business School Note 9-503-019.
Reichheld, F. F. and W. E. Sasser. “Zero Defections: Quality
Comes to Services.” Harvard Business Review 68, no. 4
(1990): 105–111.
Endnotes
1. Philip Kotler and Gary Armstrong, Principles of 5. Bhimani, Horngren, Datar, and Foster, Management
Marketing (Upper Saddle River, NJ: Prentice Hall, and cost accounting.
2005). 6. Heinz K. Stahl, Kurt Matzler, and Hans H.
2. F. F. Reichheld and W. E. Sasser, “Zero Defections: Hinterhuber, “Linking Customer Lifetime Value
Quality Comes to Services,” Harvard Business with Shareholder Value,” Industrial Marketing
Review, 68, no. 4 (1990): 105–111. Management 32 no. 4, (2003): 267–79.
3. Ibid. 7. Elie Ofek, “Customer profitability and lifetime
4. Adapted from Bhimani, Alnoor, Charles T. value,” Harvard Business School Note 9-503-019
Horngren, Srikant M. Datar, and George Foster (2002).
(2008), Management and cost accounting. Edinburgh
Gate: Pearson Education Limited.
283
284
Competitive Advantages
285
Why are some companies more successful than others? What is the secret of earning
above-average returns? In the strategic management literature there are two broad
schools of thought that attempt to address these fundamental questions: the market-
based view (MBV) and the resource-based view (RBV). The market-based view as-
sumes that success depends on characteristics of the market or industry the firm com-
petes in (industry attractiveness, industry structure, and the like), whereas the
resource-based view regards a company’s success as largely self-determined, dependent
on its unique resources and capabilities.
THE MARKET-BASED VIEW

“Five forces analysis” is a good example of a market-based view of strategy develop-
ment. In this framework, the interplay of five “forces” (bargaining power of suppliers,
bargaining power of customers, threat of substitute products, rivalry among competing
firms, and threat of new entrants) determines an industry’s “attractiveness,” or its com-
petitive intensity and profitability. For example, in an industry with low barriers to
entry (high threat of new entrants) such as the restaurant sector, competition is intense
and profit margins are generally low, making it a somewhat unattractive industry for
new investment. Thus, from the market-based perspective, the firm’s success depends
on its abilities to position itself in an attractive industry, to adapt to industry structures,
and to develop strategies accordingly. Therefore, in the market-based view, strategy de-
velopment should progress through four steps:
1. The company’s environment should be analyzed (macro environment, industry,
competitors);
2. The company should select attractive industries that promise above-average
returns;
3. Strategies that are aligned with the industry structure should be developed; and
4. The company should develop or acquire the necessary resources and capabilities
to implement those strategies.
THE RESOURCE-BASED VIEW

The resource-based view takes a very different view of strategy development and of
the determinants of firm success. It argues that each company is a collection of
unique resources and capabilities, and that those strategic resources of the company
are the sources of above-average returns. In this framework, “unique” entails not
286
only being different (unlike any other) but also Identifying Competitive Advantages
being “valued” (being something that customers
In the long run, a company will be successful if it is
want and will pay for) and being better than the
able to deliver higher customer value than its competi-
competition. Thus, a company has a “sustainable
tors. This performance can either result from bringing
competitive advantage” (SCA) if it has resources or
a product onto the market more cost-efficiently, and,
capabilities that are:
therefore, more cheaply, or from differentiating the
1. Valuable in the market (i.e., that they create product through a unique bundle of benefits for
value to the customers); which the customer is willing to pay a price premium.
2. Rare (no other competitor has these re- A company has a sustainable competitive advantage if
sources); superior customer value is delivered more effectively
3. Not imitable or substitutable (competitors and/or efficiently through a unique bundle of capabil-
have difficulty obtaining or developing simi- ities and resources that competitors do not have. And,
lar/substitute resources or capabilities); and which they cannot copy or which cannot be substi-
4. Transferable to other markets or products. tuted with other capabilities and resources. Hence, a
very practical way to understand and to identify com-
When a firm possesses such sustainable competitive
petitive advantages is a three-step approach by an-
advantages it is, in a sense, a monopolist; it owns re-
swering the following questions:
sources or capabilities (competitive advantages) that
create value to the customers, and they cannot be im- Step 1. What do we do better than the competi-
itated or substituted for by competitors. Of course, tion? What are our competitive advantages?
“sustainable” is a relative and an allusive quality; few Step 2. Which resources or capabilities are the
advantages are truly sustainable in a long-term sense, sources of these advantages?
and most are frustratingly short-lived. Within the re- Step 3. Which of these resources or capabilities are
source-based paradigm, strategy development follows valuable, unique, and not imitable or trans-
a completely different logic and process: ferable to other industries or markets?
1. Strengths and weaknesses of the company are
analyzed; STEP 1. In the first step is to identify a prioritized
2. Based on strengths and weaknesses, competi- list of customers’ buying criteria (product features,
tive advantages are identified; product quality, service, convenience, brand image,
3. Industries, markets, and, especially, market price, etc.). Qualitative and open-ended methods are
segments are targeted in which these competi- well-suited to generating the set of criteria and more
tive advantages can be exploited; quantitative methods, including ranking tasks and
4. Strategies for these industries and markets are conjoint analysis, are proficient at gauging the
developed and implemented based on the weights customers place on the various attributes.
competitive advantages. Figure 1 presents a set of hypothetical attributes
Thus, the resource-based view of the firm is
less about “where you compete” and more about Buying criteria Weight
“how you compete.” While it is still crucial to under- Fashionable design 30
stand the company’s environment and its industry Product quality 20
(the core of the market-based view), the resource-
Brand image 15
based view has proven to be more effective in pre-
dicting firm-level success. Further, in most strategic Price 25
marketing situations, choosing the industry is not an Assortment 10
option—the imperative is on winning in the given
industry; and the resource-based view of the firm FIGURE 1 Hypothetical Buying Criteria and
starts with this perspective. Importance Weights for Costume Jewelry
287
or criteria for costume jewelry and the accompany- service. Another widely used generic value chain was
ing weights, which sum to 100 percent. In any appli- developed by Michael E. Porter. It consists of pri-
cation of this analysis, it is likely that the strategic mary activities (that are directly related to the pro-
marketer will want to see these attributes and espe- duction and distribution of products) and secondary
cially their weights by segment. That is, different cus- activities (that are needed to accomplish the primary
tomers assess different attributes and place different activities). A company can decide how each of the
importance on those attributes and understanding single activities is carried out and which of these ac-
those differences at the segment or individual cus- tivities can be outsourced to other companies.
tomer level is essential. Depending on how well a company performs on the
The next step is to compare the firm to its single activities compared to the competitors, it can
strongest competitor using these attributes and develop specific strengths and weaknesses, and can
weights. That comparison should be done from the create and capture more value by being more effec-
customers’ perspective; that is, it doesn’t matter tive or efficient than the competitors. The strategic
whether the manager believes the firm is good at importance of the single activities depends on the in-
something, what matters is what the customers think dustry. In the pharmaceutical industry, research and
or perceive, and, therefore, gauging customer percep- development are key success factors. In retailing,
tions instead of accepting an “expert opinion” or procurement and inbound logistics are of strategic
managerial viewpoint is essential. Figure 2 shows a importance; and for a consulting firm, human re-
hypothetical strength-and-weaknesses profile for a source management is essential. Hence, a company
costume jewelry producer. Its competitive advan- should rate the strategic importance of each activity
tages against the strongest competitors are the fash- and then examine each activity relative to competi-
ionable design, the brand image, and the product tors’ abilities to identify strengths and weaknesses
quality; its weaknesses are the high price and (off- (see Figure 3).
target or limited) assortment. The company in this example has three clear
The next step is the analysis of the sources of competitive advantages: technology development,
these advantages by analyzing a company’s value operations, and marketing and sales. In the next step,
chain.1.The value chain is a set of activities in which we analyze the resources and competences that are
a company engages to develop, produce and market the source of these advantages.
products. McKinsey and Company2 developed a
generic value chain consisting of six distinct activi- STEP 2. What leads to the individual competitive
ties that need to be carried out to bring a product advantages—from both a customer and value-chain
into the market: technology development, product perspective? To answer this question, we try to iden-
design, manufacturing, marketing, distribution, and tify those resources and skills that account for the
Performance Compared to Strongest Competitor

Buying Criteria Weight (−2 = Much Worse, 0 = About the Same, +2 = Much Better) Weighted Score
−2 −1 0 +1 +2
Fashionable Design 30 60
Product Quality 20 20
Brand Image 15 30
Price 25 −25
Assortment 10 −10
FIGURE 2 Competitive Advantages from a Customer’s Perspective
288
Performance Compared to Strongest Competitor

Critical Success Factors (−2 = Much Worse, 0 = About the Same, +2 = Much Better)
Weight Weighted Score
(Activities of the Value Chain)
−2 −1 0 +1 +2
Secondary Activities
Firm Infrastructure 5 −5
Human Resource Development 10 0
Technology Development 20 40
Procurement 2,5 −2,5
Inbound Logisitcs 2,5 0

Primary Activities
Operations 15 +15
Outbound Logistics 5 0
Marketing & Sales 30 +60
Service 5 5
FIGURE 3 Value Chain Analysis
company’s strengths and competitive advantages. TABLE 1 Examples of Resources3

Step-by-step, the drivers for each competitive advan-
tage are examined by asking questions like: Why do we Resources Examples
have advantages in operations? Why are we able to Tangible Financial resources
continuously deliver higher product quality and more resources • A company’s ability to generate funds
fashionable design than our competitors? The list of • Cash, securities
tangible and intangible resources in Table 1 and the Physical resources
list with examples of capabilities in Table 2 help to • Location
identify the sources of competitive advantages. • Sophistication of plant and equipment
Tangible resources can be grouped into finan- • Land, buildings
cial and physical resources. Financial resources can • Access to raw materials
constitute a competitive advantage if companies have Intangible Technological resources
access to inexpensive capital or can more easily gen- resources • Technologies
erate funds for their investments and strategies. • Patents
Physical resources (e.g., locations, plants, raw materi- • Research establishments
als) can either constitute a cost advantage or access to • Technical and scientific employees
high quality inputs. For many companies, intangible Reputation
resources (e.g., technologies, reputation, human re- • Brands
sources) are more important than tangible resources. • Customer relationships
They are invisible and often more difficult to obtain • Reputation among stakeholders
or develop. Human resources
Tangible and intangible resources are not pro- • Training and experience of
ductive on their own; they only can constitute com- employees
petitive advantages if companies are able to deploy • Flexibility of employees
them. As some companies are better able to exploit
• Commitment and loyalty of
employees
resources or are more effective in combining them, • Trust and cooperation
such distinctive capabilities can provide the basis of
289
TABLE 2 Examples of Capabilities4

STEP 3. After having identified the sources of com-
petitive advantages, that is, resources and capabili-
Functional ties, we take each of them and try to answer the fol-
area Skill lowing questions:
Corporate • Financial control 1. Is this resource or capability valuable, that is,
function • Strategic management of business does it lead to a clear competitive advantage in
units the market?
• Innovativeness 2. Is this resource or capability rare, that is, does
• Multidivisional coordination no competitor own these resource or capability?
• Acquisition management 3. Is this resource not imitable or substitutable,
Management • Well-functioning management in- that is, do competitors have difficulties to ob-
information formation system and MIS-based tain or develop them?
decision making 4. Is this resource transferable to other markets or
Research & • Research capabilities products, that is, can it be leveraged and consti-
development • Product development competences tute a competitive advantage in new markets?
• Process development competences
Logistics Figure 4 shows a simple tool that helps to identify com-
• Logistics competence
petitive advantages based on these four questions. If re-
• Process control
• Interface management sources or capabilities are valuable but not rare, they do
Production not constitute a competitive advantage (e.g., highly
• Exploiting economies of scale
skilled and experienced marketing people in our exam-
• Continuous improvement
• Flexibility ple). If they are valuable and rare, but easy to imitate
Product or substitute, they constitute only a short-term advan-
• Design skills
tage (e.g., sophisticated plants and quality manage-
design
Marketing ment system). If they are valuable, rare and difficult to
• Brand management
imitate or substitute, these resources or capabilities are
• Ability to react to market
the source of a long-term competitive advantage; if
requirements
• Customer relationship management they are also transferable to other markets or products
Distribution they can be leveraged and can be successfully used for a
• Efficiency in acquisition and order
diversification strategy (e.g., grinding technology). The
processing
• Speed of distribution trend forecasting competence and the unique grinding
• Quality of customer service technology are both competitive advantages, and as
they can be transferred to different markets or prod-
ucts (e.g., crystal figurines, jewelry and accessories,
home décor), where these competences are exactly
superior performance. Such distinctive capabilities needed, they can be leveraged to build the source of
can be found in each functional area (see Table 2). sustainable competitive advantage.
Table 3 shows how sources of competitive advantages Thus, although many management teams hold
can be identified. It lists the resources and capabili- somewhat inflated views of their firm’s competitive
ties that lie behind the competitive advantages in our advantages, usually those views are based on, at best,
example. casual assessment. Identifying sustainable competi-
Competitive advantages have the following tive advantage is not as easy as asking “What are we
characteristics: they are valuable, rare, not imitable good at?” First, “good at” must be a relative assess-
and not substitutable, and are transferable to other ment; specifically, it is relative to the competition. In
markets or applications. Therefore, each source of addition, it is not enough to be good at something—
competitive advantage is now investigated in light of to be an advantage, this “something” must be valuable
these requirements. to some set of customers and must also be something
290
TABLE 3 Competitive Advantages and Underlying Resources
Competitive Advantages from the Resources and Capabilities Behind

Customer’s Point of View These Advantages
Fashionable design • Trend competence: Ability to forecast trends in the fashion
industry through a worldwide network with the leading trend
researchers, designers, and artists
Product quality • Technical sophistication of the plant and quality
management system
• Unique grinding technology that leads to superior quality
of crystals
Brand image • Marketing competence: Highly skilled and experienced
marketing people
• Decades of producing superior quality and excellent brand
management skills
• Customer Relationship Management System
Competitive advantages in the value chain Resources and capabilities behind these advantages
Technology development • First-mover in the development of the grinding technology with
continuous investment and improvement of the technology
• Highly skilled engineers
Operations • Technical sophistication of the plant and quality
management system
Marketing & Sales • Highly skilled and experienced marketing people
Service • Well-organized distribution and customer’s service department
Resource or Capability Is This Resource Is This Resource Is This Resource Is This Resource Evaluation
or Capability or Capability or Capability or Capability
Valuable? Rare? Difficult to Imitate Transferable?
or Substitute?
YES NO YES NO YES NO YES NO
Highly Skilled and No Competitive
Experienced Marketing Team X X X X Advantage
Trend Forecasting
X X X X Core Competence!
Competence
Sophisticated Plants and YES NO YES NO YES NO YES NO Short-Term

Quality Management System X X X X Advantage
Unique Grinding Technology X X X X Core Competence!
Brand Image: Superior Quality, YES NO YES NO YES NO YES NO Short-Term

Brand Management Skills… X X X X Advantage
Customer Relationship YES NO YES NO YES NO YES NO No Competitive

Management System X X X X Advantage
YES NO YES NO YES NO YES NO Short-Term
Highly Skilled Engineers X X X X Advantage
Excellent Distribution System YES NO YES NO YES NO YES NO Short-Term

and Customer Service‘s dpmt X X X X Advantage
FIGURE 4 Identifying Competitive Advantages
291
that the competition can’t match, either by imitation or

substitution. Finally, because of the imperative for What are the Firm’ s Strenghts
growth in contemporary strategic management, the and Weaknesses?
very best competitive advantages will also have “legs”;
that is, they’ll be exploitable in other, new markets, too.
The process of identifying sustainable competi- Which Resources and/or
tive advantages, summarized graphically in Figure 5, Capabilities are the Sources or
begins with the identification of strengths and weak- Bases of Those Adwantages?
nesses. These strengths and weaknesses must be linked
with the underlying resources and capabilities that
Which of These Resources or
generate the advantages. Finally, the strengths must be Capabilities are Valuable, Unique,
filtered against the further criteria of being valuable, Notimitable, and Transferable to
not easily imitated or substituted for, and transferable. Other Industries or Markets?
After that the firm can either find markets that will re-
ward its current advantages or identify new advantages FIGURE 5 Identifying Sustainable Competitive
it should create in order to achieve success in its given Advantages
markets (or, as is most often the case, do both). Thus,
the resource-based view of strategy, and inside-out it needs to do best to target receptive industries, mar-
perspective, analyzes what the firm does best and what kets, and segments.
Summary
There are two broad approaches to assessing and develop- strategy-formation processes with fundamentally different
ing strategies: the market-based view and the resource- starting points, as highlighted in Figure 6. The market-
based view. These two paradigms imply very different based view is an “outside-in” perspective; it begins with the
The Market-Based View The Resource-Based View
Identify Strengths and

Industry/ Market Assessment
Weakness
Identify Existing Sustainable

Industry/ Market Selection
Identify Industries/Markets Identify Sustainable

That will Reward Those Competitive Advantages
Strategy Formulatoin
Sustainable Competitive Required for success in
Advantages Given Industries/Markets`
Development/ Acquisition of Strategy Formulation: Create

Required Resources and New and Maintain Existing
Competencies Competitive Advantages
FIGURE 6 Distinct Strategy-Formation Processes Underlying the Market-Based and Resource-Based Views
292
assessment and selection of where to compete; the resource- influence where the firm competes, but those junctures do
based view is an inside-out process which begins with as- not occur frequently; succeeding within a given competi-
sessment of how to compete, that is with the firm’s tive fray is an ongoing challenge to most strategists.
strengths, weaknesses, and competitive advantages. While Identifying sustainable competitive advantages re-
it is important to understand the industries and markets in quires understanding the firm’s strengths and weaknesses
which the firm competes—and at certain junctures in the and tying those strengths to the underlying resources and
firm’s growth it may be possible to actually select indus- competencies that generate or support them. Strengths are
tries and markets in which to compete, making only sustainable competitive advantages if they are valued by
industry/market analysis even more central to strategy for- customers and hard or impossible to imitate or substitute
mulation, by far the more common circumstances that a for by the competition. The best competitive advantages are
strategic market faces involve succeeding in predetermined extended or transferred to new industries or new markets,
competitive contexts. That is, the marketing strategist does especially in today’s growth-preoccupied markets.
Bailom, F., K. Matzler, and D. Tschemernjak. Enduring suc- Porter, M. E. Competitive Strategy: Techniques for Analyzing
cess. What Top-Companies Do Differently. New York: Industries and Competitors. New York: The Free Press,
Palgrave Macmillan, 2007. 1980.
Barney, J. B. and W. S. Hesterly. Strategic Management and Porter, M. E. Competitive Advantage: Creating and
Competitive Advantage. Upper Saddle River, New Sustaining Superior Performance, 2nd ed. New York:
Jersey: Pearson Education, 2006. Free Press, 1985.
Endnotes
1. M. E. Porter, Competitive Advantage: Creating and 3. Adapted from R. M. Grant, Contemporary Strategic
Sustaining Superior Performance, 2nd ed. (New York: Analysis, 5th ed. (Malden, Oxford, Carlton:
Free Press, 1985). Blackwell Publishing, 2005).
2. See J. B. Barney and W. S. Hesterly, Strategic 4. Adapted from Ibid.
Management and Competitive Advantage (Upper
Saddle River, New Jersey: Pearson Education, 2006).
293
294
SWOT Analysis
295
SWOT Analysis
SWOT analysis—the systematic assessment of the firm’s Strengths, Weaknesses,
Opportunities, and Threats and the recognition of their strategic implications—is a
basic, often used tool of strategic thinking.1 It may also be one of the most often misap-
plied.2 The basic process of conducting a SWOT analysis begins with the identification
of the firm’s strengths and weaknesses, essentially an internal analysis, and of opportu-
nities and threats in the environment, or an external analysis.3 Too often, this is where
the SWOT ends—with a description of the firm’s strengths and weaknesses and an or-
ganized list of trends in the environment—and too often the firm’s strengths are not re-
ally “strengths,” but, rather, just a list of “things the firm does well.” SWOT Analysis is
only powerful when the analysis of strengths is rigorous. A strength isn’t merely some-
thing the firm does well; it is something the firm does better than the relevant competi-
tion does it or, even better, better than the competition does it or could adapt to do it.
Most importantly, the outcome of a SWOT Analysis is not merely descriptive—the out-
come should be prescriptive, too. That is, once the description of Strengths, Weaknesses,
Opportunities, and Threats is complete, SWOT analysis should lead to actions and
strategies that are derived from the analysis.
Identifying strengths and weaknesses is principally an internal analysis but in-
volves external comparisons, as well: Nothing is a strength or a weakness except vis-à-vis
the competition. Opportunities and threats arise from the external environment.
Therefore, a full environmental analysis needs to be done before the SWOT analysis can
be carried out. Figure 1 organizes SWOT analysis graphically, emphasizing the role of
internal and external analyses.
IDENTIFYING OPPORTUNITIES AND THREATS

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in
every difficulty.”
Winston Churchill4
Customer Assessment
Opportunities and threats are external phenomena. They may arise from many sources,
including technology, the physical environment, the political/legal/regulatory environ-
ment, and the economy as well as from competitor actions. Still, although they may arise
from many factors, those external events or trends tend to affect a marketing strategy via
their effects on customers. That is, other external forces usually represent opportunities or
threats because of the changes they produce in the way customers meet or can possibly
meet a need. For example, the emergence of computer technology in and of itself didn’t
296
SWOT Analysis
xt
te
on
C
n
Company
io
tit
pe
om
C
INTERNAL
Opportunities
EXTERNAL
Customer
Threats
FIGURE 1 SWOT Analysis Identifying Strengths and Weaknesses
affect the typewriter industry. The emergence of Harris Teeter, entered a market, its presence, in a
computer technology influenced the typewriter in- sense, created a high-service-seeking segment that had
dustry via changes in the ways that consumers met the not existed before. Consumers couldn’t have been
need to create documents and manage information. high-service shoppers and might not even have known
Technological change became an opportunity for they valued high-service before a high-service alterna-
IBM, a manufacturer of typewriters that developed tive became available. The need for a high-service alter-
computer technologies and competitive advantages native was what would be labeled “latent,” it may have
in computers, and the same technological changes been there but it wasn’t actively driving shopping be-
were a threat to other manufactures of typewriters haviors. Low-service/low-price competitors such as
who didn’t have and didn’t develop computer tech- Food Lion and then Wal-Mart did the same thing with
nologies. Therefore, considering and continuously re- price-conscious shoppers. By offering a price-based al-
considering customer assessment and segmentation is ternative they “created” a segment based on latent, that
essential to identifying opportunities and threats. is, previously unmet needs. Thus, what had been a rel-
atively homogenous segment of grocery shoppers split
into subsegments based on service and price; undiffer-
Segment Changes
entiated stores that didn’t move with the market could
Market segments are never static. Segments grow, easily be left in the unprofitable middle.
shrink, and change their buying habits, preferences, In other instances, previously different seg-
and buying criterion. Importantly, segments can also ments end up merging into larger segments based on
split into subsegments or can merge or combine into a products offering compound benefits. In the early-
single, larger segments. For example, in many grocery- to mid-1990s, for example, the computer industry
store markets, the dominant players were traditionally differentiated products based on processor speed.
midmarket, traditional grocers with moderately large Some consumers desired the latest and greatest in
assortments. When a high-service player, such as terms of CPU speed, others were satisfied with
297
SWOT Analysis
slower speed but required various and different ac- Wherever an opportunity or threat arises, monitoring
cessories—audio cards, storage devices, and capacity, the environment is essential to feed understandings
etc. By the early twenty-first century, most consumer of changes, trends, and events to SWOT analyses.
needs for processing power were well-met by existing
processing speed. Far fewer were demanding cutting STRATEGIC IMPLICATIONS:
edge speed or even cared to improve the CPU speed EXPLOIT STRENGTHS; AVOID
and the cost of various accessories such as storage OR AMELIORATE WEAKNESSES
had come down to the point that most manufactures
provided enough memory to satisfy most users. The As noted above, SWOT analyses are not merely de-
basis of competition shifted from processing per- scriptions; they should direct actions and resources.
formance to convenience and design and segment One fundamental reality is that all four cells in the re-
structure shifted. Many consumer segments blurred sulting two-by-two matrix are equally manageable or
into a single mass market and specialty business ap- attractive. The marketing strategist is generally look-
plications were based on new competitive factors. ing for strength-opportunity matches to exploit—
that is a basic task of strategy formulation. Thus,
SWOT analyses can be a very useful tool at the tar-
Environmental Scanning geting stage. Weakness-Threat fits—a threat in the
As noted, most changes in the environment manifest environment that exposes a weakness of the firm—
themselves in changes in consumer demand and con- generally need to be addressed or at least avoided (if
sumer behavior, but many are tied to some other as- avoiding the threat is a viable alternative). Figure 2
pect of the environment. The competition is relevant presents the strategic implications of SWOT analyses.
to both strengths/weaknesses assessment (nothing is
a strength or a weakness except as it compares with CONDUCTING A SWOT ANALYSIS
the competition). The competition is also important
The basic steps in conducting a SWOT analysis are to:
in identifying opportunities and threats; the competi-
tion can pose a threat and can, sometimes, create an 1. Assess the firm’s competitive advantages using
opportunity (e.g., by withdrawing from a segment or the competitive advantage framework and/or
market or by blundering with a product offering). comparing the value chains of the firm and its
Exploit: Develop:
Use Strengths to Take Advantage of Invest to Improve Weaknesses into
Opportunities
Opportunities. This is the Cell to Strength to Target the Opportunity

Build Strategies on – Target and/or Overcome Weaknesses by
Opportunities That are a Good Fit with Taking Advantage of Opportunities.
the Firm’s Strengths.
Contend: Address/Avoid:
Use Strengths to Avoid Threats (Reduce Address Weaknesses and/or Avoid
Exposure to Threats), Turn Threats into Threats. If a Threat puts at Risk the
Threats
Neutral Factors, or Even Turn Threats Core Business, Then the Weakness
into Opportunities. Requires Investment; if the Threat does
(Defensive Marketing) not Jeopardize the Core Business, Then
the Weakness-Threat Situation can be
Avoided.
FIGURE 2 Strategic Implications of SWOT Analysis
298
SWOT Analysis
ss
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ess
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n
te s
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ngt
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akn
akn
ake
eng
eng
ge
a
e
Gre
Big
We
We
We
We
Str
Str
Str
Str
Best Opportunity
Opportunities
Next Opportunity
Next Opportunity
Next Opportunity
Opportunity
Biggest Threat
Next Threat
Threats
Next Threat
Next Threat
Threat
FIGURE 3 Strengths, Weaknesses, Opportunities and Threats Feed into the Matrix
competitors. Remember that the question isn’t Figure 3 shows a two-by-two matrix that
“is the firm good at this or that” nor “would the matches strengths and weaknesses with opportuni-
firm like to be the best at this or that.” The ques- ties and threats. Figure 4 shows the completed matrix
tion is “is the firm the best at this and how hard with strengths and weaknesses and opportunities
will it be for competitors to achieve parity?” and threats driving strategy and actions. Note that,
2. Study the environment for opportunities and contrary to the way it is sometimes presented, the
threats with an emphasis on how changes will “descriptive” stages of a SWOT do not fill in the cells
effect consumption in the relevant market and of this matrix—they go on the axes. Similarly, oppor-
with regard to the relevant consumer needs; tunities and threats are listed at the appropriate
3. Identify strategic alternatives and imperatives places along the OT axis. This correctly uses the
from the “fit” or match between the strengths SWOT framework to match and integrate external
and weaknesses—the internal analysis, and the factors with internal attributes to drive strategic de-
opportunities and threats—the situation as- cisions. The cells are then used to list and then
sessment; and choose from strategic alternatives.
4. Prioritize, plan, and act.
Summary
SWOT analysis is a basic tool of strategic thinking but it is strategy development, strengths must be things the firm does
often misunderstood or misapplied. SWOT analysis is not better than the competition—better than what the competi-
merely descriptive of the situation; it is prescriptive, direct- tion does today, than that for which the competition can
ing strategy formation. SWOT analysis is a matching develop competency in the future, and than the available
process, meant to find opportunities that match or fit with substitutes. Thus, strengths are sustainable competitive ad-
the firm’s strengths. Further, strengths aren’t things the vantages; things the firm does that customers value, that
firm thinks it does well—to be effective foundations for are rare, and that are hard to substitute for.
299
SWOT Analysis
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kne
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ea
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ess
ess
ess
ess
st W
th
th
th
th
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akn
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akn
akn
eng
eng
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Gre
Big
We
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We
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Str
Str
Str
Str
Best Opportunity Exploit: Develop:
Use Strengths to Take Invest to Improve Weaknesses
Opportunities
Next Opportunity Advantage of Opportunities. into Strength to Target the

This is the Cell to Build Opportunity and /or Overcome
Next Opportunity Strategies On-Target Weaknesses by Taking
Opportunities That are a Advantage of Opportunities
Good Fit with the Firm’s
Next Opportunity Strengths.
Opportunity
Biggest Threat Contend: Address/avoid:
Use Strengths to Avoid Addresss Weaknesses and/or
Next Threat Threats (Reduce Exposure to Avoid Threats. If a Threat Puts
Threats), Turn Threats into at Risk the Core Business,
Threats
Next Threat Neutral Factors, Oreven Turn Then the Weakness Requires
Threats into Opportunities Investment; If the Threat
(Defensive Marketing) Does not Jeopardize the Core
Next Threat Business, Then the
Weakness-Threat Situation
Threat can be Avoided.
FIGURE 4 Strengths and Weaknesses, Opportunities and Threats Drive Strategies
Opportunities and threats are changes in the envi- they impact the way customers can meet their needs. Thus,
ronment that generally manifest themselves as changes in SWOT is about exploiting opportunity–strength possibili-
the way customers will or might meet their needs. Changes in ties, identifying weaknesses that require development, or
the context (political, economic, social/cultural, or techno- avoid a threat, and/or identifying threats to be avoided. All
logical/natural environments) or in the competition and of those “matches” have important action-oriented strate-
competitive fray become opportunities or threats because gic implications: exploit, develop, contend, or avoid.
Andrews, Kenneth R. The Concept of Corporate Strategy. Hill, Terry and Roy Westbrook “SWOT Analysis: It’s time
Homewood, IL: Irwin, 1971. for a product recall,” Long Range Planning 30, no. 1
Fehringer, D. “Six Steps to Better SWOTs.” Competitive (1997): 46–52.
Intelligence Magazine (January–February, 2007): 54. Weihrich, Heinz. “The TOWS Matrix - A tool for situational
analysis.” Long Range Planning 15, 2 (April 1982): 54–66.
Endnotes
1. D. Fehringer,“Six steps to better SWOTs,” Competitive 4. Richard M. Langworth, Churchill by Himself: The
Intelligence Magazine (January–February, 2007): 54. Definitive Collection of Quotations (New York:
2. Terry Hill and Roy Westbrook, “SWOT Analysis: It’s PublicAffair/Perseus Books Group, 2008), quoted at
Time for a Product Recall,” Long Range Planning 30, page 578.
no. 1 (1997): 46–52.
3. Kenneth R. Andrews, The Concept of Corporate
Strategy (Homewood, IL: Irwin, 1971).
300
Targeting
After a company has segmented its markets and has developed detailed segment pro-
files, two important decisions have to be made:
1. Should the company adopt a differentiated or undifferentiated marketing
approach?
2. If it adopts a differentiated marketing approach, which segments should be
targeted?
The selection of the appropriate marketing approach and the decision about the target
segment(s) require a thorough analysis of the market and the segmentation of cus-
tomers into homogeneous segments (e.g., using demographic, psychographic, or be-
havioral information). To make targeting decisions, a detailed evaluation of segment
attractiveness and competitive advantages in those segments is required.
UNDIFFERENTIATED VERSUS DIFFERENTIATED

MARKETING APPROACHES
The two basic strategies a company can adopt are undifferentiated and differentiated
marketing1 (see Figure 1). Undifferentiated marketing ignores segment differences and
applies a “one-size-fits-all” approach: one product and one marketing program for all
customers regardless of segment differences. This leads to benefits from scale, especially
economies of scale in research and development, production, advertising, distribution,
and other overhead expenditures. Undifferentiated marketing also simplifies
Differentiated Marketing
A B C D
Company Company Company Company
P1
P2
P3
P4
P5
S1 S2 S3 S4 S5 P = Product
S = Segment
FIGURE 1 Differentiated Marketing Approaches3
301
Targeting
organizational structures. An historical example of including gluten-free flours, an extensive range

undifferentiated marketing is Ford’s Model T. Henry of pasta and bread and a variety of bread sub-
Ford once wrote that “Any customer can have a car stitute products, biscuits, snacks, pizza and
painted any color that he wants so long as it is ready-to-eat cookies as well as mixes to prepare
black.”2 Coca-Cola once used this strategy, offering delicious recipes at home. The specialization
one single product and a single size—the famous on this segment of people with celiac condi-
green bottle—to the mass market. Increasing com- tion in the food market has been Schär’s strat-
petition against differentiated products and the egy for more than 25 years and has lead to its
emergence of more idiosyncratic needs (such as market leadership in Europe.
family-size bottles, sugar-free drinks, caffeine-free • Product Specialization. Focus on one prod-
drinks) has lead Coca-Cola to adopt a differentiated uct that is tailored to all market segments
marketing approach. (Case C). Trek, one of the world-leading pro-
Differentiated marketing means that a com- ducers of bicycles is an example for this ap-
pany develops adapted or customized marketing proach. It offers bikes for virtually all market
mixes for different target market segments (see segments: road bikes, mountain bikes,
Figure 1). As it tailors products and programs to the triathlon bikes, urban bikes, electric bikes, and
segments, it can better meet the segment-specific cruisers; bikes for men, women, and kids; and
needs and requirements, and can, therefore, create bikes in several price ranges.
superior value and demand price premiums. The • Full Market Coverage. A company decides to
downside of differentiated programs includes the address all market segments and develops all
higher complexity of the organization and of the products the segment wants (Case D). This is
product portfolio, the diluted benefits of scale, and, Volkswagen’s approach. With its brands (e.g.,
as a consequence, the higher per-unit costs. Volkswagen, Audi, Seat, Lamborghini,
Differentiated marketing can consist of: Porsche) it serves practically all market seg-
ments with a full range of products.
• Selected Specialization. The company selects
and focuses on one or a few single segments
TARGET MARKET SELECTION
(Case A in Figure 1). The Austrian company
Emporia Telecom uses this strategy. It devel- To identify the segments that should be targeted, two
oped a cell phone for old people, with no digital questions are of central importance:
camera, Internet access, or instant messaging
1. How attractive are the individual segments to
capabilities. However, it does include a button
the company?
to call relatives or friends in an emergency, is
2. Does the company have competitive advan-
compatible with hearing aids, and can run on
tages in these segments?
regular AAA batteries. It has big easy-to-use but-
tons, easy intuitive dialing, and big fonts. Thus, These are the same questions, essentially, that shape
the product perfectly fits the needs of elderly the core idea of portfolio analysis: How attractive is a
people, a segment that has been ignored so far. target and how strong are we vis-à-vis the require-
• Segment Specialization. A producer decides ments of that target? Hence, the same methodologies
to serve several different needs of one segment can be used for portfolio analysis and targeting.
and develops many products and marketing In the first step, criteria for segment attrac-
programs for this segment (Case B). Dr. Schär, tiveness are defined (e.g., segment size, segment
an Italian company in the food industry, uses growth rate, segment profitability, rivalry within
this approach. The company focuses on people the segment), they are weighted and evaluated (see
with celiac disease that need a gluten-free diet Table 1). A weighted score can be computed that in-
(gluten is a protein present in certain cereals) dicates the strength of each criterion in driving seg-
and offers a comprehensive product portfolio, ment attractiveness.
302
Targeting
TABLE 1 Evaluation of Segment Attractiveness
Segment Attractiveness Analysis

Criteria Weight Segment 1 Segment 2 Segment 3 Segment 4 Segment 5 Segment 6
Size 3 3 2 4 1 3 3
Growth 2 2 2 4 1 5 5
Profitability 5 1 2 3 2 4 2
Competition 3 4 1 5 1 5 3
Weighted 30 23 50 18 54 38
Score
TABLE 2 Competitive Advantage Analysis per Segment
Competitive Advantage Analysis

Success Factors Importance of success factor per segment**
(Buying Criteria) Performance* Segment 1 Segment 2 Segment 3 Segment 4 Segment 5 Segment 6
Product Quality 2 4 1 3 1 4 2
Brand -1 3 3 5 2 1 1
Price -2 2 5 1 4 2 5
Technology 3 2 1 3 3 5 2
Service 0 2 1 2 2 2 3
Weighted Score 7 -8 8 1 18 -1
*Company Performance compared to strongest competitor (-3=much worse; 0= 3=much better)
**Importance of successs factor for segment (0=not at all; 5=very important)
The next step is to analyze whether a company

has competitive advantages in the individual segments
(see Table 2). To do this, first the success factors are de-
fined (the customers’ buying criteria). Then, for each
segment, an importance weight is estimated. This is an
Segment Attractiveness
Young
important step, as the importance weights will vary Families
greatly between the segments. Finally, the company
Retirees
compares itself against the strongest competitor on
these success factors to find out whether it performs
Students
better or worse on each buying criterion. This can be
Empty
done per segment (if there are different competitors in Nesters
each segment) or against one competitor (if there is a
Single
single competitor competing for all the segments). Professionals
Multiplying the weights with the scores and adding
these numbers together, an overall score emerges that
indicates the degree of competitive superiority or infe-
Business Strength (With Segment)
riority in each single segment.
Finally, the weighted scores of segment attrac-
tiveness and competitive advantages are used to posi- FIGURE 2 Hypothetical Segment Portfolio within
tion each segment in a portfolio (see Figure 2). GE/McKinsey Grid
303
Targeting
The segments in the upper right quadrants are the The final step in the STP-process (segmenting,
most interesting candidates for target markets, as targeting, positioning) is the development of a
they are highly attractive and the company performs unique “position” in the minds of the customers. The
better on the success factors than the competitors. goal of positioning is to establish a difference the
For the target market selection the following company can preserve; the outcome is a customer-
additional criteria can be used: focused unique value proposition. Targeting is a crit-
ical task in this process; it matches the capabilities of
1. Synergies. Are there any synergies (economies
a company with the needs of an attractive market
of scope) between the segments?
and, therefore, requires careful attention.
2. Core competences. Do the segments fit the com-
pany’s core competences and core businesses?
3. Strategic objectives. Do the segments fit the
strategic objectives of the company?
Summary
Targeting is the second step in the STP-process. It builds on competitive position in these segments. Segment attractive-
a division of the overall market into smaller, more homo- ness and the firm’s competitive position can then be used to
geneous market segments and on a thorough description determine the target segments. In the next step a sustain-
of these segments. A comprehensive profile of the seg- able value proposition must be established that then guides
ments is needed to determine their attractiveness and the the design and implementation of the marketing mix.
Abell, Derek F. Defining the Business: The Starting Point for Kotler, Philip and Kevin L. Keller. Marketing Management.
Strategic Planning. Upper Saddle River, New Jersey: Upper Saddle River, New Jersey: Prentice Hall, 2009.
Prentice Hall, 1980.
Endnotes
1. Philip Kotler and Kevin L. Keller, Marketing 3. Adapted from Derek F. Abell, Defining the Business:
Management (Upper Saddle River, New Jersey: The Starting Point for Strategic Planning (Upper
Prentice Hall, 2009). Saddle River, New Jersey: Prentice Hall, 1980).
2. Henry Ford (with Samuel Crowther), My Life and
Work (Garden City, NY: Garden City, 1922), 71–72.
304
Positioning
“Positioning is not what you do to a product. Positioning
is what you do to the mind of the prospect.”
AL RIES AND JACK TROUT, POSITIONING: THE BATTLE FOR YOUR MIND1
Positioning is the final step in the strategy formation process (the “STP process” of
Segmenting → Targeting → Positioning). Positioning spans and organizes all of the tacti-
cal elements of the marketing mix, such as price, product, promotion, etc. The purpose
of positioning is to claim a unique and valued position in the minds of the customers. It
answers the question: How do we want to be perceived by our target market? Generally,
product positioning assumes that consumer’s complex perceptions of products can be
thought of as an actual, physical “space” – a two-dimensional or multidimensional
space in which product locations and proximities depict the way consumers think
about product characteristics and perceive products relative to each other. This is why
product positioning is often captured in “perceptual maps” and terms such as “white
space” (unserved or underserved markets) and even “position” itself analogize percep-
tions of products to actual spatial representations (see Figure 1: Perceptual Map of
Women’s Clothing Retailers in Washington, DC). Sometimes the characteristics that
define a space (that is, the axes of the maps) are “real,” tangible attributes of the prod-
ucts (such as “engine displacement,” “screen resolution,” or price), but consumers nor-
mally translate actual attributes into their essential benefits (such as “performance,”
“picture clarity,” or “economy”); that is, consumers usually think in terms of the needs
the attributes meet, not the actual attributes.
Positioning requires a thorough understanding of:
• The needs of the target market;
• Competitor’s positions in the target market; and
• The firm’s own competitive advantages and points of differentiation.
RELATED TOPICS AND TOOLS

Positioning involves the convergence of several analyses and strategic ideas discussed
here. In particular, because it is tied to understanding needs, competitors, and the firm’s
competitive advantages, positioning relies on thorough customer analysis and market-
ing research, competitor analysis, and understandings of the firm’s own strengths and
305
Positioning
Washington 1990 Womens Fashion Market
Conservative V. Current V. Very Latest

Limited
Neiman Marcus
Womens Wear Fashionability Saks

Bloomingdale’s Macys
Nordstrom
Hit or Miss Dress Barn TJX
Gap Sassafras
Garfinkels
Casual Corner L&T Hecht Loehmanns
Marshalls
Kmart Britches Woodies
Sears Penney
Talbots
Women’ Wear Value for the Money

Worst Value (Left) Best Value (Right)
FIGURE 1 Perceptual Map of Women’s Clothing Retailers in Washington, DC2
competitive advantages. As noted, successful position- on a scale of 1 to 5, where is “1” means “exclusive”
ing claims a unique and valued place in consumers’ per- and “5” means “mundane?”
ceptions; the firm retains that position by “branding”— The attributes selected are intended to capture
by marking or holding that position with a brand (a brand perceptions, and they do; but these
name, a logo or trademark, or other signals and a attributes/items must be selected in advance by the
“meaning” that consumers retain across occasions). researcher and may not capture the manner in which
consumers combine attributes into perceptions. In
SPECIFIC TOOLS FOR POSITIONING particular, consumers often act on their perceptions
of products benefits—benefits are what meet
There are four tools specifically related to, and espe-
needs—but semantic scales are best in order to ad-
cially important in, positioning products and brands
dress perceptions of attributes. Data collected via se-
in the market:
mantic items can be used to create perceptual maps,
• Semantic scales; to plot attributes into perceptual maps created via
• Customer value maps; Multidimensional Scaling (MDS), or to compare al-
• Perceptual maps; and ternatives along the selected attributes. Figure 2
• Positioning statements. shows the positioning of a producer of premium fur-
niture and its competitor. The dotted line represents
Semantic Scales the ideal and intended position.
A very useful tool for brand positioning is semantic
Customer Value Map
scaling. In a semantic-scale survey, customers are
asked to rate alternatives with regard to a number A basic positioning decision every company makes
of specific attributes. Those questions are usually or should make is how to locate the product in the
formulated as bipolar items—that is, as questions with customer mind regarding the two cardinal buying
alternative words (such as hot versus cold, or power- criteria of overall quality and price. A company has
ful versus weak at each end or “pole”), and customers the option of positioning their product as the price
are asked to rate each alternative (each product) on a leader, the quality leader, or as some combination
given scale (from, for example 1-to-5, or 1-to-7). For of those two high-level attributes. Figure 3 shows
example, “How would you rate this furniture dealer the price/quality position of flat screen television
306
Positioning
1 2 3 4 5
Short-Lived Long-Lived
High Quality Standard Quality
Exclusive Mundane
Dynamic Static
Exciting Boring
Young Old
Unique Interchangeable
Modern Classic
Expensive Cheap
Company A
Competitor
Ideal Position
FIGURE 2 Semantic Scale Comparison of Premium Furniture Manufacturers
Perceptual Maps
Flatscreen TVs (32 inches)
and Multidimensional Scaling
Price
Perceptual maps are graphical visualizations of cus-
Loewe
tomer’s perceptions of products or brands. The Value
Frontier is, in fact, a specific case of a perceptual map
(with the axes stipulated as overall quality and price). A
Metz
more complex way to position brands is multidimen-
Pioneer sional scaling (MDS). It allows the analyst to assess the
similarity between brands in a multidimensional space
Humax and, instead of being specified by theory, it allows con-
JVC sumers to choose the dimensions upon which they
Sony evaluate the alternatives (and it identifies those dimen-
Panasonic
sions for the strategic manager). The principle of MDS
is very simple: The positions of the brands represent
Funai their similarity; brands that are closer together are
Quality more similar and brands farther away are less similar.
Figure 4 is an example using major European
Alpine ski resorts.4 Based on customers’ evaluations of
FIGURE 3 Price/Quality Positioning
(i.e., Value Map) for Flat Screen TVs3 the resorts on a number of specific attributes (e.g., en-
tertainment and nightlife, price, quality of the slopes),
a perceptual map was created for two segments (skiers
producers within a value map. Loewe’s position is aged 50 years and above on the left, and skiers aged 25
unfavorable; it has the highest price but not the high- years or less on the right). The horizontal axis separates
est quality. Metz and Sony are much better posi- the two ski resorts and places St. Moritz (Switzerland)
tioned; compared to their competitors and com- on the left and Toggenburg (Switzerland) on the right,
pared to their quality, their prices are relatively low. indicating that these two ski resorts are perceived as the
307
Positioning
Segment 1: 50 + Years Segment 2: < 25 Years
Fair Price Entertainment &

Nightlife
Wellbeing
St. Moritz Toggenburg Obertauern
Dolomiti Superski
Dimenson 2
Dimenson 2
Mayerhofen Kids Offers St. Moritz Mayerhofen Fair Price
Quality of Slopes Accessibility
Lech/Zürs Accessibility Toggenburg
Friendliness
Friendliness Quality
of Slopes Wellbeing Kids Offers
Lech/Zürs
Dolomiti Superski
Entertainment &
Nightlife Obertauern
Dimension 1 Dimension 1
Ski Ressorts
Attributes
FIGURE 4 Perceptual Maps of Ski Resorts in Two Market Segments5
most dissimilar. St. Moritz and Dolomiti Superski TARGET SEGMENTS AND POSITIONING
(Italy) are positioned very closely to each other.
Mayerhofen (Austria) and Lech/Zürs (Austria) are also Consumers’ “ideal” products can also be understood
perceived to be very similar. via the perceptual mapping techniques described
The distance of a ski resorts from the attributes, here. The statistical analyses underlying the identifi-
which have also been plotted into the maps, indicates cation of consumers’ ideal products (or “ideal points”
the strength of the perceptions on that attribute. St. in the perceptual maps) are beyond the scope of this
Moritz’s shows very strong associations with well- book (and beyond the concern of most marketing
being and quality of slopes, and weak associations strategists). It can, nevertheless, be invaluable to plot
with entertainment and nightlife. Toggenburg is per- ideal products into these same product spaces or per-
ceived as a child-friendly ski resort and also as easily ceptual maps. The “ideal point” isn’t the consumers’
accessible. The segment of the young skiers (<25 “favorite” from among the offered assortment (prod-
years) shows quite a different perceptual map. Again, ucts already in the market); in fact, there doesn’t have
St. Moritz and Toggenburg are the most dissimilar ski to be any offered product that meets the consumers’
resorts, but their relationships with the attributes dif- ideal preferences. The ideal point is the product that,
fer from the corresponding perceptions in the 50+ if it were offered, would be the favorite of the con-
segment. St. Moritz has strong associations with well- sumers of a particular segment; in fact, the perfect
being and quality of slopes, but is also seen as very ex- product. Figure 5 shows where in the perceptual space
pensive. Among <25 skiers, Lech/Zürs has a very of Washington area retailers the ideal retailer of the
strong position regarding well-being, quality of slopes five segments would fall (the size of the circle depict-
and friendliness. These differences show how impor- ing each segment reflects that segment’s size).
tant it is to analyze brand perceptions of specific mar-
POSITIONING STATEMENTS
ket segments. Not only do they differ regarding their
needs (their “ideal” products are discussed below), These analytical tools—perceptual maps, semantic
they may also differ regarding their basic perceptions scales, and multidimensional scaling—reveal the cur-
of the assortment and the important dimensions. rent positions of products offered in a market as
308
Positioning
Washington 1990 Womens Fashion Market
Conservative V. Current V. Very Latest

Limited
Neiman Marcus
Womens Wear Fashionability

2 3
Saks
Bloomingdale’s Macys 4 Nordstrom
Hit or Miss Dress Barn TJX

Gap Sassafras
Garfinkels
Casual Corner L&T Hecht Loehmanns
1 Marshalls 5 Woodies
Kmart Britches
Sears Penney
Talbots
Women’ Wear Value for the Money

Worst Value (Left) Best Value (Right)
FIGURE 5 Perceptual Map with Segments Plotted Within Space6
perceived by customers. Once a strategy has been cho- increases performance, increases con-
sen to target a position—that is, once the target position centration and reaction speed, improves
has been established, the marketing plan or strategy vigilance, improves the emotional status
should generate a written statement of that intended and stimulates metabolism.”
position. These codifications of intended product posi- A positioning statement expresses the singular
tions are called “positioning statements.” They should characteristic of a product or a brand aiming at estab-
capture in one or two sentences the intended position lishing unique, sustainable, and positive associations
and should also convey the brand’s differentiation from in the minds of the customers. A positioning state-
its competitors. Selva, an Italian producer of high-qual- ment should be:7
ity furniture, describes its positioning as:
• Relevant, that is, it must emphasize attributes
“For nearly forty years now, the name that are important to the customer;
Selva has been a trademark for the pin- • Distinctive, that is, it must emphasize attrib-
nacle of creativity, unique variety, and utes that are superior to competitors;
fantastic quality. To reach that point, it • Believable, that is, the brand must provide a
has been the very special interplay of tra- compelling reason for being superior;
dition and innovation that provides the • Feasible, that is, the positioning must be backed-
very particular Selva touch. Tradition up by superior product attributes or capabilities;
means that we are absolutely committed • Communicable, that is, the superiority must
to the classic virtues. And throughout be easy to explain; and
the world, that has made us an appreci- • Sustainable, that is, the position must be easy
ated and reliable partner.” to sustain and difficult to imitate.
Red Bull, the Austrian inventor of energy drinks, po- Most positioning statements specify the target
sitions its core product as a functional beverage with a segment, the brand being positioned, the product
unique combination of ingredients. It has been category within which it is being positioned, the point
specially developed for times of increased mental and of difference or “unique selling proposition,” and the
physical exertion. The positioning statement states: reason to believe. For example, many experts and firms
“Red Bull Energy Drink vitalizes body use some version of a generic statement such as:
and mind. This is achieved through the For (definition of target consumers/seg-
following product characteristics: It ments), (Brand X) is (definition of frame
309
Positioning
of reference and subjective category) may also specify the “brand meaning” or “brand per-
which gives the most... (promise or con- sonality” of the intended positioning. At Johnson &
sumer benefit/point of difference) because Johnson, for example, positioning statements in-
only (Brand X) is (reason to believe).8 clude a well-known personality, not as the intended
Key elements in these statements are the prom- spokesperson (most often these celebrities have no
ise and the reason to believe—these specify and sub- formal relationship with the brand and, in fact, some
stantiate the intended position (of Brand X in this are historical figures), but rather to richly capture
market, specified as the “frame of reference,” for and communicate the “brand personality.”
these consumers/segments). Positioning statements
Summary
There is an old adage that “Segmentation is the tough job, easy. On the other hand, if the marketer doesn’t understand
and positioning is easy.” Positioning really represents the sum the segmentation and the market structure, then getting the
total of all of the marketer’s actions on each of the elements Ps right—the positioning—is just a guessing game. While
of the marketing mix, the 5 Ps. If the marketer has a well-de- there are many tools available for use in positioning prod-
fined target segment with well-defined needs and wants, then ucts, services, and brands, marketing strategists should re-
getting the Ps right (right product at right price in right place, member this basic rule. We position to a segment, not the
with right amount of information for the customer to make other way around. In other words, the process involves seg-
an intelligent decision, at the right time) should be relatively menting, then targeting, and finally positioning.
Kapferer, J-N. The New Strategic Brand Management, 4th Tybout, A. M., and B. Sternthal. “Brand Positioning,” in
Ed. Philadelphia, PA: Kogan Page, 2008. Kellogg on Branding, edited by A. M. Tybout and T.
Kotler, P., and Keller, K. L. Marketing Management. Upper Calkins, 11- 26. New Jersey: John Wiley & Sons, 2005.
Saddler River, NJ: Pearson Education, 2009.
Ries, A., and J. Trout. Positioning: The Battle for Your Mind.
New York: McGraw-Hill, 1981.
Endnotes
1. Al Ries, and Jack Trout, Positioning: The Battle for 5. Adapted from: Ibid.
Your Mind (New York: McGraw-Hill, 1981), 24. 6. Lawrence J. Ring and Douglas J. Tigert, “Store Wars
2. Lawrence J. Ring and Douglas J. Tigert, “Store Wars Around the Beltway: Women’s Fashions in
Around the Beltway: Women's Fashions in Washington Washington D. C., 1990 (A)” case number W&M-
D. C., 1990 (A)” case number W&M-M-109, pp. M-109, pp. 35–36, Copyright 1990 by the Sponsors
35–36, Copyright 1990 by the Sponsors of the of the Graduate School of Business Administration
Graduate School of Business Administration of the of the College of William and Mary, and the
College of William and Mary, and the Sponsors of Sponsors of Babson College.
Babson College. 7. P. Kotler, & K. L. Keller, Marketing management
3. Based on N.N. (2009) TV-Geräte im Test. (Upper Saddler River, NJ: Pearson Education, 2009).
Konsument. Also see Bradley T. Gale, Managing 8. J-N. Kapferer, The New Strategic Brand
Customer Value. (New York: Free Press, 1994). Management, 4th Ed. (Philadelphia, PA: Kogan
4. See R. Faullant, K. Matzler, and J. Füller, “A Page, 2008), 178; and A. M. Tybout and B. Sternthal,
Positioning Map of Skiing Areas Using Customer “Brand Positioning,” in Kellogg on Branding, ed. A.
Satisfaction Scores,” Journal of Hospitality & Leisure M. Tybout and T. Calkins (New Jersey: John Wiley &
Marketing, 16, (2008): 230–245. Sons, 2005), 11–26, see pages 12–13.
310
Customer-Oriented
Market Research
Effective strategic marketing requires persistent and thorough attention to the customer
and to customer needs—that’s “the marketing concept.” A customer focus pervades our
strategic marketing framework, by design, taking different forms at different points in the
process. Some distinctions across market research activities and related terminology are
summarized in Table 1. Market research includes studying events and trends in the general
environment (situation assessment), including events and trends with regard to competi-
tors and in the “general context,” summarized by the mnemonic PEST (Political/regula-
tory/legal, Economic, Social/cultural, and Technical/natural/physical). Marketing research
also encompasses customer assessment, the wide-ranging search for social trends and cus-
tomer insights. Those applications of marketing research to situation assessment and, in
particular, to customer assessment are inductive, exploratory, and less structured.
Marketing research also encompasses research focused on specific problems or
on guiding specific marketing-mix activities. This note links focused customer-oriented
market research to marketing strategy; this is the issue-specific research that (1) segments
and targets customers, (2) shapes specific marketing programs and tactics (positioning
and the marketing mix), and (3) evaluates those activities against standards and ob-
jectives for use in assessment and adjustment. This note takes a strategic marketer’s
perspective, emphasizing how to manage the research function. It is not about how to
do market research; it is about how to manage market research and how to integrate
market research into strategic planning (See Figure 1).
Table 1 highlights the pervasive role of market research in strategy formation, im-
plementation, and assessment. Market research is a required input to segmenting cus-
tomers based on consequential differences in needs and responses to the marketing mix.
Market research is similarly essential to developing marketing mixes; it tests and directs
everything from new product development and pricing to advertising, sales, and distribu-
tion. Finally, assessment and adjustment requires rigorous measurement and a “dash-
board” of marketing metrics including outcomes such as customer satisfaction, customer
311
Customer-Oriented Market Research
TABLE 1 Customer Consideration in the Strategic Marketing Process

Assessment Assessment customers in general to identify (1) trends in
needs and demand, and (2) customer insights.
Segmentation, Ongoing as well as focused research identifying
Targeting, and differences across customers/consumers with

Positioning regard to needs and descriptive characteristics
and linking those differences to existing or
achievable competitive advantages.
Positioning and Focused research to pretest and refine tactics
Strategy the Marketing including price, promotions and advertising,
Formation and Mix new products or product modifications, and
Implementation merchandising programs and to gauge the effects
of those tactics on achieving the desired positioning.
Customer Ongoing data collections tied to specific accounts,
Relationship customers, or consumers that serves to tailor
Management offerings (personalize or customize offerings) and
(CRM) direct investments and efforts toward the “right”
customers and segments.
Assessment & Customer- and Focused and ongoing research collecting
Adjustment Market- information on customer responses to the
Oriented marketing mix including measures of satisfaction,
Metrics loyalty, profitability, and revenues.
Context
Industry
Competitive
Advantage(s)
Positioning
Branding Promotion
Products &
People
Marketing
Research
Price Place
Profits
FIGURE 1 Market Research Supports Various Stages in Strategic Planning
312
profitability, and customer loyalty measures that the benefits of the effort. The costs of market research
gauge how the firm is doing with its customers).Still, include financial costs—market research can be very
every problem doesn’t require formal market re- expensive—as well as the time required to conduct
search. Before discussing market research from a the research (including managerial time and delays in
strategic perspective, it is worthwhile to clarify some taking the contemplated actions). The benefits of
considerations about when market research is re- market research are its support for decision making
quired and when it may not be necessary or wise. and the reduction of risk. Risk assessments should be
multifaceted, taking into account both the probability
WHEN TO DO MARKET RESEARCH— of an outcome (its likelihood) and the consequences
of the risk. Market research may be wasted on refin-
AND WHEN NOT TO
ing elements of a marketing program that can be eas-
Obviously, every marketing decision doesn’t require ily adjusted after “launch,” on reducing the risk of
formal market research; in fact, in many situations, highly unlikely outcomes, or on reducing risks that
traditional market research may be inaccurate and will in any case have inconsequential impacts on the
misleading. Decisions about when to undertake mar- program or the firm. Those deliberations are espe-
ket research and when not to invest in market re- cially relevant when speed-to-market is critical. A
search should be based on considerations of: study by Arthur D. Little & Company found that 92
percent of all new cereals launched in the market
• Whether or not the information can realisti-
failed despite the best market research efforts, leading
cally be researched; for example, whether or
cereal marketers to reduce their expenditures on mar-
not customers can be realistically expected to
ket research in favor of cutting the costs of launching
know or estimate their responses to a proposed
a new cereal and increasing the agility and flexibility
marketing action; and
of their manufacturing operations.3 Introducing new
• Whether or not the benefits outweigh the costs
products into actual markets and “seeing what sticks”
of doing the research.
may, in many cases, be more efficient and more effec-
When a product is truly “new to the world” cus- tive than investing in expensive and time-consuming
tomers may not understand it well enough to predict market research and test markets.
their responses. Sony executive, Kozo Ohsone, observed One interesting observation in this regard is
that “When you introduce products that have never that modern business education and culture seems
been invented before, what good is market research?”1 to teach managers not to trust their instincts or ex-
When Sony introduced the Walkman personal music pertise. That is probably a good thing in many situa-
player into the market, market research had determined tions; good market research should suffer less bias
that customers would not buy a tape player that did not than managerial judgment. Nevertheless, in some
record; Sony management trusted its instincts and went cases managerial expertise or “gut feel” is accurate,
ahead and launched the now legendary device— more accurate than customers themselves can be in
without recording capabilities—despite those research some situations. Further, for some decisions, mana-
findings. Similarly, market research on the phone an- gerial expertise can be “close enough”; more research
swering machine found that customers thought it may tweak and refine a decision but those tweaks
would be rude to have a machine answer their phone. and refinements may not produce much in terms of
Today, of course, most phones have voicemail.2 The un- substantive improvements or increased sales. For ex-
derstanding that, in some cases, customers can’t accu- ample, Sony co-founder Masaru Ibuka wanted to ex-
rately respond to new product ideas and that the tend Sony’s competence in magnetic recording,
knowledge and the “instincts” of experts, including which had been focused on audio recording, into
marketing managers and channel partners, may be video recording. Traveling in the United States to re-
more accurate in predicting market responses is espe- search the concept, he observed people buying pa-
cially relevant to the marketing of radical innovations. perback books at the airport and easily carrying
Additionally, before investing in market re- those books in their pockets, briefcases and pocket-
search, the marketer should weigh the costs against books. Without further market research to validate
313
or fine-tune the concept, he decided that the Kotler and Armstrong, Andreasen,
2009 1985
Betamax video-tape cassette should be the size of
those paperback books. Returning to Japan, he chal- Define the Problem and Determine Implementation
lenged the research and development team to come Research Objective of Results
up with Betamax; he took a book he’d purchased at

the airport in New York out of his pocket, “This is the
size I need for the cassette.”4 Although Betamax Develop the Research Plan Structure
for Collecting Information Report
eventually lost out to the VHS format, that outcome
was unrelated to the size of the cassette. Ibuka under-
stood the appropriate role of managerial judgment Implement the Research
Determine Required
Plan-Collecting and
and expertise in directing certain details of the mar- Analyzing the Data
Analysis
keting programs—further research might have
changed the size and shape of the Betamax cassette,
but the size and proportion of Mr. Ibuka’s book was Interpreting and Reporting Determine
the Findings Required Data
an adequate.
THE MARKET RESEARCH PROCESS Look For

Existing Data
When market research is appropriate and needed, it
should be clearly based on a specific understanding
of the issue, opportunity, or problem that is to be re- Collect
searched and with a detailed understanding of the Primary Data
managerial decision to be guided by the research.
Figure 2 presents two versions of the same basic,
strategic market research process. The four-step Analyze
process on the left, adapted from Philip Kotler and
Gary Armstrong’s classic Principles of Marketing text-
book,5 is a traditional view of the Market Research
flow: The first step is to define the problem and the Write the Report
objectives of the research. Subsequent steps plan and

execute a data-driven project that addresses those
FIGURE 2 The Market Research Process8
problems and objectives, leading toward a summary
report.
The process graphed on the right in Figure 2 is
adapted from an article, “Backward Market and executing the research plan. Andreasen’s frame-
Research,” by Alan Andreasen6 in which he argued work emphasizes the need to hone in on what, exactly,
that “Only by first thinking through the decisions to could be done differently depending on the results of
be made with the research results will the project be this research and the need to think ahead about how
started with a high likelihood of actionability.”7 the research will address the issue and how the rec-
Andreasen argued that the manager should not only ommendations will be communicated.
spell out the issue or problem to be addressed by the Most of the remainder of these marketing-
research, but should also carefully tie the research to research process steps are “technical”—sampling
specific managerial actions (the “implementation” or plans, data collections, and statistical analyses that
“actionability”) that are possible depending on the are the purview of research staff and vendors—but
outcomes of the research, and even go so far as to an appreciation of the need to link investments in re-
draft the eventual report—including the tables for search to specific issues and feasible strategic actions,
presenting quantitative results—before developing discussed above, and a broad understanding of the
314
ways different research approaches link with different Types of Research

issues and produce different sorts of information are
Market Research can have three basic formats:
invaluable to guide decision making to effective and
efficient strategic management. • Exploratory. We have separated out customer
assessment, which is certainly exploratory re-
Questions and Issues that Market search, as a distinct set of processes. Exploratory
Research Can Address research is also part of market research.
Exploratory research uses less structured and
In science there are two types of “errors”: Type I er- wide-ranging methods to identify issues for
rors are when the research finds positive results for further research without imposing a priori
something that is, in fact, not true (these are also structure or hypotheses on the data collection
called “false positives”); and Type II errors are those or the respondent. In market research, focus
that reject hypotheses that are really true (“false groups, depth interviews, and other methods
negatives”). A third sort of error, not as often dis- may all be useful, especially at the front end of a
cussed in the research literature, is a “Type III project, to explore customer experiences and
error”: finding the right answers for the wrong ques- the underlying factors driving observed phe-
tions.9 Market researchers should be particularly at- nomena, and to generate specific issues for fur-
tentive to Type III errors when structuring the pa- ther research.
rameters of a research project. There are at least • Descriptive. Descriptive research character-
three broad categories of questions that market re- izes the who, what, when, and where of the
search can address: market (but not the why—why implies causa-
tion, which is discussed below). Descriptions
• Market Questions:
are most often of markets, segments, or spe-
• Demand forecasting: What is the size of the cific customers and their size, attitudes and
market? What are the sizes and growth rates
of the different segments? How will mar- preferences, and behaviors or other characteris-
kets/segments respond to the offerings? tics important to strategy and marketing-mix
management.
• Describe competition and context (see
Table 1: the row “Situation Assessment”); • Causal. Causal research is the why of a mar-
ketplace phenomena. It relates two or more
• Needs identification and segmentation: variables and isolates the causal factors. Causal
What do customers need and care about,
and how much do they care? How do cus- research identifies the event (or “cause”) and
tomers differ in regards to those needs and its consequence (“effect”). Experiments are
“importance weightings?” the most common form of causal research.
Experiments are research designs in which one
• Mix/Program Questions: group of customers or one market is exposed
• The effect of various marketing mix ele- to one level of a variable (a promotion, a price
ments: What is the best product, message, level, or an advertisement) while another
channel, or price? What is the best combina- group is not, (making it the “control group”)
tion of these interdependent tactics? or in which different groups are given different
• Assessment and Adjustment Questions: levels of a variable (different prices, for in-
• Market Share: How are we doing vis-à-vis stance, or different advertisements).
the competition? How are we meeting our
objectives?
Types of Data
• Performance: Success in meeting customer
needs: How do our customers feel about us There are several ways to differentiate sources of and
(customer satisfaction)? How loyal are they? types of data. Some data are internal to the firm—
How profitable are they? and most firms can find out a lot just by analyzing
315
data they already have “in house”—and other data TABLE 2 Primary versus Secondary
are external to the firm. Generally, because internal
data are more readily at hand (although not neces-
Customization
Time Required
sarily “easy” or free to access), it is a good idea to start
Timeliness
to Obtain
by asking “what do we already know” and to thor-
oughly analyze internal data first, before investing in
Cost
gathering external data. It is also generally true that
firms underappreciate the informational value of in-
ternal data, such as shipments, inventories, and re- Can be Low to
Secondary: Low Quick
turns. The Japanese tend to rely on hard data along Outdated None
with channel partners (conversations with and visits
to distributors and retailers) more, in making deci- Primary: High* Delayed Current High
sions—than do American managers.10
A second distinction across data is between *Costs of primary Market Research are high in both monetary
terms and in terms of managerial time and effort and with regard
secondary data, preexisting data already collected for to delays in taking action.
some other purpose either by the firm or elsewhere,
and primary data, data collected specifically for the
project and issue at hand. As with the internal–external Another distinction across data is between
distinction, there is a general rule that looking at sec- qualitative and quantitative data. Every marketer
ondary data first is a good idea. Secondary data may can appreciate that a customer’s reaction to almost
not be free or immediately available, there may be any consumption experience, from dining at a fine
costs to obtaining secondary data and it may take restaurant to purchasing raw materials for a plant,
some time, but secondary data are generally cheaper, is going to be hard to summarize with a single, sim-
easier, and faster to access than primary data. For ex- ple number. Customer satisfaction, for example, is
ample, a firm might want to know how much has certainly a much “richer” experience than a single
been paid in taxes on the sale of alcohol in a certain number (e.g., on a scale of 1–10) can possibly de-
jurisdiction in order to estimate the size of the mar- scribe. Nevertheless, in order to test hypotheses and
ket for adult beverages; obtaining those secondary evaluate concepts in large, random samples and in
data may require sending a paid staff researcher to order to compare responses across customers, mar-
Alcoholic Beverages Commission (ABC) and could keters frequently must use simple, forced-choice
involve fees for the reports, but those costs and time scales to gauge and analyze phenomena such as cus-
required would be less than doing a survey to esti- tomer satisfaction.
mate the size of the market. On the other hand, Qualitative data are those data that are devel-
primary data would be customized to the specific re- oped from observation or via textual, verbal, and
search issue being addressed; if the product being open-ended responses methods; qualitative data
considered is high-end tequila, for example, a pri- tend to be subjective and imprecise and are not easily
mary data collection such as a consumer survey compared or generalized across customers, but quali-
could ask how much premium tequila the customer tative data can provide invaluable depth and vividness.
has consumed or intends to consume, providing Quantitative data are responses that are provided or
more specifically relevant information (e.g., than can be summarized numerically, and quantitative
simple tax receipts would). In addition, some sec- methods are conducive to statistical analysis, en-
ondary data can be a little outdated (e.g., tax receipts abling generalization of results across larger groups
for the current year may not be available), and others (“populations”). The ability to compare data across
can be quite outdated (e.g., the U.S. Census is collected customers, for example the ability to compare cus-
every ten years), but primary data will be up-to-date. tomers across time (e.g., last year versus this year) or
Table 2 summarizes these basic distinctions between across segments, and the ability to “generalize” to all
secondary and primary data. customers in a target population (a segment or a
316
market) support the use of quantitative data in many understand the issues and problems better and from
market research applications. the customers’ perspective and to confirm that the is-
Generalizability is an important idea. Because sues the manager thinks are important are important
qualitative techniques require a lot of the respondent’s from the customers’ perspectives, too. If the re-
time, thought, and energy, it is often impossible to searcher believes that the problem is with a certain
develop qualitative data from adequate sized, truly- aspect of the product (e.g., the size of the package),
random samples. Only when each member of a pop- and doesn’t go out to interview customers to let them
ulation (the overall group the researcher is interested describe what they see as the problem (e.g., package
in) has had an equal chance of being selected for a resealability), a resulting survey may be ineffective at
data collection can its results be generalized to the describing the problem or selecting solutions. The
population. If the researcher selects and pays eight general flow should be from qualitative research in
retirees that she or he personally knows to attend a small, nonrandom samples toward quantitative
focus group, she or he only knows what those eight methods in larger and random samples.
retirees think about the product or advertisement— Various specific types of data combine these
they weren’t selected randomly and they are a very characteristics—internal/external, secondary/primary,
small sample, so we can’t generalize to all retirees. If and qualitative/quantitative—in different ways. Some
we randomly sample from all of the retirees in a mar- data, like syndicated data (i.e., scanner data or panel
ket and survey a large enough number of them re- data), are external/secondary/quantitative data tied to
garding their responses to a new product idea, our observations of consumers’ behaviors recorded elec-
results will be quantitative and, although not rich tronically (in the case of scanner data) or via surveys
(e.g., a rating of a new product might be an 8.73, ver- (in the case of panels). Other data, such as sales-force
sus a 7.49 for an alternative, or a 23% “definitely will feedback, are internal/secondary/qualitative. Other
try”), those results will be generalizable to all retirees sorts of data can combine these characteristics in innu-
in the market—we would know that there is a signif- merable ways but all can be characterized using these
icant probability that all retirees will prefer one prod- three qualities and those characterizations are useful in
uct to the other or will try the product. understanding the data’s content, their usefulness in
Thus, as summarized in Table 3, there is an in- strategic planning, and their limitations.
herent tradeoff between the richness of qualitative
data and data collection methods and the generaliz- Data Analyses
ability and comparability of quantitative data. As a
As noted, it is generally not the marketing strategist’s
general course of action, market research projects
job to design or execute the data collection in a re-
should begin with qualitative research in order to
search project nor is it the strategist’s job to analyze
those data, but it is important to understand some spe-
cific analyses that are especially useful in strategic mar-
TABLE 3 Qualitative versus Quantitative keting planning. Three market research analyses are
important for the strategic marketing to understand:
Generalizability
Comparability
• Syndicated data and associated analyses, such

as All Commodity Volume (ACV), Brand
Richness
Development Indices (BDI), and Category

Development Indices (CDI);
• Perceptual Maps, including those developed
Low to from direct items (such as, “On a scale of 1–7,
Qualitative High Low how heavy is beer X?”) or from indirect “paired
None
comparison” (“How similar or dissimilar are
Quantitative Low High High beers X and Y?”) using multidimensional scal-
ing (MDS);
317
• Conjoint analysis, which pulls apart customer tions but also advertising), and purchase behaviors as
preferences along specific attributes when cus- well as for describing retail coverage.
tomers consider those attributes in conjoint
with (or “simultaneously and interdependently PERCEPTUAL MAPS. One of the most useful ways
with”) other attributes; and, to present and to think about competitive position in
• Experiments, which allow the researcher to the marketplace is to translate positions in consumer
identify with certainty which actions or other perceptions to position in a two-dimensional map
variables cause what outcomes (e.g., to deter- (a plane), with products and customer preferences
mine with certainty that a change in price leads graphed into that space. The usefulness of maps in
to higher sales). understanding actual positions held in customers’
minds is well-established (Even though it is unlikely
This section briefly describes each of these three that many customers carry such “maps” in their minds,
specific sorts of research and analysis. they do perceive the various products in relationship
to each other and to some salient characteristics—and
SYNDICATED SOURCES Syndicated data are col- the maps capture that reality). It is, therefore, reason-
lected by third parties (not the customers, not the able to conceptualize targeting (directing marketing
trade (retailers), and not the company itself), usually programs at segments) and competitive differences
one of a very few large market research companies (relationships amongst products and brands) within
(Information Resources Incorporated [IRI] and these two-dimensional representations. Figure 3 is a
ACNielsen dominate the market). Syndicated data two-dimensional map of perceptions of woman’s
have grown dramatically with technological ad- magazines in the United States. It shows that a certain
vances over the past few decades and today re- set of magazines, including Vogue and Cosmopolitan,
searchers have access to hundreds of terabytes of are perceived as upscale fashion magazines while an-
data. These data include scanner data, the data other cluster, including Ladies’ Home Journal and
recorded each time a UPC code (Uniformed Product Redbook, are viewed as downscale service magazines.
Code or bar-scan) is passed over a checkout scanner “Joint space” maps allow the researcher to also place
at a grocery store, from retailers across the country characteristics (such as “sophisticated,” “stylish,” etc.)
(but missing Walmart’s data—they compile their and customers’ “ideal points” into these maps—
own scanner data for their own suppliers’ use). usefully showing how perceptions of product alter-
Those scanner data are augmented with information natives and attributes correspond with product at-
about “causes” or events such as coupons, price pro- tributes and customer preferences. Two commonly
motions, and the like to allow for analysis of sales applied approaches to creating perceptual maps are
patterns across time and in correlation with price (1) structured or semantic items mapped into
and promotion tactics. Other data offered by these Cartesian Coordinates and (2) multidimensional
third-party research syndicators include panel data, scaling which derives “similarities” from less struc-
which results from a panel of consumers tracking tured customer responses that tap into the dimen-
their actual purchases, including the retailers they sions along which customers perceive the product
purchase from, across time. Single-source data com- category when they are not given dimensions but
bine panel data (tacked purchases and purchase ven- must develop there own.
ues) with surveys of things like demographics and
lifestyles, and also augments those data with con- CONJOINT ANALYSIS Another invaluable class of
sumer media usage (television watched, newspapers analyses addresses how customers evaluate and
read, etc.). These syndicated data are powerful tools choose across products when those products are
in understanding the links between segments, media, made up of multiple attributes, when those attrib-
marketing actions (especially price and price promo- utes must be considered together, and when prefer-
ences with regard to those attributes involve trade-
offs across attributes. For example, everyone would
318
like a car that handles really well. Everyone would tions” of different customers and different segments,
also prefer a car that can carry a lot of luggage. But gauging the importance different segments place on
customers know that if they want handling, they different attributes, and identifying each segment’s
must give up some cargo capacity (and vice versa). It perfect product or “ideal point.” Those pieces of in-
is physically impossible to get a great handling car formation can be invaluable in new product develop-
that also has the maximum cargo capacity. In other ment, integrated marketing communications, and
cases those trade-offs are based on price; even if a car other positioning activities.
that could do everything—handle well and move lots
of things—were possible, most customers know it EXPERIMENTS. Experiments are a powerful tool to
would cost a lot and they aren’t willing to pay for it. fine-tuning marketing programs and linking specific
In this way, different customers and different seg- actions (causes) with specific outcomes (effects).
ments of customers have different preference. The Managers have been encouraged to turn to experi-
perfect car for one segment will embody a certain set ments more as technology has allowed for the easier
of trade-offs. Young families frequently trade off targeting of different groups with different actions.
handling and performance for cargo space and fuel For example, the Internet allows for quick changes in
economy. On the other hand, young single profes- the way products are described and priced. By vary-
sionals probably will prefer handling and performing the presentation and price across consumers the
ance. Conjoint analysis, which takes its name from researcher can link specific changes in the marketing
the fact that multiple attributes are considered “in mix to specific outcomes (usually those outcomes are
conjoint” or simultaneously and interdependently, is desired customer responses such as sales or satisfac-
capable of identifying the trade-offs or “value function). If customers are “assigned” to different “cells”
Perceptual Mapping Allows Marketers to Identify Consumers’ Perceptions

of Their Brand in Relation to the Competition.
Upscale
Vogue
Architectural Self
Digest
Cosmopolitan
Glamour
Mademoiselle
Ladies’ Home Journal
Service Fashion
Harper’s
Bazaar
Family Circle
Redbook
Seventeen
Woman’s
World
Downscale
FIGURE 3 Perceptual Map of Woman’s Fashion Magazines11
319
or treatments randomly then differences in their re- tributed to the treatment variable (different price,
sponses (higher sales, greater satisfaction) can be at- different advertisement) with confidence.
Summary
The marketing strategist at any medium-to-large firm that may be guided by the research. The marketing strategy
should not be designing research, collecting data, or analyz- itself should be based on and tested against data.
ing results, but she or he should be expert in what sorts of This note has presented a high-level perspective on
research are possible, what sorts of information those re- when to do research, why to do research, how to manage
search alternatives can provide, and how market research the research effectively and efficiently, and on what the
should drive strategy development, implementation, and as- compelling link is, between research and strategy in a market-
sessment. Managers at small firms may actually conduct re- driven firm. The only way to develop, implement, monitor,
search themselves, and there are many sources available to and adjust the appropriate marketing mix toward achiev-
guide the details of those activities. In any case, market re- ing a desired marketing strategy is by means of rigorous
search should start with a clear understanding of the prob- marketing research.
lem or issue to be addressed and the managerial actions
Larreche, Jean-Claude. The Momentum Effect: How to Vitale, Dona. Consumer Insights 2.0: How smart companies
Ignite Exceptional Growth. Upper Saddle River, NJ: apply customer knowledge to the bottom line. Ithaca, NY,
Wharton School Publishing, 2008. USA: Paramount Market Publishing, 2006.
Malhotra, Naresh K. Marketing Research: An applied orien-
tation, 6th ed. Upper Saddle River, NJ: Pearson/Prentice
Hall, 2010.
Endnotes
1. Willard I. Zangwill, “When Customer Research Is a 7. Ibid., page 180.
Lousy Idea,” Wall Street Journal (March 8, 1993): 8. The six-step process on the left is from Kotler and
A12. Armstrong, Principles of Marketing, page 106. The
2. Ibid. eight-step process on the right is adapted from
3. Ibid. Andreasen, “Backward Market Research.”
4. See Akio Morita, Made in Japan (New York: E.P. 9. Allyn W. Kimball, “Errors of the Third Kind in
Dutton, 1986), 112. Statistical Consulting,” Journal of the American
5. Philip Kotler and Gary Armstong, Principles of Statistical Association 52, no. 278 (June 1957):
Marketing, 11th ed. (Upper Saddle River, NJ: 133–142.
Pearson/Prentice Hall, 2009), 106; compare that 10. Johny K. Johansson and Ikujiro Nonaka, “Market
with Alvin C. Burns and Ronald F. Bush’s 11-step Research the Japanese Way,” Harvard Business
elaboration on the same underlying flow of tasks Review 65, no. 3 (May–June): 16–19.
and analyses, in Alvin C. Burns and Ronald F. Bush, 11. Michael R. Solomon, Greg W. Marshall, and
Market Research, 6th ed., (Upper Saddle River, NJ: Elnora W. Stuart, Marketing: Real People Real
Pearson/Prentice Hall, 2009). Choices, 6th ed. (Upper Saddle River, NJ: Prentice
6. Alan R. Andreasen, “Backward Market Research,” Hall, 2009), 219.
Harvard Business Review 63, no. 3 (May–June,
1985): 176–182.
320
Brands and Branding
“If this business were split up, I would give you the land
and bricks and mortar, and I would take the brands and
trade marks, and I would fare better than you.”
JOHN STUART, CEO OF QUAKER (CA. 1900)1
According to the American Marketing Association, a brand is: “A name, term, design,
symbol, or any other feature that identifies one seller’s good or service as distinct from
those of other sellers. The legal term for brand is trademark.”2 This useful but narrow
definition focuses on the specific indicators of brands (name, term, symbol, etc.) and
the functions of brands in the marketplace. Brands are also complex social phenomena.
As concepts in customers’ minds (and hearts), brands have rich symbolism and mean-
ings that go beyond their identifying function. That social symbolism and meaning is,
to varying degrees, beyond the marketing strategist’s or the brand manager’s control.
Nevertheless, the essential strategic roles of a brand are to identify the product and its
producer to consumers, to differentiate the offering in a valued way, and to command
margin—and these are roles that the marketing manager must shape and control.
BRAND MARKS AND THE FUNCTIONS OF BRANDS

In the movie 50 First Dates (2004), Henry, played by Adam Sandler, falls in love with
Lucy, played by Drew Barrymore. The theme of the movie is that Lucy suffers an un-
usual memory disorder as a result of a car accident. She awakes every day with no
memory of the day before—in Lucy’s mind each morning is the morning before the
accident. Consequently, Henry must reintroduce himself and win Lucy’s heart anew
every day. Marketing would be like 50 First Dates if marketers couldn’t build brands to
identify their products to customers across occasions and to capture the benefits—the
“brand equity”—earned by delivering satisfying customer experiences. From the cus-
tomers’ perspective, shopping and buying would involve reevaluating every option on
every occasion—the absence of brands would make it difficult to ever routinely repur-
chase alternatives that served well in the past (or to avoid alternatives that disap-
pointed). Branding is not always generated by the brander. In the old Soviet Union,
there was an interesting historic instance of consumer generated “branding.” There,
when products were supposedly identical and “unbranded” and could have been pro-
duced anywhere, consumers figured out how to decipher barcodes in order to identify
goods from factories that produced higher-quality items.3
321
Brands and Branding
Brands are manifest in an offering’s characteris- strategist, brands embody and retain the benefits, in-
tics that mark or identify it in consumer perceptions, cluding loyalty and margins, from “a job well done,”
that distinguish it from other offerings, and that retain and can serve to facilitate distribution and accelerate
a valued place in customers’ minds across occasions. A new product launches (brand extensions). This infor-
brand’s identifying characteristics usually include the mation-value or commercial-identity role of brands is
brand name (or “trade name”), logos and marks a good foundation for understanding brands, but it is
(“trademarks”), and distinguishing features such as narrow and legalistic; brands also serve to deliver
packaging, colors, and even sounds.4 That commercial value to consumers in and of themselves and hold rich
identity is not dissimilar to an individual’s personal and influential meanings of their own.
identity; we know a person by their name but we may
also recognize them by their attire, their posture or BRAND MEANING
gait, their voice, even associated smells and sounds.
AND BRAND EQUITY
Coca-Cola, for example, is a trade name—as is
Coke—but Coca-Cola is also identified by the dis- “What’s a brand? A singular idea or concept that you
tinctive red, “Spencerian cursive” logo, by its packag- own inside the mind of the prospect.”9
ing (especially the “contour bottle”), and by slogans Al and Laura Ries, authors and
such as “It’s the Real Thing” and “Open Happiness.” marketing experts
Intellectual property law not only protects trade-
marks and trade names, it protects “trade dress,” the The functional or information-value view of brands,
distinctive configuration of nonfunctional elements explicated above, is useful—an essential part of
such as package shapes, designs, colors, materials, branding is this notion of commercial identity—but
and sounds. Owens Corning has, for example, pro- it leaves out some important roles that brands play in
tected their pink fiberglass insulation coloring,5 and the modern marketplace and in contemporary cul-
NBC trademarked its station-break “chimes.”6 ture. Brands hold meaning that can encompass a va-
Thus, a straightforward way to understand what riety of aspects from functional and hedonic benefits
a brand is and what can be protected as a trademark, to social significance and symbolism, and those
trade name, service mark, or trade dress is to under- meanings reside in the minds of consumers.
stand that a brand is the producer’s and the product’s Professor David Aaker, a leading authority on
commercial identity.7 Table 1 summarizes some es- branding, defines brand equity as the “set of brand as-
sential benefits of brands to both marketers and cus- sets and liabilities linked to a brand, its name and
tomers. For customers, brands offer efficiency and symbol that add to or subtract from the value pro-
assurance in overwhelmingly complex lives; brands vided by a product or service to a firm and/or to that
may also offer abstract benefits, including comfort, firm’s customers.”10 Thus, brand equity is a summary
risk reduction, and self-expression. To the marketing of brand meaning/associations along with brand
TABLE 1 The Benefits of Brands8
Benefits to Customers Benefits to Markets/Firms

• Efficiency: Reduce demands on information • Responses to marketing mix
search/cognitive processing • Loyalty
• Assurance: Confidence and comfort in • Prices and margins
purchase
• New-product launches and brand
• Social signals/symbolic value extensions
• Personal identity and self-image • Effectiveness and efficiency of
distribution/trade programs
322
Brands and Branding
Brand
Brand as
Awareness and
Product
Loyalty
Brand as
Brand Assets
Organization
Consumer Purchase and
Brand Other Responses to the
Equity Marketing Mix
Brand as Person Brand Quality
Brand as Brand Identity/

Symbol Meaning
FIGURE 1 Brand Meaning and Brand Equity
awareness, brand loyalty, brand quality, and other brand loyalty and to brand equity. These joint con-
“brand assets,” ranging from protected trademarks nections are shown as shaded links in Figure 2 to il-
and proprietary technology to the strength of long- lustrate the complexity of the interrelationships.
term relationships with distribution partners (chan- Differentiating these abstract ideas too narrowly
nel presence). Professor Aaker also distinguishes four could reduce to a semantic muddle: is there really a
aspects of a brand’s identity or “brand meaning”: difference between “identity,” “meaning,” and “eq-
uity”? The answer is that, although some of these
• The “brand as a product” (attributes and benefits may be fine lines to draw, the higher-level ideas are
such as hard-disc memory, taste, or reliability); substantive and important for marketing strategists to
• The “brand as an organization” (ties to the iden- understand: consumers do hold in their minds differ-
tity and heritage of the parent organization); ent perceptions like awareness, beliefs about quality,
• The “brand as a person” (includes the brand per- feelings of attachment and loyalty, and diverse asso-
sonality, for example, “rugged,” and the brand- ciations ranging from “prestigious” and “traditional”
customer relationship, such as “friend”); and to “cool” or “stylish.” Those perceptions and predis-
• The “brand as a symbol” (brand meaning and positions are not only real, they are invaluable to the
the connection of that meaning to the cus- firm—they drive differences in responses to the mar-
tomer’s self-image; for example, youthful, keting mix, in purchase behaviors, and in margins.
prestigious, practical).
All these potential aspects of brand identity WHO OWNS THE BRAND?
may not be relevant to every brand. The roles of
brand identity and brand equity in driving desirable “Brand equity is the sum of all the hearts and
responses to the marketing mix, including especially minds of every single person that comes into
purchase behavior, are diagramed in Figure 1. contact with your company.”
These definitions and the graphic organization Christopher Betzter11
of these variables impose specific labels and roles on
things that, in reality, have overlapping and blurred Brands as products delivering functional and hedonic
meanings. For example, “the brand as product” in- (emotional) benefits are, in general, things that a mar-
cludes “product quality,” which also contributes to keter can influence, if not control. Brand “meanings,”
323
Brands and Branding
brands as “symbols,” and brands as means of self- veloping any creative advertising copy or clever spon-
expression all begin to suggest richer cultural roles for sorships for a brand, before hiring a spokesperson or
brands. In fact, brands may begin with producers and choosing a promotion, the strategic position that the
marketers, and brand managers may influence the brand intends to claim in the marketplace must be de-
brand’s meaning, but brands belong to the consumers termined, based on customer and competitive analyses,
who use them and who assign meaning to them. and should be recorded in a ‘positioning statement”.
Major brands, including Timberland boots, the A complete positioning statement usually specifies:
Cadillac Escalade, and Pabst Blue Ribbon beer have all the brand/product to be positioned, the market (the
taken on meanings and gained traction in segments “frame of reference”), the target segment(s) and target
the branding organization never imagined or targeted. needs (the “target”), at least one “point of difference”
Timberland’s CEO Jeffrey Swartz once acknowledged, or “brand promise,” and the “reason to believe” that
“Timberland is being adopted by a consumer that we supports those points of difference.13 A positioning
didn’t know existed relative to our target audience.”12 statement isn’t intended for customers to see—al-
He meant that Timberland had become a fashion though it may be distributed to vendors such as adver-
brand for many consumers as opposed to a functional tising agencies and to channel partners—it is intended
footwear product which it was intended to be. as an internal record of what the brand is meant to be.
Some brands have become the focal point of It serves to keep the various tactics “on strategy,” and it
“brand communities,” communities that deliver com- fosters institutional memory of what the brand is and,
plex personal, psychological, and social benefits to often just as importantly, what it is not. For example,
their members. Owning a Harley Davidson, for ex- many experts and firms use some version of a generic
ample, has utilitarian value (a Harley Davidson takes statement such as:
its owner from point A to point B), hedonic value
For (definition of target consumers/
(riding a Harley Davidson evokes feelings of joy and
segments), (Brand X) is (definition of
freedom), and self-expressive benefits (owning a
frame of reference and subjective category)
Harley Davidson may tell others the rider is a “rugged
which gives the most . . . (promise or con-
individualist”). Further, Harley Davidson riders are a
sumer benefit/point of difference) because
community of people who identify with the brand
only (Brand X) is reason to believe).14
and with each other and who take value from their
membership in that community. The brand has even Once the desired position has been determined
become so intertwined with some consumers’ self- and spelled out in a positioning statement, the mar-
concepts that they tattoo the brand logo on their keting strategist has a variety of tools to use in
bodies. These consumer-centered aspects of brand “claiming” and reinforcing the brand’s position. The
meanings are more difficult to manage; in a sense, product itself has an enormous impact on the brand
brands can take on “lives of their own” with con- in customer perceptions. Additionally, brand man-
sumers. Nevertheless, from a marketing strategist’s agers generally emphasize the promotion mix or “in-
perspective, there are marketing tools that influence tegrated marketing communications” to build and
consumers’ perceptions of brands, that connect hone brand image. Figure 2 organizes the many
brands to purchase and loyalty, and that build strong, controllable factors that can influence brand iden-
enduring brands. The next section clarifies the tools tity/meaning, brand equity, and brand strength:
the marketing organization and strategist can use to
build, shape, and profit from strong brands. • The Product Itself. There is no evidence as con-
vincing to the customer as their experience with
the brand itself. In order to be credible, the core
BUILDING BRANDS
product must live up to the brand promise.
The marketing strategist has numerous tools to build Hayes Roth, chief marketing officer at Landor
a brand—but building or maintaining a brand must Associates summarized this truth:“In the end, all
begin with a clear understanding of what the brand is of the fine promises and business and marketing
meant to be in consumer perceptions. That is, before de- acumen come down to one simple question:
324
Brands and Branding
Parent/Producer:
• History of Company
• Organization & People
• Founder & Spokespeople
Product /Design: • Country of Origin
Brand Heritage:
• Attributes & Performance
• History of Brand
(Function)
• Product Lines & Families
• Value (Price Quality)
• Dual-& Co-Branding
• Aesthetics (form) Brand Equity & • Founder & Spokespeople
Brand Identity:
• Brand as Organization;
• Brand as Product;
Promotion: • Brand as Person;
• Advertising • Brand as Symbol;
• Sales Distribution:
• Promotions • Retailers
• Sponsorships & Placement • Point-of-Purchase Displays
• Spokespeople/Endorsers • Service & Support
Social
SocialPhenomena:
Phenomena:
••Spokespeople
Spokespeople
••Consumers
Consumers
••Brand
BrandCommunities
Communities
FIGURE 2 Building Brand Identity and Brand Equity
Does my actual experience with the brand meet cause it has been argued that price promotions
or exceed my expectations?”15 Consequently, the may damage brand image and brand equity.
primary and essential element in brand building Brand building, positioning, and integrated
is the product itself, and the surest way to dilute marketing-communications strategies are in-
brand equity is for the product to fail to live up separable. For example, McDonald’s presents a
to the brand promise. “Design” encompasses consistent and focused message across all of its
both form and function—how the product integrated marketing communications that it
works (functional benefits), how it is experi- delivers consistency at a great value.
enced (i.e., aesthetically and emotionally via its • Parent/Producer Organization. Apple makes
look, feel, touch), and how the two work to- well-designed, user-friendly products with trendy
gether. The control wheel on Apple’s iPod is a cachet. Anheuser-Busch is the classic American
great example of the fusion of form and function brewer. BMW makes high-performance cars.
to create a unique consumer experience. Many companies have well-established repu-
• Promotion/Integrated Marketing Communica- tations tied to their histories and core compe-
tions. One of the overarching, organizing tencies. Those corporate reputations can be
principles of integrated marketing communica- advantages, or, in certain cases, they can also be
tions is that those communications should detriments for subordinate products and
contribute to building the brand and to claiming a brands. Table 2 presents various aspects of cor-
unique and valued place in consumers’ percep- porate image that can influence product brand
tions. The key to that investment is a unified images. The country of origin will also con-
voice; a consistent, compelling, and focused tribute to product brand equity and is an ele-
message repeated and reinforced at every point ment of parent organization reputation and
of contact. Within the promotion mix, price legacy; country of origin can be a positive influ-
promotions have been contrasted with “brand ence on the brand’s meaning, as in the case of
building” investments, such as advertising, be- Italian shoes or German cameras, but it can
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Brands and Branding
TABLE 2 Dimensions of Corporate • Distribution. An underappreciated element in

Image16 brand building and also a potential trap toward
brand destruction is the selection, affiliation
Common Product Attributes, Benefits, or with, and control of channel partners.
Attitudes Especially in instances of products requiring
knowledgeable sales support, products aug-
• Quality
mented by high-levels of service, and products
• Innovativeness
pursuing prestige positions in the marketplace,
People and Relationships channel partners can be a powerful means for
• Customer Orientation building and reinforcing the brands promise.
Stihl, the premium chain saw brand has always
Values and Programs insisted that its channel partners provide signif-
• Concern with the Environment icant after sale service and support. Conversely,
• Social Responsibility partnering with the wrong channel partners
can be harmful to the brand and the business.
Corporate Credibility
Snapper, the manufacturer of premium lawn
• Expertise equipment, made the extraordinary decision to
• Trustworthiness stop selling through Wal-Mart in 2002 just as
• Likability Wal-Mart was offering to expand its outdoor
power-equipment category around Snapper
lawnmowers. Snapper CEO Jim Wear said:
also be a detriment, as has become the case for
American automakers. “We’re not obsessed with volume.
• Brand Heritage. Many brands build on strong We’re obsessed with having differ-
brand heritages—they have a history of sus- entiated, high-end, quality prod-
tained and consistent presence in the market. ucts . . . If a brand is going to stand
That heritage was perhaps best illustrated in the for being high end, with special fea-
case of New Coke and Coca-Cola; although con- tures, catering to a particular kind
sumers supposedly preferred the taste of Pepsi to of customer, that wasn’t compatible
(old) Coke, the heritage of the brand and its as- with selling though Wal-Mart.”17
similation into American culture had secured a
place in the hearts of consumers. Coca-Cola was
• Social Phenomena. Other consumers of the
brand, the brand in popular art, and affiliated
deeply ingrained in American culture. Coke had
spokespeople all influence brand meaning and
appeared in popular media from Andy Warhol
brand associations. For example, despite the fact
lithographs to Bob Dylan songs, and when
that Cadillac’s traditional target markets are older
Coca-Cola tried to adjust the taste it found out
and suburban and that the company’s cars are
quickly that customers wanted their familiar
perceived as “your grandfather’s car,”18 the
Coke. In fact, the Coke consumers rose up in
brand’s SUV Escalade has become popular with
disgust and bombarded Coke’s head office in
highly-successful athletes and celebrities, and that
Atlanta with their complaints about the change
has fed broader popularity with young, urban
in the product. Clearly, some brands have
consumers. The Escalade brand manager con-
heritages that have integrated them into the
ceded: “It has been the vehicle of choice among
common vernacular, and others have shorter
some Hollywood folks and athletes, even though
histories that, nevertheless, carry over into every
we’ve never particularly marketed it that way.”’19
new endeavor. Apple’s relatively brief but focused
and consistent record of offering convenient, The marketing strategist has numerous tools to
reliable, and trend-setting devices imparts new utilize in building a brand. These elements cannot be
offerings with that heritage identity. treated as disconnected or be managed separately.
326
Brands and Branding
Disney CEO Michael Eisner summed it up: “A brand is Consumer-Level Brand Meaning, Brand
a living entity—and it is enriched or undermined cu- Equity, and Brand Strength
mulatively over time, the product of a thousand small
Brand equity is complex—it includes basic brand
gestures.”20 Consumers’ impressions of the brand are
awareness but also brand associations and the mean-
inclusive and cumulative; building a strong brand re-
ings that a brand holds in consumers’ minds, and it
quires consistency and long-term commitment across
includes consumers’ loyalty to the brand and their
the big campaigns and all the small details.
perceptions of the brands quality or objective at-
tributes. There are various measurement approaches
that gauge these different and disparate aspects of
MEASURING BRANDS brand equity. As each brand is unique and as not all
Like most things in strategic marketing planning, aspects of brand equity are relevant to every brand,
brands can be and should be measured and moni- the measurement of brand equity should be tailored
tored rigorously. Measuring brands can be ap- to the individual brand. Nevertheless, there are some
proached in at least two basic ways: well-accepted measures of various aspects of brand
equity. Things like awareness, quality, and loyalty are
• Consumer-level brand meaning, brand equity,
basic concepts in marketing research—for example,
and brand strength; and,
brand awareness is often measured as “unaided recall”
• Firm- or brand-level value.
and “aided recall,” that is, the proportion of consumers
Consumer-level brand meaning and brand equity who mention the brand without being prompted and
focus on the beliefs, attitudes, and behavioral ten- those who recognize it when prompted. Quality is a
dencies that exist in consumers’ minds. Firm- or belief system related to product-category-specific at-
brand-level value deals with the financial impacts of tributes and performance: How reliable is Brand X?
the brand on the financial performance and the How well does Brand Y remove dirt? Employees at Brand
value of the firm. Z are polite.21
TABLE 3 Brand Personality22
Factors Facets Traits*

Sincerity Down-to-earth Down-to-earth; Family-oriented; Small-town
Honest Honest, Sincere, Real
Wholesome Wholesome, Original
Cheerful Cheerful, Sentimental, Friendly
Excitement Daring Daring, Trendy, Exciting
Spirited Spirited, Cool, Young
Imaginative Imaginative, Unique
Up-to-date Up-to-date, Independent, Contemporary
Competence Reliable Reliable, Hard-working, Secure
Intelligent Intelligent, Technical, Corporate
Successful Successful, Leader, Confident
Sophistication Upper class Upper-class, Glamorous, Good looking
Charming Charming, Feminine, Smooth
Ruggedness Outdoorsy Outdoorsy, Masculine, Western
Tough Tough, Rugged
*The Brand Personality Scale consists of these 42 “traits” rated as to “How well does this describe [Brand]; traits can then be summed to
facets and factors.
327
Brands and Branding
Millward Brown (understanding the brand’s attributes and benefits),

Brand Dynamics “advantage” (preference), and “bonding” (loyalty),
Pyramid
and awards one “score” per level of the relationship.
Bonding
Advantages of hierarchical models of brand
strength, such as Millward Brown’s BrandDynamics,®
Advantage include their capacities to compare competitive brands
Performance
and to assess the results of specific marketing programs
and investments. For example, if a firm determined
Relevance that it needed to increase awareness and, therefore, un-
Presence
dertook a mass advertising campaign—a promotion-
mix emphasis well-suited to increasing awareness (but
less adept at converting interest to purchase) and loy-
FIGURE 3 Millward Brown’s BrandDynamics® Model
alty—the “before” and “after” assessment of brand
strength would capture their success (Figure 4). In this
fictitious example, bonding and advantage are largely
Well-established measures are available for unaffected by the campaign, relevance and especially
brand meaning, especially for “brand personality.” presence are dramatically improved.
Jennifer Aaker’s Brand Personality Scale (Table 3) il-
luminates the measurement of brand meaning and
Brand Valuation23
highlights the breadth of human-like qualities a brand
can hold. The five factors—sincerity, excitement, com- Brand strength is important for building brands, and
petence, sophistication, and ruggedness—are the measures of brand strength are indispensable in com-
highest-level structure. Facets and traits expand paring competitive brands and in evaluating specific
those factors into greater detail. While any brand can marketing investments, but there is another perspec-
be described on these traits, not all these traits are tive on measuring brands that approaches the issue
relevant to every brand. from a very different angle: What is a brand worth taken
Brand strength is a reduction of brand equity as a whole? What does a brand contribute to the firm’s fi-
to the basic drivers of customer behavior. It is usually nancial value? This is referred to as “brand valuation.”
modeled using a hierarchy of effects similar to those Of course, what a brand is worth to the firm is, in real-
used in advertising to set objectives and track cus- ity and as a marketing strategist would recognize, the
tomers from unaware through awareness and knowl- sum total of all the consumer perceptions—all that
edge to interest, preferences, and eventually trial and brand strength manifest in thousands, even millions, of
loyalty. One of the best-known commercial gauges of consumer behaviors. That is, although it is a different
brand strength is Millward Brown’s BrandDynamics® measurement approach, the brand is valuable to the
model (Figure 3), which encompasses “presence” firm because it can be expected to generate sales and
(awareness), “relevance” (interest), “performance” command margin in the future, and those sales and
10% 11% +1%
25% 27% +2%
40% 43% +3%
55% 65% +10%
60% 80% +12%
Before Campaign After Campaign
FIGURE 4 Hypothetical Effect of a Communications Investment on BrandDynamics®
328
Brands and Branding
margins are the product of cumulative individual-level sales stream are due to the specific brands (many com-
feelings about the brand. panies own multiple brands, so brand revenues are
The strongest global brands are worth billions parceled out from total revenues), and then attempts to
of dollars each to their parent corporations; Business identify how much of those earnings are attributable to
Week and the global brand consultancy Interbrand, the brand. To accomplish this, variable costs and capi-
for example, value the Coca-Cola/Coke brand at tal investments in the brand are differentiated from
more than $66 billion.24 Brand valuation can be ap- revenues due to the intangible assets, including the
proached in many ways, and several consulting and brand. Finally, earnings due to parent activity and the
advertising agencies generate slightly different but like are also removed from the calculation. Then,
very similar annual rankings.25 They all attempt to Interbrand calculates the present value of those rev-
gauge the aggregate, discounted financial value of the enues, discounting out the time value of money and
brand to the corporation.26 That is, these methods risks to the brand.27 Distinguishing future revenues at-
view the brand as a source of revenue spread out tributable to the brand from those resulting from pro-
across time—and they estimate what future flows of prietary technology and other tangible and intangible
revenue are worth in current terms. assets is inherently subjective, but in any case these
The Business Week/Interbrand rankings calcu- brand valuation efforts tend to triangulate on which
late how much of the firm’s market capitalization and brands are the most valuable, and these efforts empha-
size another approach to understanding how impor-
tant brands are to firm success and wealth creation.
Summary
Brands have benefits for both branding organizations and the value of the brand—the most prominent are encom-
customers. They serve as commercial identities that retain passed in the marketing mix of product, promotion, price,
the value of marketing investments across time; brands and place—and there are social and cultural roles of
that deliver satisfactory experiences are rewarded and brands that are somewhat beyond the control of the parent
those that disappoint are avoided. Brand value can be a organization. In general, brands are derived from decisions
substantial asset to companies and brand meaning can about positioning—brands are the “place holders” that
deliver real benefits to consumers beyond core product embody the position the strategy targets in the market—
attributes or performance. There are a variety of tools and brands are shaped by and should direct all of the tacti-
available to the marketing strategist to shape and maintain cal elements of the marketing mix.
Aaker, David. Building Strong Brands. New York: Free Press, Keller, Kevin Lane. Strategic Brand Management, 3rd ed.
1996. Upper Saddle River, NJ: Pearson/Prentice Hall, 2008.
David Aaker. Managing Brand Equity. New York: Free Tybout Alice M., and Brian Sternthal. “Brand Positioning.’
Press, 1991. In Kellogg on Branding, edited by Alice M. Tybout and
Kapferer, Jean-Noel. The New Strategic Brand Management, Tim Calkins, 11–26. Hoboken, New Jersey: John Wiley
4th ed., Philadelphia, PA: Kogan Page, 2008. & Sons, 2005.
Endnotes
1. www.brandchannel.com/papers_review.asp?sp_id= layouts/Dictionary. zaspx?dLetter=B. Last accessed
357. Last accessed on July 11, 2010 June 19, 2009.
2. From the American Marketing Association’s online 3. The Economist, “Warfare in the aisles,” 375, no. 8420
dictionary found at www.marketingpower.com/_ (April 2, 2005; Special Section): 6–8.
329
Brands and Branding
4. In the United States, the Lanham Act defines pro- 20. Interbrand, The Brand Glossary (Hampshire UK:
tectable marks as “any word, name, symbol, or device, Palgrave Macmillan, 2007).
or any combination thereof ” (15 USC §§ 1114-27). 21. The final example item is from a specific measure,
The World Trade Organization’s Agreement on the “ServQual,” which measures service quality
Trade-Related Aspects of Intellectual Property Rights, along five dimensions: reliability, assurance, tangi-
defines a trademark as encompassing “any sign . . . bles, empathy, and responsiveness. See A.
capable of distinguishing the goods or services of Parasuraman, Leonard L. Berry, and Valarie A.
one undertaking from those of other undertakings.” Zeithaml, “A Conceptual Model of Service Quality
5. See, for example, Samuels, Jeffrey M. and Samuels, and Its Implications for Future Research,” Journal of
Linda B. “Color Trademarks: Protection Under U.S. Marketing 49, no. 4 (1985): 41–50; A. Parasuraman,
Law,” Journal of Public Policy and Marketing 15, no. 2 Leonard L. Berry, and Valarie A. Zeithaml,
(Fall 1996): 305–07. “SERVQUAL: A Multiple-Item Scale For Measuring
6. U.S. Trademark Registration No. 0523616 Consumer Perceptions of Service Quality,” Journal
7. See, for example, Ralph S. Brown Jr., “Advertising of Retailing 64, no. 1 (1988): 12–40; for a review, see
and the Public Interest: Legal Protection of Trade Francis Buttle, “SERVQUAL: Review, Critique,
Symbols,” 57 Yale Law Journal 1165, 1167 (1948), Research Agenda,” European Journal of Marketing
reprinted in 108 Yale Law Journal 1619, 1621 (1999). 30, no. 1 (1996): 8–31.
8. Adapted from David Aaker, , Building Strong Brands 22. Jennifer L. Aaker, “Dimensions of Brand
(New York: Free Press, 1996); David Aaker, Managing Personality,” Journal of Marketing Research 34, no. 3
Brand Equity (New York: Free Press, 1991), p. 9. (August 1997): 347–356, especially Figure 1, page
9. Al Ries and Laura Ries, The 22 Immutable Laws of 352 and Appendix A, page 354.
Branding (London: Harper Business, 1999) 172. 23. See Kusum L. Ailawadi, Scott A. Neslin, Donald R.
10. Aaker, Building Strong Brands; Aaker, Managing Lehmann, “Revenue Premium as An Outcome
Brand Equity. Measure of Brand Equity,” Journal of Marketing 67
11. Dick Martin, Rebuilding Brand America (New York: (2003): 1–17; V. Srinivasan, Chan Su Park, and Dae
AMACOM Books, 2007), 95 Ryun Chang, “An Approach to the Measurement,
12. Michel Marriott, “Out of the Woods,” New York Analysis, and Prediction of Brand Equity and Its
Times, November 7, 1993, Section 9, page 1. Sources,” Management Science. 51, no. 9 (September
13. See Alice M. Tybout and Brian Sternthal, “Brand 2005), 1433–1448.
Positioning,’ in Kellogg on Branding, ed. Alice M. 24. Burt Helm, Best Global Brands BusinessWeek,
Tybout and Tim Calkins (Hoboken, New Jersey: (September 18, 2008) www.businessweek.com/mag-
John Wiley & Sons, 2005), 11–26. azine/content/08_39/b4101052097769.htm. Last ac-
14. J-N. Kapferer, The New Strategic Brand cessed on July 11, 2010
Management, 4th ed. (Philadelphia, PA: Kogan Page, 25. Compare the data in Table V-11-4 with rankings by
2008), 178; and Tybout, and Sternthal, “Brand Young & Rubicam’s Landor
Positioning,” see p. 12–13. 26. Technical valuations, such as those used for balance
15. Peter Walshe, “Ten-year trends: Rise of Machines sheet reporting, litigation, and tax planning categorize
and Mobile Technology,” The Financial Times “brand value” as falling into the accounting category
(April 2008) of “unrecorded, intangible assets.” These issues are
16. Kevin Lane Keller, Strategic Brand Management, 2nd largely beyond the scope of this book, and there is
ed. (,Upper Saddle River, NJ: Prentice-Hall, 2003), little agreement on the correct or generally-accepted
545. way to do this. For more information see Mary E.
17. Charles Fishman, The Wal-Mart Effect (New York: Barth, Michael B. Clement, George Fosthr, and
Penguin Press, 2006) 119–120 Ron Kasznik. “Brand Values and Capital Market
18. David Menzies, “It Don’t Mean a Thing If It Ain’t Valuation.” Review of Accounting Studies 3, no. 1/2
Got That Bling,” National Post, October 24, 2003 (1998): 41–68.
(Toronto). 27. www.businessweek.com/magazine/content/08_39/
19. Robert Strauss, “MARKETING; Appealing to Youth, b4101056103890.htm?chan=magazine+channel_sp
Selling to the Not-So-Young,” New York Times, ecial+report. Last accessed on July 11, 2010.
October 22, 2003, Section G, page 37.
330
Products—New Product
Development
New products—usually understood as products that are for less than five years on the
markets—make up an increasingly large share of sales across companies and industries.
In many leading firms, new products contribute more than 50 percent of overall sales
volume.1 New product development, however, is a risky process. Studies show that for
every seven new product ideas, on average of not more than four enter the development
stage, one-and-a-half are launched and only one succeeds. Others speak of a failure rate
up to 45 percent or 55 percent.2
However, only 10 percent of all new products are truly innovative.3 Most new
products that are called an innovation are, in point of fact, merely line extensions, con-
tinuous improvements, or revisions of existing products. A study by the PDMA
(Product Development Management Association) has shown that of all new products,
4 percent are repositionings, 9 percent are cost reductions for the firm through new
production processes but not new product developments in the sense of new product
features, new design or the like, 20 percent are new product lines (i.e., new to the firm
but not new to the market), 23 percent are product improvements, and 34 percent are
additions or subsets of existing product lines.4 Just 10 percent are “new to the world.”
As product lifecycles become shorter and rivals are increasingly faster to copy new
products, time to market becomes crucial. This implies that companies do have less time for
extensive market research, or concept testing. Striving for higher customer value often means
higher development and production costs. And if a company wants to keep development
costs down, it has less time and resources to design new products in a way that they can be
produced at low costs. The majority of large companies have introduced systematic processes
for new product development; about 60 percent use a systematic blueprint or roadmap for
moving a new product project through the various stages of new product development.5
Through systematic new product development processes, companies want to achieve that
• There is a steady stream of new and promising ideas into the pipeline of the
product development process
• These ideas are screened for customer benefit, feasibility, and market potential
systematically and early enough (before resource are committed to poor ideas)
• The product concept is market oriented and has a unique selling proposition
• The selling price, production costs, and market demand are such that the product
can be sold at a profit
• The concept is extensively tested before market introduction to make sure that it
is accepted by the customers and that the marketing plan works.
331
Products—New Product Development
THE NEW PRODUCT DEVELOPMENT analysis, prototype and market testing, and prod-
PROCESS uct launch. Each has some important tasks to ful-
fill and is characterized by important challenges
A systematic product development process con- (see Table 1).
sists of several phases: idea generation, idea selec-
tion, concept development and testing, business
TABLE 1 Phases in the New Product Development Process
Phase Task Challenge

1. Idea This phase aims at collecting • Generate as many good ideas as possible
generation as many promising ideas for
a new product or service as
• Unleash creativity
possible. The starting point • Use all internal and external sources for new product
ideas (customers, suppliers, distributors, technology, R&D,
is unsolved customer needs.
marketing)
2. Idea selection In the idea selection phase, Identify ideas
ideas are eliminated that do • That create customer value (address a real unsolved need)
not deserve additional
resources and attention and
• For which a substantial market exists (size and growth of
the market)
the most promising ideas
are selected for the next • That can be profitably produced and marketed (competi-
tive situation)
phases of the development
process • That fit the vision and strategy of the firm
3. Concept Develop the marketing and Specify
development engineering details • The target market and product positioning
and testing
• Product attributes
• Unique selling proposition
• Prove feasibility
• Estimate production and marketing costs
• Test product idea with customers, distributors, experts, etc.
4. Business Create a business plan, Determine
analysis estimate resources needed, • Selling price
and profitability
• Costs
• Sales volume
• Breakeven and profitability
5. Prototype Develop a physical Get feedback
and market prototype and test it in a • On market acceptance
testing typical usage situation
• For necessary adjustments
• On marketing concept in a test market
To refine
• Product and
• Marketing campaign
6. Product Launch product and Executive marketing campaign, react flexibly to competitor
launch marketing campaign moves, changing market conditions and needs
332
Idea Generation Salomon became a leading producer of skis

and all other ski manufacturers had to switch
The so called “fuzzy front end” of innovation (all
to the new technology. Salomon was able to
activities from the search of new opportunities
discover and satisfy a not yet fulfilled basic
until the development of a product concept) usu-
requirement.
ally is not very capital intensive, but it can consume
up to 50 percent of the development time. In this
• Excitement factors (delighters) are the factors
that increase customer satisfaction if deliv-
phase, ideas are developed and it is decided whether
ered but do not cause dissatisfaction if they
or not further resources are invested in the further
are not delivered. Excitement factors are not
development of this idea.6 Therefore, it can be very
expected, they surprise the customer and gen-
crucial for the success of the entire process. Ideas
erate “delight.” Delighters typically are latent,
for new products can come from many sources in-
not articulated customer needs and add value
side or outside the company, from engineers, suppli-
to the core product. In the car industry, de-
ers, scientists, distributors, or customers. Companies
lighters play an important role to differentiate
use creativity-generating techniques with internal
the product. GPS, head up displays, infotain-
and external groups and focus groups, conduct in-
ment systems, etc., are features that fall into
depth interviews with customers, analyze customers’
this category.
problems and complaints, use surveys, observe on-
line communities and brand communities or inte-
• Performance factors (the more the better) lead
to satisfaction if performance is high and to
grate lead users (highly innovative customers that
dissatisfaction if performance is low. In this
have their own ideas for new products), and observe
case, the performance–overall-satisfaction re-
competitors to get ideas for new products.
lationship is linear and symmetric. These at-
A logical starting point for the idea generation
tributes usually are explicitly expected. Gas
phase are unsolved customer needs. In this context,
mileage of a car, battery life of a laptop, and the
the Kano-model of customer satisfaction can help to
weight of a mountain bike are examples of per-
identify promising ideas (Figure 1). It distinguishes
formance factors.
three types of product attributes:
• Basic factors (must haves) are minimum re- For product development, the following im-
quirements. The fulfillment of basic require- plications emerge from Kano’s model: Basic factors
ments is a necessity, but an insufficient con- establish a market entry “threshold.” If they are de-
dition for customer satisfaction. Basic factors livered at a satisfactory level, an increase in per-
are entirely expected. The customer regards formance does not lead to an increase in customer
them as prerequisites; they are taken for satisfaction. Typically, performance factors are di-
granted. If basic factors are already fulfilled, rectly connected to customers’ explicit needs and
an increase of their performance usually does desires. They are typically clearly stated and articu-
not increase the customer benefit. If however, lated by the customer. Therefore, a company should
basic factors are not yet fulfilled, this offers be competitive with regard to performance factors.
great opportunities for a product innovation. Excitement factors are unexpected and surprise the
When the French ski producer Salomon en- customer. As they generate “delight”, a company
tered the ski industry in the 1990s, it discov- should try to stand out from the rest with regard to
ered that a basic need of the skiers was not these attributes.7 It is important to emphasize the
fulfilled. Most skiers had difficulties to ski dynamic nature of these product requirements.
well on hard and icy slopes. The edge grip of What delights customers today, become explicit ex-
the ski was a basic factor. Salomon invented a pectations after some time, and eventually turn into
new technology, the monocoque ski with basic factors. Wireless LAN and free Internet in ho-
dramatically improved edge grip, and had a tels is a good example. When the first hotels intro-
tremendous success. Within a short time, duced it, it delighted customers. It soon became an
333
Satisfaction,
Delight
Delighters
Performance
Factors
Low Attribute High Attribute

Performance Performance
Time
Must Haves
Dissatisfaction
FIGURE 1 The Kano Model8
explicit expectation and many hotel guests consider Concept Development and Testing
it as a basic feature today.
For the remaining ideas, product concepts are devel-
oped and preliminarily tested. The target market has
Idea Selection
to be clearly defined; product attributes must be
The challenge in the second phase of the new product specified to achieve a unique selling proposition,
development process is to select those ideas that are technical and economic feasibility must be proved,
promising enough to be pursued and to eliminate and the prototype should be tested with customers.
those that do not deserve additional resource com- In this phase, trade-offs among needs and features
mitment. This is a critical task, because, if not done have to be made. Usually not all needs can be ad-
carefully, good ideas might be killed or poor ideas dressed economically, and sometimes needs contra-
might enter the next phase—concept development— dict each other (e.g. weight and battery life of a lap-
and waste resources. Therefore, a systematic approach top). An important principle in this phase is: Every
to a preliminary assessment of an idea’s potential is product feature causes costs, but not every product
advisable. Many companies use an idea rating matrix feature generates value to the customer. Hence, a
as shown in Table 2. Success criteria are defined, careful examination of the cost–utility relationship
weighted, and each idea is evaluated. A weighted score of the single features is important. Conjoint-analysis
is computed and a minimum threshold is defined is a widely used tool in this phase. It helps to measure
(e.g., a weighted score above 6) that must be met to the utility a customer attaches to varying levels of
enter the next phase of product development. product attributes.
334
TABLE 2 Idea Rating Scheme
Score (0–10)
Success Criteria Weight Idea 1 Idea 2 Idea 3 Idea 4 ...
Superior customer benefit 0, 4 4 7 2 8 ...
Potential market size 0, 3 5 4 5 5 ...
Competitive situation 0, 1 8 3 4 6 ...
Fit vision and strategy 0, 2 2 6 3 7 ...
Weighted 4, 3 5, 5 3, 3 6, 7 ...
Score
More and more companies use the Internet buy an innovation. Early adopters accept new ideas
and virtual reality to test concepts. When Audi devel- early, but are more careful and also frequently are
oped a new infotainment system, it decided to inte- opinion leaders. And the mass market often reacts
grate customers into the development process.9 It with an enormous time lag to innovations. Therefore,
devised a virtual lab as a web-based platform in quantitative and representative market research stud-
order to generate ideas, configure a product, and test ies cannot really help in the innovation process. On
its acceptance. It attached importance to addressing the contrary, if one tries to interview a representative
customer groups with different levels of innovative cross section of customers about their desires or tries
ability. Lead users were to provide inspiration for fu- to test the potential of an innovation on them, the re-
ture infotainment systems, early adopters were to sults can be misleading.10 Products such as the Sony
configure aspects of functionality using a virtual Walkman, the SMS (Short Message Service), or the
prototype, such as navigation, telematics and voice Blackberry would never have come to market as the
control, and heavy users in the low-end segment market-research studies showed that these products
were to provide input as to the weaknesses of the ex- had no potential.
isting system. These different customer groups were
found on various portals (e.g., www.autobild.de, Prototype and Market Testing
www.tt-owners-club.de, www.automotor-und-sport.
For those products that prove to be promising after a
de). The results were impressive: The lead users pro-
thorough business analysis, a physical prototype is
vided visions about the infotainment of the future,
developed and tested in the typical usage situation.
the early adopters provided input about configura-
Before the product is introduced, customer feedback
tion of it, and the heavy users provided clues as to its
is sought to make final adjustments of the product
acceptance in the mass market.
and marketing plan. This can be done by bringing
customers into laboratories where they test a proto-
Business Analysis
type. Philips, for example, has such a laboratory in
For product ideas that “survive” the concept and Klagenfurt, Austria. They have a panel of women
testing phase, a detailed business analysis must be who are invited every time they have developed a
carried out. The exact price must be determined, the new prototype of epilators. In the laboratory the
sales volume as well as costs and profits have to be women test the prototype and give feedback about
estimated. A particular challenge in this phase is the the functionality, handling, etc. Other companies
estimation of demand. Not all customers react to in- give the prototype to customers to test it at home.
novation with the same speed; some need years until Often, test markets are used. These are representative
they take an interest in it. Innovators are adventur- cities or regions where the product is introduced
ous and prepared to take risks, they are the first to accompanied with all marketing activities that
335
are planned for this product. This way trials, repeat RESEARCH VERSUS DEVELOPMENT
purchases, purchase frequency, etc., can be tested.
The two words, “research” and “development” are al-
most always used together in the everyday business
Product Launch lexicon to refer to a single undifferentiated set of
The product launch phase usually is the most costly activities—in fact, they’re regularly shortened to
phase. Advertising, promotion, and other communi- “R&D” with little thought about why there are two
cations of a major new consumer packaged good can parts to the description—but “research” and “devel-
cost up to $100 million in the first year; marketing ex- opment” can be distinguished, and the difference can
penditures of new food products represent up to have significant strategic implications. Research
roughly 60 percent of the first year’s sales volume.11 refers to more basic explorations while “develop-
Of particular importance in the product launch deci- ment” refers to more applied and incremental and
sion is timing. As a first entrant, a company can bene- tactical new product development and “design.”12
fit from the first-mover advantages (e.g., acquiring Research and development range from basic “re-
the most attractive customer segments, locking up search” that involves explorations of fundamental
key distributors and suppliers, gain market share, and ideas and that advances in theory to applied “devel-
benefit from scale economies). As a follower, one can opment” that takes known technologies and applies
learn from competitor’s mistakes and free ride. them to specific problems or product applications, as
Another critical question is internal cannibalization. shown in Figure 2. Basic research is often con-
When a new generation of products is introduced, ducted at universities or in very specialized laborato-
they can replace the old products. If the new product ries. Applied research is usually done by corporate
only substitutes for the old product and does not in- departments or teams and even by managers and
crease sales or generate marginal profits, then the entrepreneurs in commercial settings.
company is no better off; this is called “cannibaliza- This distinction between theoretical research
tion.” New product launches often involve some de- and applied and incremental development has
gree of cannibalization with the critical question strategic implications. Different mixtures or “R&D
being whether or not that cannibalization is strategi- orientations” are appropriate for different strategies
cally justified by marginal (i.e., new) sales and profits. and are more effective or less effective depending on
GM’s 2009 Chevrolet Traverse crossover, for instance, the product’s stage in the product life cycle. Most
not only competes with other larger crossovers such as new industries emerge from breakthroughs gleaned
the Mazda CX-9, Ford Flex, and Toyota Highlander. from basic research. If a firm wants to be a “pioneer”
Under the skin, the seven-passenger crossover wagon or “first mover” it must invest in basic research to en-
Traverse is nearly identical to GM’s Saturn Outlook sure that, if it isn’t the one to develop the basic tech-
and other GM vehicles and is expected to cannibalize nology, it isn’t far behind. “Fast followers” and “late
sales and marketing budgets from these cars that are movers” let others do the basic research; they focus
made on the same platform. on adapting and improving those breakthroughs,
Earlier, Table 1 summarized the phases of a and on taking advantage of earlier entrants’ mistakes
new product development process, with the challenges and learning. More mature markets generally compete
that have to be addressed in each single one. The indi-
vidual steps in this process may be reiterated as
needed. If, for example, the physical prototype turns Incremental and Applied
out to be technically unfeasible or is not accepted by Basic and Theoretical
the customers, a new concept needs to be developed. Research Development
Also, some steps might be eliminated to reduce time.
Some companies try to reduce time to market by over-
lapping several activities of the process and complet- FIGURE 2 Research versus Development
ing them at the same time (concurrent engineering). as a Continuum
336
by incremental improvements and product aug- and/or servicescape, the product’s func-
mentations anchored in development or design. tion, i.e., its capabilities, and the integra-
Nevertheless, firms in mature industries may invest in tive properties of the combination of both
basic research to “shift the product life cycle curve,” to form and function.”15
extend the product lifecycle, or to “change the game”
by forging new markets or “blue oceans.” The most Thus, design or “product design” as a process is
important aspect of integrating this continuum from a broad, holistic, and integrative set of activities link-
basic theoretical research to applied incremental de- ing the new product development process to the cus-
velopment is to have an understanding of exactly tomers and to the firm’s strategy from the onset. The
what the investments are meant to contribute to the outcome, or product, of design may be a tangible
strategy and to then shape the activities to conform to good and/or service or the combination of goods
that purpose. Firms that need product modifications and services, and the design elements include its
but that invest in abstract experiments or, conversely, form, its function, and the vital interactive effect of
that need the “next big idea” but that study mundane both. These elements include, among other things,
and well-known technologies are likely to fail. usability, ergonomics and haptics, form and aesthet-
ics, packaging, materials, and other elements of sus-
DESIGN tainability as well as core technology and functional-
ity. Because customers engage with the whole
In the past, “design” meant different things to dif- product, not its parts, the holistic perspective on de-
ferent people (it often meant different things to sign is invaluable to enhancing the customer’s expe-
different people in the same firm): industrial de- rience and to creating customer value. This under-
signers typically focused on the “form” in the standing of the product design process, therefore, is
form-versus-function distinction,13 whereas engi- broader than mere new product development as it
neering designers focused on function and the has traditionally been understood; it extends back-
practical issues such as “design for manufacturabil- wards into strategy formation and forward into mar-
ity.”14 The newer, integrated view looks at both and, keting research and methods for understanding how
importantly, does so from a customers’ point of customers use and take value from the product and
view while also taking into account the firm’s strat- even how customers dispose of the product.
egy and other considerations. That is, the term “de- Apple’s iPod is a great example of the more in-
sign” has been broadened to recognize the essential tegrative and more comprehensive design orienta-
process of integrating both nonfunctional or aes- tion leading to great strategic success. Apple took
thetic elements of the product (i.e., the form) with existing technology and, rather than maximize func-
the functional elements to create enhanced cus- tionality and then fitting it into a form (the tradi-
tomer experiences and customer value. Professors tional, form-follows-function approach), Apple took
Michael Luchs and Scott Swan have offered a new, into account the entire product from a consumers’
more holistic and relevant definition of design point of view. The result was a simplified set of fea-
(based on an extensive review of how the process tures, an intuitive interface, a form that conveyed the
has been defined in the literature): simplicity and elegance of the underlying technol-
“Product design refers to both a process, ogy, a highly functional accompanying Web site, and
integral to the definition and realization of a “cool” aesthetic that improved the business model
a firm’s strategy, and the outcome of the for Apple and increased value to consumers. While
process; where the process includes analy- none of the underlying elements were groundbreak-
sis of the internal and external context, ing on their own, providing all of them in an inte-
strategy development, and the definition grated experience set Apple apart, and has opened
and realization of the finished product; doors to subsequent products that exhibit a similar
and the “product” refers to the product’s design philosophy (the iPhone and iPad). The iPod
form, i.e., its physical manifestation wasn’t an isolated tactical or product decision, but a
337
superbly conceived design strategy consistent with

and adding to the Apple brand.
Outputs (R&D Breakthroughs)

DIMINISHING MARGINAL RETURNS
IN R&D
Research and development efforts, like a lot of invest-
ments, conform to the law of diminishing marginal
returns, which holds that “As successive equal in-
creases in a variable factor of production, such as
labor, are added to other fixed factors of production,
such as capital, there will be a point beyond which the Inputs (R&D Investments and Effort)
extra, or marginal, product that can be attributed to
each additional unit of the variable factor or produc- FIGURE 3 Diminishing Returns on R&D Investments
tion will decline.”16 That is, there is a range of inputs
to R&D that achieve a certain level of outputs, and
then the output from each marginal input begins to marginal returns. In the strategic management of re-
diminish. In practice, there is often a converse rela- search and development, this means that if the firm
tionship, too—some minimal investment is required can’t afford the minimum threshold amount to do
to get any benefits. To even begin doing research in R&D well, it should not do it at all. It also means that
areas like genetic therapy or nuclear power generation, some “breakthroughs” will be achieved more easily
investments below that threshold will likely be ineffec- than others and that a strategy that is grounded on
tive or wasted entirely. These realities produce an s- breakthrough research and development may have its
shaped relationship between inputs and outputs limits. At some point, the next breakthrough will be
(shown in Figure 3 with the inputs along the hori- much more expensive to achieve than the earlier
zontal and outputs on the vertical axis). As shown, as breakthroughs—if it is achievable at all. This problem
inputs initially increase, the outputs produced are low; of diminishing returns on R&D investments is exacer-
but once some threshold is reached, outputs rise dra- bated by the reality that early breakthroughs are more
matically across a range of inputs. Then a second in- likely to meet pent-up customer demand but later, in-
flection point is reached and marginal returns dimin- cremental advances don’t enjoy that eager customer
ish in accordance with the law of diminishing reception because the basic need has already been met.
Summary
Thus, the new product development process has tradition- R&D emphasis have important implications for marketing
ally been organized into several phases: idea generation, strategy and the success of the firm. New product develop-
idea selection, concept development and testing, business ment and research and development have traditionally
analysis, prototype and market testing, and product been set aside as a distinct functional area within the firm
launch. Each of these phases or steps has an important role but a more integrative and broader view of product devel-
in delivering successful new products to market that are opment has emerged under the rubric of “product design”
consistent with the firm’s strategy and with customers’ that promises to integrate new product development into
needs. “Research and development” intended to create new every step of strategy formation, from situation assessment
products is often reduced to a simple, undifferentiated idea to market research and operations. This note has reviewed
within the organization, but a continuum can be drawn the traditional new product design process and briefly out-
between basic theoretical research and applied develop- lined some of the challenging ideas involved in a design-
ment, and different orientations along that continuum are oriented strategic focus.
appropriate and effective for different strategies; choices of
338
Bailom, Franz, Kurt Matzler, and Dieter Tschemernjak. swan.pdf. Product Design since Bloch: Analysis of 14
Enduring success. What top-companies do differently. Years of Research and the Emergence of Product Design
New York: Palgrave Macmillan, 2007. as a Field of Marketing Inquiry,” Journal of Product
Füller, Johann and Kurt Matzler. “Virtual Product Innovation Management (1995).
Experience and Customer Participation—A chance for Matzler, Kurt and Hans H. Hinterhuber. “How to Make
customer-centred, really new products.” Technovation, Product Development Projects More Successful by
27 (2007): 378–87. Integrating Kano’s Model of Customer Satisfaction into
Kano, Noriaki. “Attractive Quality and Must Be Quality.” Quality Function Deployment.” Technovation 18, no. 1
Hinshitsu [Quality], 14, no. 2 (1984): 147–56 (in (1998): 25–38.
Japanese). Trott, Paul. Innovation Management and New Product
Luchs, Michael and Scott Swan (forthcoming). Working Development, 4th ed. Harlow, England: Prentice Hall,
paper version available at Mason School Web site: 2008.
mason.wm.edu/faculty/documents/product_design_
Endnotes
1. Paul Trott, Innovation Management and New Product 9. Johann Füller and Kurt Matzler, “Virtual Product
Development, 4th ed. (Harlow, England: Prentice Experience and Customer Participation—A Chance
Hall, 2008). for Customer-Centred, Really New Products,”
2. For a review see Robert G. Cooper, Winning at New Technovation 27, nos. 6/7 (2007): 378–387.
Products, 3rd ed. (Cambridge, MA: Perseus publish- 10. Franz Bailom, Kurt Matzler, and Dieter
ing, 2001). Tschemernjak, Enduring Success: What Top-
3. Paul Trott, Innovation Management and New Companies Do Differently (New York: Palgrave
Product Development, 4th ed. (Harlow, England: Macmillan, 2007).
Prentice Hall, 2008). 11. Philip Kotler and Kevin L. Keller, Marketing man-
4. Abbie Griffin, “PDMA Research on New Product agement, 13th ed. (Upper Saddler River, New Jersey:
Development Practices: Updating Trends and Pearson Education, 2009).
Benchmarking Best Practice,” Journal of Product 12. Marc A. Annacchino, New Product Development:
Innovation Management 14, no. 6 (1997): 429–58. From Initial Idea to Product Management
5. Robert G. Cooper, Scott J. Edgett, and Elko J. (Amsterdam: Elsevier, 2003) 18–20.
Kleinschmidt “Optimizing the Stage-Gate process: 13. See, for example, Peter H. Bloch, “Seeking the Ideal
What best-practice companies do-I,” Research Form: Product Design and Consumer Response,”
Technology Management (September–October 2002): Journal of Marketing 59, no. 3 (1995): 16–29.
21–27. 14. James G. Bralla, Design for Manufacturability
6. Trott, Innovation management. Handbook, 2nd ed. (New York: McGraw-Hill
7. Kurt Matzler et al.,“How to Delight Your Customers,” Professional, 1998).
Journal of Product and Band Management 5, no. 2 15. Michael Luchs and Scott Swan (forthcoming)
(1996): 6–18. Working paper version available at Mason School
8. Adapted from Noriaki Kano, “Attractive Quality and Web site:: mason.wm.edu/faculty/documents/prod-
Must Be Quality,” Hinshitsu [Quality] 14, no. 2 uct_design_swan.pdf. Product Design since Bloch:
(1984): 147–156 (in Japanese); and Kurt Matzler Analysis of 14 Years of Research and the Emergence
and Hans H. Hinterhuber, “How to Make Product of Product Design as a Field of Marketing Inquiry,”
Development Projects More Successful by Journal of Product Innovation Management (1995).
Integrating Kano’s Model of Customer Satisfaction 16. Roger LeRoy Miller, Economics Today, 15th ed.
into Quality Function Deployment,” Technovation, (Boston, MA: Addison-Wesley, 2010), 588.
18, no. 1 (1998): 25–38.
339
340
Products—Innovations
341
What is an innovation? When marketing strategists talk about “innovations” they’re
usually referring to “discontinuous innovations”—products that are truly “new to the
world” and that change the way a customer need is met. In marketing strategy, the de-
gree of innovation is not generally thought of in terms of the underlying technology.
Although products such as hybrid-powered cars are generally viewed as very innovative
and the underlying technology may be groundbreaking, the marketing of a product like
hybrid cars may not be “innovation marketing” per se. People buy and consume hy-
brids in much the same way that they bought and consumed their previous, gas-only
cars. Even if they stop at gas stations less often, they bought the car from the same sort
of dealer, they have the car serviced in a similar way as they would have maintained any
earlier car, and they drive it and it takes them places in almost exactly the same manner
that their earlier cars did.
DEGREES OF NEW PRODUCT INNOVATION

For marketing strategy, an “innovation” is defined by the degree of change in consumer
behavior or “consumption patterns” required to adopt it, consume it, and meet a need with
it (Figure 1). Consumption patterns include the actual behaviors required to use the
product as well as the knowledge required and the ancillary equipment and installa-
tions required. “Discontinuous innovations” or “disruptive technologies” require
substantial changes in consumption patterns (they disrupt consumption patterns and
they disrupt industries and markets). “Continuous innovations” offer incremental
value without major or sometimes even noticeable changes in consumption patterns,
and “dynamically discontinuous innovations” fall in between (they change consump-
tion behaviors and change the way the need is met, but only to a limited degree). This
may seem like a semantic exercise, assigning labels and definitions to ranges along
a continuum, but it is strategically important to consider the degree of change in
Change in Consumption Patterns

Continuity in Consumption Patterns
Continuous Dynamically Discontinuous
Innovation Continuous Innovation
Innovation
FIGURE 1 Degrees of New Product Innovation
342
consumption patterns that an innovation requires of most markets there are offerings that are low in price
the customers. This attribute of an innovation—re- but also low in relative performance/quality, other
quired changes in consumption patterns and behav- offerings that offer “more for more,” that is, that offer
iors—determines important aspects of the market- some more features of performance at a higher price,
ing programs and strategies that will be effective or and then some offerings that offer very high per-
ineffective in supporting it. The “diffusion of innova- formance for quite a bit higher price. These two as-
tions” framework, presented in this note, is most pects of the offerings in any market can be used to
relevant to marketing discontinuous innovations. create a two-dimensional space or map, as shown in
Strategies for incremental, continuous innovations Figure 2, in which the axes are relative price (on
are less likely to be effectively based on the diffusion- the vertical) and relative performance/quality (on
of-innovation dynamics. the horizontal). In that space there are trade-offs that
customers understand and are willing to make—that
is, there is an equilibrium frontier or zone in which
CUSTOMER VALUE AND customers and marketers understand that the trade-
PRODUCT INNOVATION offs are “fair.” Customers may not personally choose
A useful framework for understanding new product to pay less to get less or to pay more to get more, but
innovation in strategic marketing is the “customer the trade-off is nevertheless understood as fair and
value frontier.” Value is defined as what the cus- justifiable.
tomers get adjusted for what the customers give—or There are also regions in that “value map” within
relative performance adjusted for relative price. In which the trade-offs are not sustainable. Products in
High
Relative Price
Low
Low High
Relative Performance (Relative Quality)
FIGURE 2 The Value Frontier and Innovation
343
the upper-left (the “northwest”) quadrant are charg- the same price or they charge less for the same per-
ing more than products in the lower-left (the south- formance. Those superior offerings attract customers
west) quadrant but are offering only the same per- to their better value propositions, and in the long
formance/quality. This is not viable in the long term; term shift competition toward that new equilibrium.
customers will find the offerings in the lower left and Thus innovation can be thought of as continuous
choose to save and/or find offerings in the upper right “creative destruction”; in the words of renowned
and choose to pay the same but get more. economist Joseph Schumpeter, innovation is the
On the other hand, products in the lower right
process of industrial mutation—if I may
(the southeast) are offering more performance than
use that biological term—that incessantly
products in the southwest but at the same relative
revolutionizes the economic structure
price; they can also be seen as offering the same qual-
from within, incessantly destroying the
ity as products in the northeast but at a lower price—
old one, incessantly creating a new one.
either way, more-for-the-same or the-same-for-less,
This process of Creative Destruction is
these products have found a way to dominate their
the essential fact about capitalism. It is
competition. These are innovations! They will draw
what capitalism consists in and what
sales and gain market share until the competition
every capitalist concern has got to live in.1
catches up.
Of course, it isn’t easy to offer more for less—
but that is what entrepreneurship and innovation THE DIFFUSION OF INNOVATIONS
require. If the firm itself isn’t innovating, it can be
The “diffusion of innovations” refers to the speed at
sure that the competition is or will be soon. When
which a truly new product (or an idea, for that mat-
Wal-Mart introduces electronic inventory tracking
ter) spreads through or “diffuses” into a market.
systems enabled by RFID tags (radio-frequency iden-
Much of what is known about the diffusion of inno-
tification tags) on pallets of merchandise, or when
vations comes from studies of the agricultural sec-
Apple adds features, style, and convenience to its
tor—the basic ideas and much of the early research
iPod, iPhone, and iPad product lines, they are offer-
was done by rural sociologists studying patterns of
ing the same goods for a lower price or something
adoption for new farming methods and technologies
more than the competition offers for a fair price.
such as weed sprays and crop varieties. Because, it
Wal-Mart’s extraordinary logistics backbone delivers
turns out, innovations diffuse through markets
the same products that customers could buy else-
much like diseases like the flu spread through popu-
where at lower prices. Apple’s intuitive interfaces and
lations (including the reliance on interpersonal con-
distinctive designs offer “much more for a little
tact), marketing has also adopted knowledge from
more”; that is, something that customers perceive as
epidemiology. Epidemiology uses sophisticated
unique and valuable at a price they’re willing to pay.
mathematical models to forecast the rate and severity
That attracts customers and, eventually and in-
of the spread of diseases through populations of peo-
evitably, it attracts competition—which should lead
ple and marketing has borrowed some of that math.
to further innovation. The competition “catching
Although many of those models go beyond the scope
up” can be understood as the fair value zone shifting
of this note and are beyond the needs of most mar-
to the right—as the market adjusts to new offering
keting strategists, one basic framework, the “Bass
that appear to the southeast of the frontier, what is
Model,” emphasizes the underlying mechanisms of
considered “fair” shifts to the right to establish a new
diffusion and is invaluable in forecasting.
equilibrium.
One way of understanding innovations and
The Adoption Process
how innovations enter the market and affect a market
is to view them as changing or “destroying” the struc- The adoption process of an innovation includes
ture of a market and the way the market is defined. As stages that a consumer moves through on their way
discussed, they offer customers more performance for from unaware of a new product to eventual (hoped
344
Awareness
Interest/Understanding
Adoption
Evaluation/Attitude
Trail/Purchase
Time
FIGURE 4 The Diffusion S-Curve

Adoption/Loyalty
curve (Figure 4). At first only a few consumers

FIGURE 3 The Adoption Process
will buy the product—it is untried and they can’t see
anyone else using it, but someone has to be the first
for) adoption and loyalty. The consumer must start to buy. As more people try a product and adopt it the
out unaware of the product and therefore the first speed of that adoption increases—the curve turns
objective of the marketing program for innova- more sharply upward because, as more people adopt
tions must be to gain awareness in target markets. the product, others see it in use, distribution broad-
Consumers then move from susceptible—that is, ens (it is easier to get), and perceptions of risk di-
having the need and in the target market but un- minish (it’s been “tested” by others). Eventually that
aware—through awareness, interest or understand- diffusion starts to “max out”; most of the people
ing toward an evaluation (an attitude) eventually to who have the need and the means have purchased
trial and adoption (Figure 3). It is important for the product, more of the product’s sales become re-
the marketing strategist to recognize where con- purchases, and the rate of new adoption inevitably
sumers are in that process—and to recognize that flattens. At some point, everyone in the market who
different consumers, different proportions of con- was ever going to try the product has tried it and the
sumers, and different segments of consumers will be only new customers are new to the market.
in different stages at any given time. Different tools
Types of Consumers
and different messages are required for consumers in
different stages of the adoption process. One of the most important understandings to come
Not all consumers are equally likely to adopt a out of the study of farmers’ adoption of new agricul-
new technology as others, certainly not at the same tural methods was the recognition that markets can
time. Some consumers are more likely to adopt; they be segmented into groups of consumers (farmers)
will buy the new product when it is very new, while who will adopt new technologies at different stages in
others will wait for different periods of time. Much the diffusion lifecycle. Some consumers are inherently
of the study of the diffusion of innovations has been more likely to adopt a new technology—and some are
the study of who will adopt when and, importantly, very unlikely to be “innovative.” Some of those differ-
what a marketing strategist can and should do ences are general—they’re true across product cate-
differently when dealing with different types of gories and across innovations—and some are prod-
adopters at different times in the diffusion of an in- uct category specific. The most basic segmentation
novation. In general, the diffusion of an innovation scheme regarding adoption of a new product presents
into the market across time forms and S-shaped five types of consumers: innovators, “early adopters,”
345
Relative% of Adopters
2.5%
Innovators Early
Adopters Early Majority Late Majority Laggards
13.5% 34% 34% 16%
Time
FIGURE 5 Segments Based on Propensity to Adopt Across Time
the “early majority,” the late majority, and laggards There are some important strategic differ-
(Figure 5; Table 1). In general, and unsurpris- ences between these segments. Innovators are too
ingly, innovators and early adopters tend to be “out there”; they typically do not influence as many
younger, better educated, more affluent, and more other consumers—certainly not as many as the
open-minded, and innovators and early adopters for early majority influence; because they are so in-
any particular product category tend to be more involved in the product category and have such a spe-
volved in the product and more attuned to product- cialized knowledge, their needs are simply different.
category-specific media. They also don’t tend to be as well-connected to
TABLE 1 Characteristics of Adoption Segments
Adoption Segment Bass Model Label General Characteristics Strategic Implications

Innovators Innovators Younger, highly involved in Great source of new-product
the product category. Less ideas—less important to
socially connected than Early accelerating the diffusion of
Adopters. Individualistic. the product.
Early Adopters Young, better educated, more Critical to gaining market
(Opinion Leaders or affluent, socially connected. foothold and to influencing
Gatekeepers) Extraverted. Moderate- to later adopters.
high-category involvement.
Early Majority Imitators Deliberate but open-minded.
Moderately interested in the
product category.
Late Majority Conservative and skeptical.
Low product category
involvement. Risk averse.
Laggards Older, less well-educated,
lower incomes, risk-averse,
low interest in product
category.
346
broader social networks. Innovators can provide adopter categories can be connected to the product
important design feedback and may be the source lifecycle in the same way.
of innovative ideas, that is especially true in the cur-
rent reality of “Web 2.0,” in which online consumers
Importance of Two-Step
“co-create” and collaborate in new product devel-
Communications
opment, but they’re less influential on other
adopter segments. When thinking about marketing communications the
The early adopters are sometimes referred to as tendency is to think first about marketer-controlled
“opinion leaders” or “gatekeepers.” Those labels em- communications—messages created by the market-
phasize the important role this segment plays in ing organization to send to consumers and potential
marketing and in the success or failure of truly new consumers via some media such as newspapers, tele-
products. Like innovators, these consumers are vision, or the sales force. Nevertheless, the most im-
younger, better educated, more affluent, more open portant and persuasive information that consumers
minded and more highly involved in the product cat- receive about a product, especially a truly new inno-
egory. Unlike innovators, these consumers are also vation, is received from other consumers. In addition,
well-connected in social networks and tend to talk some of the most important information consumers
with and influence many other consumers. use in decision making is from observing other con-
The bell-shaped curve is simply the S-curve— sumers using a product (rather than from overt,
not coincidently exactly the shape of the “product life explicit communications or traditional word-of-
cycle”—but instead of graphing cumulative sales it mouth communications). That is, some information
graphs trial by period. Figure 6 shows the same consumers transmit overtly—by telling others about
phenomenon with the vertical axis capturing cumu- the product; but another influential source of infor-
lative (percent of total) trial. We highlight that rela- mation is simply observing the product being used
tionship to emphasize the relationship between or seeing another consumer with the product. This
diffusion and the product lifecycle. The product life- process is called the “two-step communications.” The
cycle graphs cumulative total sales—the diffusion first step is the marketing effort—traditional ele-
process addresses cumulative trail. By adding ments of communications such as sales, advertising,
“adopters” or repeat sales, the diffusion curve maps and public relations—and some customers do re-
directly to the product lifecycle. By graphing trial as spond to marketer-controlled communications and
period specific rather than cumulative, the five try the product. Nevertheless, the communications
Saturation
Percentage of
Adoption
Time
s
rs
ity
y
ter
rd
rit
ato
jor
a
op
ajo
gg
ov
Ma
Ad
La
Inn
rly
te
rly
Ea
La
Ea
FIGURE 6 Cumulative Adoption and Adoption Segments
347
Marketer Majority
Communications (Imitators, Followers,
and Laggards
Organization
Marketing
Innovators
Marketer Inter-consumer
(Opinion Leaders or
Communications Communications
Gatekeepers)
FIGURE 7 “Two-Step” Communications
process that actually drives most customer behavior communication is positive—in fact, negative word of
is one that is mediated by a second step, the process- mouth is considered to be more influential than rec-
ing of the information via other customers (shown ommendations and dissatisfied consumers are far
graphically in Figure 7). more likely to talk about their experience than satis-
Both explicit inter-consumer communications fied customers.
(consumers telling other consumers something or
sending a message to other consumers) and observa-
Attributes of the Product/Innovation
tions of other consumers’ behaviors are especially
powerful mechanisms via which truly innovative Various characteristics of the product or the innova-
new products gain acceptance and thereby diffuse tion influence the rate at which that innovation dif-
into the market. For older technology and familiar fuses through the market. Some of these attributes can
brands it is difficult to motivate consumers to talk be addressed or changed by the marketing strategist to
about the product and, although it is still possible to increase the rate at which consumers adopt the new
observe the product in use, these observations are product—and it should be remembered that, while we
less important. There are older product categories talk about the “rate of adoption,” marketers should
such as fashion and clothing, which defy that general equate that diffusion with rate of “sales growth”—each
rule—purchases are still strongly influenced by opin- trial is a sale and every adopter is a loyal customer.
ion leaders within a mediated, two-step process even While some attributes of an innovation can’t be
though fashion is not a new or technologically so- changed—a new medicine, for example, may be in-
phisticated category. Nevertheless, for truly new herently risky and there is nothing anyone can do
products, inter-consumer communications are espe- about that riskiness—other attributes of an innova-
cially persuasive and, conversely, marketer-controlled tion may be “manageable,” such as the financial risk
communications (ads, sales messages, etc.) are not (which can be mitigated by lowering the price or of-
particularly persuasive. Communications mediated fering guarantees or warranties). So, although dis-
by third-party news organizations, that is, news re- cussed as a separate topic here, it is important for the
ports that result from public relations efforts, are marketing strategist to understand that some of
more persuasive than paid-for communications such these “attributes of the product” that drive the rate of
as advertisements, but are still less influential than diffusion are under the influence of the marketing
inter-consumer communications and observed manager and are therefore part of the “marketing
behaviors. Importantly, not all inter-consumer program” discussed after this.
348
• Relative Advantage. The first and most obvious • Compatibility. The less the degree of change—
attribute of an innovation itself that is related to and the lower the price of change required to
its speed of diffusion is the “relative advantage” try a product, the more likely customers and
the new technology offers over existing, “old” consumers will be to try. Innovations which
technologies. This is not surprising but is impor- require major changes—either to behaviors or
tant to consider: The enhancement in the way to other systems—will be less readily tried.
consumers meet a need and the significance of • Risk. There are many forms of risk perceived
the met need to the consumers will, in large part, by customers—financial risk, physical (health
drive acceptance of the innovation, and these two and welfare) risk, social risk, etc.—and the
attributes (advantage over existing technologies greater the risk of any sort the less likely cus-
in meeting a need and the salience of the need to tomers are to try the innovation.
consumer) equate to “relative advantage.” • Network Effects. Some of the substantive, core
• Trialability. If consumers can try a product benefits of an innovation may also go up with
without committing to adopting it or commit- wider market adoption via “network effects”;
ting to a large purchase or effort to try it, they for example, owning the first fax machine had
will be more willing to “sample” and evaluate few benefits to the innovative firm that bought
the product. Innovations which require com- it—until others bought faxes. The utility of
plete conversion or even large purchases will owning a fax machine was greatest when, even-
diffuse more slowly due to the increased price, tually, fax machines became pervasive.
the increased risk, and the increased effort re-
quired to try without perfect knowledge.
• Complexity/Ease of Use. The more complex ATTRIBUTES OF THE MARKETING
an innovation is, the slower and less willing PROGRAM AND LINKS TO
customers will be to try the innovation. The
MARKETING STRATEGIES
simple and easier to use the technology is, the
more readily customers will try it. This may All of the elements of a marketing strategy and the
seem obvious, but, in too many instances, mar- tactics of a marketing offering can influence the pace
keters have adopted the attitude that “cus- of product diffusion and the resulting realized market
tomers should just know how to use the prod- size. Most of those relationships can be understood as
uct,” instead of recognizing that it is the influencing that diffusion via the reality of and/or
marketers’ job to ensure that the product is consumers’ perceptions of the characteristics of the
easy for customers to understand and to use. innovation, described above. That is, changing the ac-
• Observability. Innovations that can be seen in tual relative advantage, trialability, complexity/ease of
use will diffuse into a market more quickly use, observability, compatibility, risk, and network
than products that are not visible. The logic effects or changing consumers’ perceptions of those
underlying the two-step process of communi- things will speed diffusion. Marketers can change the
cations and the effect it has on diffusion is that size of product packages or offer smaller minimum
some consumers—in many markets for disorder quantities to create easier trialability. Product
ruptive technologies most consumers will use names can be displayed more prominently to enhance
other consumers as “testers” for the innova- observability. Lower prices for first-time buyers and
tion. Either deliberately or unconsciously, cus- money-back guarantees increase trialability and
tomers will think “I don’t want to be the first to lower risk. Increased channel support and training
try that innovation” but, once they’ve seen for sales clerks improves understanding (i.e., reduced
someone else trying the product, they will per- perceived complexity). Another way to think about
ceive the risk to be lower and may also believe the influence of mix decisions on the diffusion of in-
that information and assistance will be avail- novation is to consider the two segments modeled
able more readily from others. in the Bass Model: marketing mix elements can
349
influence innovation or can affect imitation (or as those about fertilizers and seeds, visible to
might augment both). Some elements may be specifi- passersby. Some of these mix decisions are tactical
cally developed, for example, to facilitate word of while others may demand distinct strategies. For ex-
mouth and observability. Agricultural supply compa- ample, pricing to accelerate diffusion precludes
nies develop programs via which opinion-leader “skimming” strategies in pricing and developing
farmers host events to display innovations and also knowledgeable sales support from channel partners
offer discounts to farmers who post signage in their precludes intensive, mass distribution.
fields making otherwise unobservable choices, such
Summary
Innovation involves the creation of something new that in driving adoption. Strategists should also understand
customers will value more than they do their previous al- how different attributes of the innovation and different el-
ternatives. Innovation is an essential element of free mar- ements of the marketing mix such as price and integrated
kets and competition. As Joseph Schumpeter recognized, communications can influence the adoption and diffusion
innovation “incessantly revolutionizes the economic struc- of innovations. That is, although the diffusion of innova-
ture from within”2; that is, markets are constantly evolving tions into a market is influenced by some factors largely
as competitors and new entrants offer more for the same outside the marketers’ direct control, there are controllable
price or the same for lower prices. tools available that influence those customer and market
Marketing strategists must understand: how differ- reactions, and the successful strategist will have a keen ap-
ent customers react to innovations, including the adoption preciation of those tools and their limits. This note has
process at the individual customer level, differentiable seg- summarized these ideas and frameworks and connected
ments of customers based on their propensity to adopt, them to the strategic marketing process.
and the essential role of inter-customer communications
Additional Resources:
Moore, Geoffery A. Crossing the Chasm: Marketing and Rogers, Everett M. Diffusion of innovations, 5th ed. New
Selling High-Tech Products to Mainstream. New York: York: The Free Press, 2003.
Harper Business, 1991.
Mohr, Jakki J., Sanjit Sengupta, and Stanley Slater. Marketing
of High-Technology Products and Innovations. Upper
Saddle River, NJ: Pearson/Prentice Hall, 2010.
Endnotes
1. Joseph A. Schumpeter, Capitalism, Socialism and
Democracy (New York: Harper, 1975; originally
published in 1942), 83.
2. Ibid.
350
Products—Product
Portfolios
Most companies produce and sell more than one product or service, and many compa-
nies have more than one business unit. Those collections of products and businesses
are referred to as “product portfolios.” Marketing strategists must make important and
inevitable decisions about how to allocate cash, expertise, time, and other scarce re-
sources across individual products and business units. Different products and different
strategic business units (SBUs) require and justify different levels of investment. In ad-
dition, those investment priorities change across time as markets, products, industries,
and customers evolve. Marketing strategists need ways to decide which products justify
more resources to grow, which products should merely hold their market position, and
even which products should be withdrawn from the market.
When facing these decisions about investments and withdrawal of investments
across the product portfolio, it is useful for managers to consider two fundamental ques-
tions: “How strong is the product/SBU in its market?” and “How attractive is the market?”
(or “How likely are we to win at this game?” and “How nice would it be to win at this
game?”). These two considerations—the product or SBU’s strength in the market and the
market’s attractiveness—are, of course, complex questions, especially if a company has
dozens of products or business units to manage. Fortunately, there are several straightfor-
ward models managers can use to address these questions. Two of the most widely used
and well-tested models are The Boston Consulting Group (BCG) portfolio matrix and the
GE (General Electric)/McKinsey Portfolio Planning Grid. Both hold these two questions as
central to decisions about whether to grow a business, or maintain it, or withdraw:
1. How attractive is the market?
2. How strong is the product/SBU in the market?
These frameworks differ in their complexity or “granularity” of the analyses and the re-
sulting strategic recommendation.
THE BCG MATRIX

One of the earliest portfolio models was the BCG matrix, developed by The Boston
Consulting Group in the 1960s.1 It remains the best known and most often applied.
Several terms now part of everyday business jargon originated with the BCG matrix,
including “cash cow,” “harvest,” and “dog.” The BCG matrix is an uncomplicated de-
scription of strength and attractiveness. It uses just one variable, market growth rate, to
351
Products—Product Portfolios
summarize attractiveness.2 Using growth rate as the BCG framework defines relative market share as the
single characteristic that makes a market attractive can sales volume of an SBU divided by the sales volume
be justified because, for one thing, growing markets of the largest competitor. Therefore, the largest firm
offer opportunities of investments, which promise in a market will have a relative share greater than
higher returns later on than low-growth markets. one, and all the other entrants will have relative mar-
Additionally, during the growth phases of the product ket shares of less than one. The BCG model com-
life cycle, market share can be gained by expanding ca- bines the two questions—attractiveness and relative
pacities earlier than competitors, ensuring product strength as indicated by market growth and relative
availability, and managing sales effectively—all rea- market share—into a two-by-two matrix (shown as
sons to increase investments in higher-growth mar- Figure 1). Products or SBUs in each quadrant ne-
kets. Further, in high-growth markets, competitors cessitate different strategic orientations, have invest-
may not react as intensely when they lose market ment requirements, and present different cash-flow
share, because, even if their sales increase below mar- challenges and opportunities.
ket growth, the sales do increase. In a no-growth mar-
ket, increases in sales can only be achieved by reducing Applying the BCG Matrix
the competitors’ sales—and competitors are likely to
To better understand the strategic and investment im-
feel the losses more acutely and to respond to actual
plications of the BCG matrix, we may start by consid-
losses in sales more intensely.
ering the information in Table 1, which describes
The BCG matrix uses relative market share as
the growth rates and market shares for ten SBUs and
the single marker or the product or SBU’s strength.
their respective markets within a single consumer
This, too, is true in as far as it goes. Relative market
electronics company. Figure 2 displays that prod-
share corresponds to relatively greater scale (produc-
uct portfolio within the BCG Matrix. The size of each
tion volume). That is, the higher a product or busi-
circle in the matrix represents that business unit’s share
ness unit’s relative market share, the lower its relative
of the company’s overall sales volume. The following
unit costs and the higher its relative margins. All of
strategic implications emerge for each quadrant:
these things are “relative” in that they’re specific to
the comparison with the competition. The original • Question marks (low market share/high
market growth; in the electronics firm exam-
ple these are flat-screen TVs and game con-
Market Share soles): Business units in this quadrant are
usually in the early phase of the product life-
High Low cycle. As the market grows, investments in ca-
pacity expansion, marketing, distribution,
and related activities are required. Cash flow is
usually negative. It is vital to grow faster than
High
? the market; otherwise, the market leader can-
not be caught. As their name indicates, “ques-
Growth Rate
tion mark” business units have an unsure and

risky future. If they are able to build market
share, they become the stars and, eventually,
the cash cows of the future; if not, they become
dogs and cash drains.
Low
• Stars (high market share/high market growth;
here, car navigation): These strategic busi-
ness units are the market leaders in high-
growth markets. As the market continues to
FIGURE 1 The BCG Matrix3 grow strongly, they need high investments.
352
TABLE 1 Growth Rates and Market Shares for Selected Units of a Consumer Electronics
Company4
Market volume (in Million. EUR)

2006/2002 2007/2006 2011/2007
Business Unit 2002 2006 (%)* 2007 (%)* 2011 (%)*
CRT TV 2781 745 28,1 331 55,6 26 47,1
Flat-screen TV 330 4041 87,1 4601 13,3 5200 3,1
DVD Player/Recorder 725 646 2,8 525 18,7 840 12,5
Digital Still Cameras 870 1988 22,9 2062 3,7 1760 3,9
Digital Multimedia Player 77 695 73,3 681 2 620 2,3
Personal Audio 483 877 16,1 835 4,8 730 3,3
Home HiFi 1233 775 11 711 8,3 670 1,5
Game Consoles 210 487 23,4 705 44,8 570 5,2
Recording Media Digital 229 1008 22,3 993 1,5 1420 8,7
Car Navigation 180 748 42,8 1010 35 610 5
*Compound annual growth rate (CAGR)
Business Unit Sales 2006 (Million. Euro) Profit 2006 Sales 2006 Strongest Competitor
CRT TV 12 2,5 16
Flat Screen TV 330 48 913
DVD Player/Recorder 92 12 180
Digital Still Cameras 312 9,8 188
Digital Multimedia Player 118 35 90
Personal Audio 210 54 128
Home HiFi 72 23 144
Game Consoles 150 2,2 336
Recording Media Digital 99 7,5 188
Car Navigation 336 33 212
Cash flow usually balanced or slightly positive. they require no investment at all. In fact, one of
The strategy should emphasize maintaining the first rules of portfolio management and
market position into the next phase of the differential investment should be “feed your
product life cycle; if this occurs—if the star can cows first.” These products should have a cost
strengthen its market-share leadership, these advantage based on their greater scale and,
products/SBUs become cash cows as market therefore, they should generate a large cash
growth rate inevitably declines. surplus that can be invested in question marks
• Cash cows (high market share/low market and stars (even after receiving the level of in-
growth; here, digital still cameras, personal vestment required to maintain the cash cow).
audio, and digital multimedia players): These • Dogs (low market share/low market growth;
products/SBUs need little investment because here, recording media digital, home HiFi, DVD
the market is mature—but that does not mean player/recorders, and CRT TVs): Holding a
353
50
Car Navigation
40
Game Consoles
30
Flat-Screen TV
20
Digital Still
Cameras
10
Market Growth Rate
Recording Media
Digital
0
Digital Multimedia Home HiFi

−10
Personal Audio Player
−20
DVD
−30 Player/Recorder
−40
−50
CRT TV
−60
2 1 0
Relative Market Share
FIGURE 2 BCG Matrix for a Consumer Electronics Company
weak position in an unattractive market interproduct economies of scope. The result-

should be a sure warning against further in- ing entity, Syngenta, quickly became a market
vestment (“good money after bad”). Dogs are leader in agribusiness and agrichemicals.5
candidates for withdrawal and divestment, es-
A well-managed portfolio is characterized by
pecially if a product is at the end of its lifecycle
balanced cash flow and balanced risk, and it has busi-
(e.g., CRT TV). Still, divestment decisions are
ness units in each quadrant (including dogs, as long
more complex than simply “sell or don’t sell.”
as they are profitable). Thus, for the company in this
For example, in the late 1990s Novartis and
example, portfolio analysis suggests adopting the fol-
AstraZeneca each had agribusiness divisions
lowing strategies:
they had identified as being unrelated to their
core businesses and suitable for divestment. • Withdrawing from the CRT TV market
The two firms joined to divest their respective • Keeping the home HiFi and DVD player/
units into a single business that could estab- recorder business units as long as they are
lish strengths and synergies based on size and profitable
354
• Investing in the recording media digital busi- latest technology to manufacture cars, respec-
ness unit, because the long-term perspective is tively. Another anomaly is Microsoft, which has
attractive (as evidenced by growth during the a high growth rate but low cash usage.
period 2001–2007) 3. Using relative market share only makes sense
• Using cash generated by the personal audio when economies of scale and experience curve
and digital multimedia player business units to effects play a major role. In industries in which
increase market share of the game console and size does not lead to cost advantages, relative
flat-screen TV units and to maintain the lead- market share is not a good indicator for com-
ing position of the car navigation unit petitive advantages.
4. Not only the variables but also the specific val-
Limitations of the BCG Matrix ues or cut-off points along the axes of the ma-
trix are somewhat arbitrary.
The BCG matrix is widely known and often ap- a. Relative Market Share. Defining market
plied; as noted, it has added to the common busi- shares and splitting the y-axis of the matrix
ness vernacular and it is a basic concept in strategic into high and low growth can present prob-
management. Nevertheless, it has certain limita- lems. First, for many companies, reliable
tions that managers should be aware of, including market share data is not available, and sec-
the following:6 ond, markets can be defined broadly or nar-
1. The use of market growth rate and relative rowly (e.g., beverages, soft drinks, or energy
market share may be oversimplifications; they drinks in the case of Red Bull). Market
certainly are simplifications. In reality, whether share can be high or low depending on this
a market is attractive can depend on many fac- definition of the market, and that adds an
tors such as market size, competitive intensity, element of subjectivity to the BCG frame-
and average profitability as well as growth rate. work which has not always been adequately
Furthermore, competitive advantages (relative appreciated.
strength) may not only depend on relative b. Market Growth Rate. The original BCG
market share but may also result from distinc- framework suggested a 10 percent market
tive R&D capabilities, marketing capabilities growth rate as a threshold to differentiate
and relationships, loyal customer bases, and between “high” and “low” growth markets,
other attributes. The BCG framework assumes and that criterion is better understood as de-
that market growth rate and relative market pendent upon the market and the times: a 5
share are enough, or that they, in fact, capture percent growth rate may be high in the food
the effects of these other sources of attractive- industry but low in the consumer electron-
ness and strength—and either of these as- ics industry, and a flat growth rate might be
sumptions may not always be true. an achievement in a major recession but a
2. The BCG matrix treats relative market share as setback in a high-growth economic cycle.
a proxy for cash generation. It also treats mar- 5. The BCG portfolio framework ignores syner-
ket growth rate as a proxy for cash usage, be- gies between business units or products.
cause slow-growth markets are mature and pre- Hence, it does not consider the ways in which
sumably don’t require much investment. divesting one business unit can affect other
Unfortunately, this is a problematic assumption, business units if those units share fixed costs or
because mature markets are often competitive produce products that complement each other.
and, therefore, require cash. For instance, airlines 6. Finally, the BCG Matrix is a snapshot; it captures
and car manufacturers immediately come to the state-of-market growth and market share at
mind. These businesses can be said to be quite a specific time, and does not consider changes
mature, but they also require huge capital in- or trends in the market or in the product/
vestments to replenish airlines and invest in the SBU’s strength.
355
These cautions indicate that the BCG Matrix should now-classic scheme. GE/McKinsey Grid is a some-
not be used for making decisions but as a guide to what more complex and detailed matrix, addressing
discussions that will lead to decisions. In any case, the “reductionist” nature of the BCG Matrix (which
the BCG Matrix remains one of the most durable, reduces business strength to just relative market
well-known, and functional frameworks in the strat- share and market attractiveness to just market
egy literature, and terms such as “cash cow” and growth rate). It was developed by McKinsey and
“dog” have become part of the ubiquitous business Company, the international strategic consulting
vernacular. firm, for GE in order to evaluate business units, to
evaluate the balance and allocation of resources
across the overall portfolio of business units, and to
GE/MCKINSEY PORTFOLIO
assist in setting appropriate performance targets
PLANNING GRID
across products and units. The GE/McKinsey Grid is
A second framework for managing and prioritizing based on some of the same assumptions as the BCG
multiple products or SBUs within the single firm’s matrix—especially the assumption that investment
assortment is the GE/McKinsey Portfolio Planning levels across products or SBUs should be a function
Grid (also referred to as the GE Business Screen of business strength and market attractiveness—but
Matrix, the “Stoplight Grid” due to its adoption of it incorporates more variables into the two main axes
green, yellow, and red to emphasize its strategic im- (business strength and market attractiveness) and it
plications, and, henceforth in this note, abridged to offers a more granular distinctions across
the GE/McKinsey Grid); it was developed subse- product/SBU positions within the resulting space.
quent to the BCG Matrix and it follows from that The GE/McKinsey Grid is shown in Figure 3.7
Industry Attractiveness
High Medium Low
• Grow • Identify Growth • Maintain Overall
• Seek Dominance Segments Position
• Maximize • Invest Strongly • Seek Cash Flow
High
Investment • Maintain Position • Invest at

Elsewhere Maintenance
Level
Business Strength
• Evaluate Potential • Identify Growth • Prune Lines

for Leadership Segments • Minimize
Medium
Via Segmentation • Specialize Investment

• Identify • Invest Selectively • Position to Divest
Weaknesses
• Build Strengths
• Specialize • Specialize • Trust Leader’s

• Seek Niches • Seek Niches Statesmanship
• Consider • Consider Exit • Sic on
Low
Acquisitions Competitor’s Cash

Generators
• Time Exit and
Divest
FIGURE 3 The GE/McKinsey Portfolio Planning Grid8
356
Applying the GE/McKinsey Grid which they determine or influence the superordinate
variable (market attractiveness or business strength).
To compile the GE/McKinsey Grid, six steps are
After choosing the markers and assigning each
necessary:
marker an importance weight, each product or SBU
1. Define and weight market attractiveness markers; should be evaluated on those factors (e.g., with a
2. Define and weight business strength markers; 0–100 score), and a weighted score can be computed
3. Evaluation each product’s or SBU’s market at- by multiplying the evaluation score by its weight,
tractiveness and business strength; as in Table 3. For some factors, the scores can be
4. Compute weighted scores for market attrac- determined from hard numbers (e.g., market growth
tiveness and relative competitive position; and market size). For other factors, managerial
5. Position business units in the portfolio; judgment might be called upon (e.g., R&D capabili-
6. Derive strategic implications of positions ties or environmental impact.) The weighted scores
within matrix. can then be used to position the business units in
the matrix. Finally, strategies can be derived based on
There are a number of variables than can be used
each unit’s position, as in Figure 4.
to mark or assess market attractiveness and relative
business strength (we’ll refer to these as “markers”). Advantages and Limitations of the
The BCG Matrix incorporates just one of those vari- GE/McKinsey Grid
ables for each two axes, and those may be the most
powerful variables in explaining strength and attrac- As illustrated by the example, the GE/McKinsey Grid
tiveness, but they are certainly not the only variables is more comprehensive and more detailed than the
that lead to strength or attractiveness, and, in fact, it is BCG Matrix. It has the advantage of taking into ac-
likely that the “best” variables to consider depends count more market and company information and it
upon the industry, the firm, and the situation. Table 2 leads to more specific strategic recommendations.
lists some common indicators of business strength Furthermore, the GE model can be applied at the
and industry attractiveness. As noted, the variables level of business units, product lines, or single prod-
chosen in any particular analysis and the relative ucts, and it can even been adapted to a number of
weights put on those variables varies across different other applications, such as the following:
types of industries and should be selected carefully, • Customer portfolios (by considering customer
customized to the particular firm and its circum- attractiveness and relative competitive position)
stances. Each of the chosen markers of market strength • Segment portfolios (by considering segment at-
and business attractiveness may not be equally impor- tractiveness and relative competitive position)
tant. Different variables should be assigned different • Country portfolios (by considering market at-
importance weights or “weights” based on the degree to tractiveness and relative competitive position)
TABLE 2 Common Markers of Market Attractiveness and Business Strength
Market Attractiveness Relative Competitive Position

• Market growth • Market share
• Market size • Product quality
• Profit margins • R&D capabilities
• Competitive intensity • Marketing capabilities
• Market entry barriers • Brand awareness and image
• Cyclicality of life cycle • Production capabilities
• Environmental impact • Cost efficiency
357
TABLE 3 Assessment of Market Attractiveness and Relative Competitive Position
Business Unit: Flat-Screen TVs

Assessment of Market Attractiveness
Score Weighted
Criteria Weight (%) Evaluation/Remarks (0–100) Score
Market 30 Highly growing market in growth phase of the life 90 27
growth cycle: CAGR 2002–2006 87%; 2006–2007 13%;
Projected CAGR 2007–2011 3.1%; growth is going
to slow down in the coming years (CAGR Compound
Annual Growth Rate)
Market 25 Market size in 2006 4,000; only 15% of households 100 25
size own flat-screen TVs; still very high potential
Competitive 10 Strong, suppliers of CRT TVs have already switched to 30 3
intensity flat-screen
Profit 20 Price wars not yet to be expected, high growth rate in 80 16
margins Euro sales volume due to higher prices for high-end
products: unit increase 2002–2006 5%, increase of
Euro sales volume 54%
Market 15 Medium to high, biggest market entry barriers are 60 9
entry access to distribution channels, economies of scale,
barriers and brand name
100 80
Business Unit: Flat-Screen TVs

Assessment of Relative Competitive Position
Score Weighted
Criteria Weight (%) Evaluation/Remarks (0–100) Score
Relative 30 Low relative market share (.36); strong cost 10 3
market disadvantages due to lower economies of scale and
share experience curve effects
R&D 15 Low, behind competition in introducing new 10 1,5
strengths technologies or upgrading technologies, R&D budget
only 1/3 of strongest competitor
Marketing 20 Brand awareness and brand image according to 15 3
capabilities market research clearly below competition, lower
marketing budget than strongest competitors
Distribution 25 Limited access to distribution channels, listed in only 3 10 2,5
and sales of 7 major distributors of consumer electronics
Production 10 Medium, high investments in capacity enlargement, 50 5
capabilities production technologies
100 15
358
100
Car Navigation Game Consoles
67
Digital Still Cameras

Digital Multimedia
Player
Flat-Screen TV
Personal Audio Recording Media

Digital
34
Home HiFi
DVD
Player/Recorder
CRT TV
1
100 67 34 1
Relative Competitive Position
FIGURE 4 GE/McKinsey Grid for a Consumer Electronics Company
In such applications, customers, segments, or coun- business in that segment. Segment attractiveness
tries are rated on attractiveness and business strength: might be a function of size, price insensitivity, lack of
appropriate offerings in the marketplace (they’re
• How much would we like to succeed with this
“under-served”), or a number of other qualities.
customer (with this segment or in this coun-
Business strength might be a function of such things
try)? and
as current market penetration (share), fit between
• How likely are we to succeed with this cus-
competitive advantages and the segment’s needs,
tomer (with this segment or in this country)?
proximity or access to the segment, and the like. This
Companies will, generally, want to balance these two firm would then assess the array to choose target
considerations when targeting customers, segments, markets and to prioritize the development of new or
or countries and when deciding which business future strengths. This firm should likely target the
strengths (competitive advantages) to invest in. “Retirees,” if it hasn’t already. The firm should avoid
For example, in Figure 5, segments are ar- allocating resources toward attracting the “Single
rayed by their attractiveness and the strength of the Professionals”; they are a bad fit with the firm’s
359
more money to spend, are less price sensitive, tend to

High be more loyal, or somehow are attractive in an im-
portant way). Very similar analyses could assort
specific customers or entire countries with regard to
their attractiveness and the firm’s strengths to serve
Segment Attractiveness
Young
Families them, aiding in everything from account selection in
sales force management to planning for international
Retirees
expansion.
The GE/McKinsey Grid also has some impor-
Students tant limitations. In particular, because the assessment
Empty factors have to be selected, weighted, and evaluated by
Nesters
managers, there is greater subjectivity in this model at
Single
each step in the process than in the BCG Matrix (note
Professionals
that the subjectivity of distinguishing the distinct
products or strategic business units and defining the
Low market for each product/SBU is an issue in both ana-
High Low
Business Strength (With Segment) lytic frameworks). This subjectivity is especially prob-
lematic when planners are inexperienced and when
they evaluate their own business units. Unsurprisingly,
FIGURE 5 GE/McKinsey Grid for when these analyses are done by product or SBU man-
Hypothetical Segments of Customers
agers, their evaluations commonly avoid placing busi-
ness units in a weak competitive position and/or in
strengths and are, in any case, an unattractive target unattractive markets. Finally, like the BCG Matrix, the
market. The firm might be well-advised to develop GE/McKinsey Grid is most often a snapshot of
strengths that would fit well with the “Young strength and attractiveness at a particular time, unless
Families” or “Students” because, although the firm’s trends are specifically incorporated into the summary
strengths and offerings are not currently well-suited variables (i.e., unless trends in business strength
to those segments, those segments are the most at- variables or market attractiveness variables are specif-
tractive in the market (maybe they are growing, have ically incorporated into the analysis).
Summary
Portfolio logic arrays competitive position against market more granularities. In the simplest case then, for BCG we
attractiveness in matrix form. The growth/share matrix have the following summary:
(a crossing of the concepts of product/market evolution
and cost and share leverage) offers generic strategies for • Low share/high growth—the question mark or prob-
four (BCG) to nine (GE) polar product/market positions. lem child, which either needs significant investment
Where the BCG model is based on two dimensions, mar- to improve position (build share) during market
ket growth rate and relative market share, the GE model growth, or probably should be divested. Often, this
is based on multiple dimensions summed to two: market quadrant can be viewed as cash flow negative.
attractiveness and competitive position. However, market • High share/high growth—the star, whose share
growth rate is but one measure of market attractive- should at least be maintained and should continue
ness—there are many others. Likewise, relative market to receive enough investment dollars to maintain or
share is just one measure of competitive position and increase its distance from competitors. This quad-
there are many others. The nine GE positions more or less rant is likely a cash flow neutral one as we are rein-
map to the four position of the BCG model, just with vesting whatever we make.
360
• High share/low growth—the cash cow, which • Low share/low growth—the dog, which should
should get just enough investment to maintain eventually die, it is just a question of how fast, be-
share and because of low growth, market maturity, cause it has neither leverage from cost or share nor
and low cost (further down the cost curve) should the advantages of a growth market.
throw off significant cash to fund either other stars
or problem children.
Day, George S. “Diagnosing the Product Portfolio.” The Hedley, Barry. “Strategy and the ‘Business Portfolio.’” Long
Journal of Marketing. 41, no. 2 (April 1977): 29–38. Range Planning 10 (February 1977): 9–15.
Hax Arnoldo C., and Nicolas S. Majluf. “The Use of the Zook, Chris, with James Allen. Profit from the Core: Growth
Industry Attractiveness-Business Strength Matrix in Strategy in an Era of Turbulence (Boston, MA: Harvard
Strategic Planning.” Interfaces 13, no. 2 (1983): 54–71 Business School Publishing).
Endnotes
1. Barry Hedley, “Strategy and the “Business Portfolio,” 7. See Arnoldo C. Hax and Nicolas S. Majluf, “The Use
Long Range Planning 10 (February 1977); 9–15. of the Industry Attractiveness-Business Strength
2. Ibid. Matrix in Strategic Planning,” Interfaces 13, no. 2
3. The BCG Portfolio Matrix from the Product Portfolio (1983): 54–71; Darrell Rigby, Management Tools
Matrix, © 1970, The Boston Consulting Group. 2003: An Executive’s Guide (Two Copley Place,
4. Data source: BITKOM (2007), Die Zukunft der dig- Boston: Bain & Company, 2003); S. Robinson, R.
italen Consumer Electronics. Berlin: BITKOM. Hitch, and D. Wade, “The Directional Policy
5. Patricia Anslinger, Justin Jenk, and Ravi Chanmugan, Matrix—Tool for strategic planning,” Long Range
“The Art of Strategic Divestment,” Journal of Applied Planning 11, no. 3 (1978): 8–15; Michael G. Allen,
Corporate Finance 15, no. 3 (2003): 97–101. “Diagramming GE’s planning for What’s Watt,”
6. Adrian Haberberg and Alison Rieple, Strategic Strategy & Planning 5, no. 5 (1977): 3–9.
Management: Theory and Application (Oxford: 8. Adapted from Allen, “Diagramming GE’s planning.”
Oxford University Press, 2008).
361
362
Pricing Strategies
363
Pricing Strategies
Of all the marketing mix elements, price is the one (and only) that generates rev-
enues. Price is usually the easiest element of the mix to set and adjust—and is the
easiest competitive action to imitate. A company’s pricing policy can make or break
the bottom line.1 Pricing changes have a stronger impact on profits than revenue in-
creases or reductions in the costs of goods sold. On average, a 5 percent increase in
selling price increases earnings before interest and taxes (EBIT) by 22 percent,
whereas increasing sales (revenue) by 5 percent increases EBIT by 12 percent, and a
5 percent reduction in costs of goods sold increases EBIT by just 10 percent.2 Price is
also important as a compliment to other mix elements in shaping customers’ per-
ceptions of the offering, its quality, and its value and, therefore, setting pricing
objectives must be done within the context of the intended positioning and the
overall strategy. The following four steps are central to effectively developing pricing
strategies and tactics:
1. Define Price Objectives;

2. Analyze Key Elements of Pricing Situation;
3. Define the Pricing Strategy; and
4. Set the Price and the Pricing Tactics.
PRICE OBJECTIVES
Pricing objectives are derived from the marketing strategy and the positioning deci-
sions the firm has made. Pricing decisions can have short-term or long-term objectives.
Two common short-term objectives are survival or maximum current profit:3
• Survival. In the short run, sales contribute to survival as long as all variable costs
are covered. That is, if price is at least as much as the marginal cost of creating
each additional unit, then the sale of any additional unit contributes something
toward overhead. Therefore, the minimum price (the “floor price”) is the amount
of direct variable costs. In the long run, however, prices must be set in such a way
that, in aggregate across the assortment, all the fixed costs are also covered and the
company earns a profit.
• Maximum current profit. When a company knows the precise cost and demand
functions for its products and markets, it is possible to set price to maximize
profits. In reality, however, these parameters are very difficult to gauge precisely.
Furthermore, a company that maximizes current profits might sacrifice long-
term profits by, for example, ignoring competitor actions.
364
Pricing Strategies
Three long-term objectives include building market to judge, price is an important quality cue; cus-
share, market skimming, market penetration, and tomers may not only infer quality during
product positioning: shopping but may also actually perceive more
expensive alternatives as actually being of
• Building and protecting market share. Low higher quality or greater prestige while con-
prices can serve to build and to protect market suming the product. A low price, on the other
share. By increasing market share, companies hand, can increase brand awareness and the
expect to lower unit costs due to economies of product visibility.
scale and experience curve effects. A market
leader can discourage competitors to enter the
industry by cutting prices further as costs fell ELEMENTS OF PRICING DECISIONS
with increasing experience.
After the objectives have been formulated, at least
• Market skimming. Customers’ price sensitiv-
four key elements of a pricing should be analyzed:4
ity depends on the product lifecycle and varies
the firm’s costs and cost structure, its customers, its
across market segments. Many companies
competition, and the legal and ethical implications of
“skim” the market by setting high prices for an
the decision and strategy.
innovation at the beginning of the lifecycle and
targeting price insensitive segments. Later they
Costs
plan to lower prices step by step to target other
customer segments’ differing willingness to In the first step, fixed and variable costs are deter-
pay. A skimming strategy foregoes volume for mined. Next, given a certain selling price, the contri-
margin. bution margin (selling price less variable costs) and
• Market Penetration. The converse of a mar- the break-even-volume (fixed costs divided by con-
ket skimming strategy (above), which forgoes tribution margin) can be calculated. A company can
sales volume to skim high prices from price- also set a profit goal; in this case the target profit is
insensitive customers, a market penetration added to the fixed costs to calculate the breakeven
strategy entails setting a relatively low price volume. In a second step, cost-volume-profit (CVP)
and accepting that lower unit margin in order analysis can be used to answer questions like: “If
to gain market share rapidly (i.e., in order to prices are raised by 10 percent, how much sales vol-
penetrate the market). This strategy is based ume can the company afford to lose, if overall profits
on the recognition that volume leads to the are at least to be maintained?”, or “If prices are re-
benefits of scale, including economies of scale duced by 10 percent, to what extent does sales vol-
and learning curve or experience effects, and ume need to increase if overall profits are to be
that those benefits of scale include lower unit maintained?” CVP analysis builds on some basic, im-
costs. Further, the first brand to penetrate a mutable accounting relationships between price,
market enjoys primacy effects including brand sales and production in units, and costs. For exam-
equity and customer stickiness (customers ple, total sales revenue is equal to price (per unit rev-
who have purchased a product and tend to stay enue) times the number of units sold. Total variable
with the brand, sometimes due to inertia and cost (the total of those costs that vary directly with
sometimes due to “installed base” of ancillary units produced) is equal to variable costs per unit
or support equipment). times the number of units sold. Overhead is equal to
• Product positioning. The price is an impor- both marketing overhead (advertising costs, sales
tant positioning variable. A premium price can force expenses, etc.) and general administrative over-
serve to position the product as the quality head. Figure 1 organizes these relationships graphi-
leader in the category. In many categories, espe- cally. These basic relationships allow for accurate
cially those in which intrinsic quality is difficult assessment objectives, such as breaking even and
365
Pricing Strategies
Price
(/Unit)
Number of Sales ($)
*
Customers
Sales (units)
*
Purchase Rate – – Contribution ($)
(Units/Customer
Variable Costs
($/units)
Total Variable
* Costs ($)
Sales (units)
Advertising
Expenditures
– Profits ($)
Sales
Expenditures
Public Relations Marketing Mix

Marketing
+
Other Marketing Overhead ($)
Investment
Mix Expenditures + Overhead ($)
(R&D, etc) ($)
Administrative
Marketing = Overhead ($)
Research
Unit Contribution
Margin
FIGURE 1 Cost-Volume-Profit Relationships
target profits, and of the effects of proposed changes simulation software. The marketing
in price on changes in units sold (demand) and on strategy is to sell this device to auto man-
profitability. ufacturers. The CVP parameters are
The following example illustrates these analyses: shown in Table 1.
One of the first questions man-
Sample Cost-Volume-Profit Analysis agement would want to ask would be
A mechanical engineering company has how many units of the software they
developed a new device to test the crash- would need to sell to “breakeven”; that is,
worthiness of car components using to have revenues exactly equal to total
TABLE 1 Cost-Volume-Profit Parameters for a Sample Analysis
Fixed costs (e.g., R&D, production facilities, marketing): $4,100,000

Target profit $2,000,000
Variable costs (e.g., variable manufacturing & marketing costs) $77,000
Selling price $120,000
Contribution margin $43,000 (35.8%)
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Pricing Strategies
costs (variable costs per unit times units elements of overhead will, in reality, look
produced plus fixed costs or overhead): like steps across levels of production; a
certain investment in overhead is able to
(P *Q) = (VC>u*Q) + FC
support certain levels of sales and pro-
We can solve this equation for Q (the duction; when sales and production lev-
breakeven quantity in units) by subtract- els go over that level or capacity then the
ing (VC/u * Q) from both sides and then overhead must be expanded in incre-
dividing by (P ⫺ VC/u), leading to the ments or “steps.”
breakeven formula:
Cost-Volume-Profit Analysis is also invaluable
FC in evaluating the effects of price changes. Any change
Qbe = in price is likely to have a direct effect on demand: A
aP - b
VC
u price increase will increase revenue and margin per
unit and, as a rule, lower demand; and a price decrease
If management wanted to change that will lower revenues per unit but increase demand. The
analysis slightly to include target profit— trade-offs in price changes and consequent changes in
that is, to ask how many units sold would demand can also be evaluated directly using the basic
cover all costs plus contribute the target CVP logic.5
profit, the breakeven formula could be
adjusted to include target profit with the Customers
fixed costs (p denotes “profit” or, in this
case, target profit): Many companies use markup pricing to determine the
selling price; whatever the costs of the product are,
FC + Target Profit they mark that amount up a set percentage to arrive at
Qp =
aP - b
VC the list price. Others use “market pricing,” or mark-to-
u market, charging a traditional or “everybody’s doing
it” price. These are simple and low-risk methods, but
Plugging in the data from the example they don’t consider the customers’ perceived value or
presented in Table 1, the mechanical engi- willingness to pay from the customers’ perspective, and
neering company would use compute: therefore may miss opportunities. More sophisticated
$4,100,000 considerations are not based on the product’s cost but
Qbe = = 96 begin, instead, with the customers’ willingness to pay
$120,000 - $77,000
and the customers’ perceived value and value function
To calculate the level of sales/production to determine prices.
required to breakeven and make the de- Table 3 presents real data from the automobile
sired target profit ($2,000,000) the for- industry, showing that a car feature’s costs do not cor-
mula is adjusted: respond to customers’ willingness to pay. For example,
$4,100,000 + $2,000,000 customers are willing to pay : 340 for the metallic
Qp = = 142 color option, which costs just : 20 to add to the vehi-
$120,000 - $77,000
cle, while they are only willing to pay : 260 for a sun-
These illustrative calculations assume roof, but adding a sunroof costs the manufacturer :
that variable costs per unit and overhead 350. If the manufacturer charged a set percentage
stay the same across levels of production. mark-up on the color and the sunroof they’d be leav-
Variable cost usually is static across only ing a lot of money on the table when selling the metal-
some specific range of production; those lic color and likely dissuading customers from
costs will go down with increasing pro- purchasing the sunroof option altogether. Margin is
duction or scale due to economies of the difference between costs and price; in Table 2 mar-
scale and learning or experience curve gins are shown as percentages of selling price. For ex-
effects. Likewise, the costs of many ample, customers are willing to pay : 340 for the
367
Pricing Strategies
TABLE 2 Product’s Cost versus Willingness to Pay for Car Components6
Product Feature Customer’s Willingness to Pay Product Costs Margin

Metallic color 340 20 94%
Light-alloy wheels 220 140 36%
Air condition 750 550 27%
Sun roof 260 350 ⫺35%
Navigation System 310 450 ⫺45%
metallic color option; if the pricing manager used competition into price wars. During the Christmas
willingness to pay instead of some predetermined retail-season of 2009, for example, Walmart.com, the
markup, the price for the color would be : 340. retailing behemoth’s online store, marked down the
The metallic color costs just : 20 to add to the vehi- ten best selling books in its assortment to $10.
cle. Thus, the margin is : 320, a 94 percent margin Amazon.com responded to the “opening salvo” and
(320 margin/340 price = 94% percentage margin). matched Wal-Mart’s prices on the same 10 titles.
This same logic can be used in new product Wal-Mart then dropped its price to $8.99, which
development to set target costs for alternatives; when Amazon again matched. (Target got into the fight
developing a new product, target costs are often an with an $8.99 price point.) Wal-Mart dropped its
important starting point. For example, if the mar- price to $8.98 (a penny below Target’s price).
keter has determined that customers are willing to Amazon and Target did not counter the $8.98 price.
pay : 310 for a navigation system but the current al- Of course, none of these competitors made any
ternatives cost : 450 to add to a vehicle, as shown in money on sales at the low-price point. Nevertheless,
Table 3, the new product development project might Wal-Mart succeeded in signaling to customers and
focus on developing a barebones navigation system competitors that it was a serious player in the online-
that satisfies customer needs but that also costs less book sector. Amazon succeeded in signaling that it
than : 310 to produce. would respond to any competitive price threat.
Target stayed in the game. Who lost this price war? In
Competitors the long run, small book retailers lost to the large on-
line players, and consumers may have lost, too. The
The third element of a pricing decision is competi-
online price competitors signaled to each other and
tion. Important questions include: What are the com-
the world that they would not be beaten on price—
petitors’ prices? What are competitors’ costs and, there-
and all entrants are now, it seems likely, preparing to
fore, their floor prices? What are their pricing
compete on something else.7
strategies, tactics, and intentions? Although price-set-
ting collusion is illegal, price signaling is an important
Legal and Ethical Considerations
reality in interpreting competitive strategies and in-
tentions and in setting prices. The various rivals in a Finally, legal and ethical issues also need to be con-
market signal their pricing policies and intentions to sidered in setting prices. Legal constraints proscribe
customers and to competitors via statements and ac- overt price collusion between competitors, predatory
tions. Advertising “we match all competitors’ prices,” pricing, deceptive pricing, price fixing in channels of
for example, may signal to customers that a retailer is distribution, and price discrimination across cus-
the low-price alternative but that policy signals com- tomers or channels. These myriad laws and regula-
petitors that dropping price will not lead to sustain- tions are complex and dynamic. For example, in the
able advantage; the expectation is that everyone will United States any price fixing between vertical
therefore maintain pricing norms. channel members, most commonly a manufacturer
Unfortunately, an insidious pattern in many setting a minimum price for its distributors or retail-
competitive markets is the tendency to follow the ers, was illegal per se for almost a century. Recently,
368
Pricing Strategies
however, the United States Supreme Court changed fiscal and brand losses, Ford, the Pinto, and the deci-
its interpretation of those laws, allowing manufac- sions made with regard to gas-tank safety remain
turers to, in some cases, implement pricing policies emblematic of shortsighted overemphasis on analy-
on its resellers.8 In Europe, on the other hand, many sis and underappreciation of the role of managerial
countries still prohibit “sales” (temporary price reduc- and personal ethics in price and strategy setting.
tions on items or on entire assortments) and presale
price announcements, a regulation that dampens
DEFINE THE PRICING STRATEGY
price competition among retailers.9
Ethical standards should shape all managerial The company’s pricing strategy has to be in line with
and strategic decision making, as they should per- the core strategy of the business unit. A differentia-
sonal decision making, and that includes pricing de- tion strategy, for example, implicates a premium
cisions. One of the most notorious cases of unethical price strategy; a cost leadership strategy usually
and ill-advised strategic decision making relates to means low prices. Hence, the core strategy defines
the earlier example of customers’-willingness-to-pay the pricing objectives, and the pricing objectives to-
and the cost-of-automobile options. In the early gether with customer, cost, competitor, and legal and
1970s, Ford Motor Company recognized that there ethical aspects set the framework for the pricing
might be safety issues with the subcompact Pinto’s strategy. There are several important concepts that
gas tank rupturing in relatively low-speed colli- can shape the pricing strategy:
sions.10 Ford executives made the cost-benefit calcu-
1. The value map;
lation that the cost of adding safety features, which
2. Skimming versus penetration strategies;
was at most $11 per car and likely a lot less, out-
3. Razorblade pricing;
weighed the benefits of saving the victims’ lives and
4. Price promotions versus brand building; and
wellbeing, which were callously appraised at a little
5. Premium/prestige pricing.
more than $200,000 per life and $67,000 per burn
victim. Ford argued that car buyers were not inter-
The Value Map
ested in paying more for safety features; CEO Lee
Iacocca was quoted as saying “Safety doesn’t sell.”11 In most markets, and for most product categories, cus-
In hindsight it is clearly appropriate to criticize tomers shop for more than the lowest price; fully aware
Ford and Iacocca—the company and its executives customers will deliberately pay more to get more, but in-
failed to apply the same standards to their profes- formed customers will not pay more to get the same, or
sional decision making that they would, presumably, pay the same (or more) to get less. For example, in the
have applied instinctively to their personal behav- automobile sector, customers who buy a BMW know
iors—but in the context of the commercial, legal, that they could pay less and get a Toyota or pay more
and regulatory environments of the time, their deci- and get a Porsche—or pay even more and get a Ferrari.
sions seemed prudent. Nevertheless, as with all mar- Those are rational trade-offs, and BMW’s customers
keting-strategy decisions and as with all professional have chosen their preference. There are stated or im-
behavior, ethical standards should have prevailed plicit trade-offs that customers make when choosing to
over cost-benefit analyses, worries about retooling pay more and get more or to pay less and get less and
costs, prevailing regulatory standards, or perceptions the value functions that underlie those trade-offs in
of customers’ willingness to pay. Ford’s analyses and any market serve to shape a “value frontier” or natural
rationale were documented in a memorandum that boundary along which customers will make trade-offs.
laid out the cost-benefit analysis, and when it was re- Products that lie to the southeast of that frontier are
vealed in a prominent expose by Mark Downie in naturally more attractive—they exceed the value func-
Mother Jones,12 it triggered an embarrassing and ex- tion by offering more quality/performance for the
pensive public furor, a costly recall, and extended same price or the same quality/performance for a
legal difficulties. The Pinto brand was destroyed; it lower price. Offerings that lie to the northwest of the
was soon withdrawn from the market by Ford. The frontier are inherently inferior, dominated by some al-
Ford brand itself was damaged. Even without those ternative that offers the same quality/performance for
369
Pricing Strategies
lower price or more quality/performance for the same The value map is a very practical tool to define the
price. This reality, shown in Figure 2, can be used to pricing strategy, as it contains all essential informa-
set pricing strategy and is useful for describing differ- tion: competitor’s quality, competitor’s prices, cus-
ences across strategies: tomer’s price sensitivity (slope of the fair-value line)
and customer value.
• Product A is positioned as the premium brand
in the market—it offers the highest quality
(differentiation) at the highest price; SKIMMING VERSUS PENETRATION PRICING.
• Product C is the price leader—it offers the least When a new product is introduced, that is, early in
quality/performance but offers it at the lowest the product lifecycle, a company can opt for one of
price; two basic pricing strategies. The choice has implica-
• Product B’s strategy offers superior customer tions for operations and the achievement of scale
“economy,” sometimes called “value” pricing— and should be driven by careful consideration. With
this offering is to the southeast of the frontier a skimming strategy, the company sets a high price to
and should be attractive to a large segment of “skim” profits from customers with low price sensi-
the market because it pushes the value fron- tivity and high, unmet need for the new product and
tier toward the right (offering more quality/ its advantages. After that market segment has been
performance for the same price or the same served, the price is usually lowered so that segments
quality/performance for a lower price). with lower willingness to pay can afford the product.
• Product D’s position is unfavorable; it offers There are a number of requirements for success with a
low-customer value and there are alternatives skimming strategy, including a substantial market of
along the value frontier that dominate it on customers with low price sensitivity and high unmet
both quality/performance and price. needs, a truly innovative product with substantial
Fair-Value Line
lue
Va
Product A
er
om
st
Cu
w-
Lo
Product D
Price
Product B
ue
l
Va
er
m
to
Product C
us
-C
gh
Hi
Quality
FIGURE 2 The Value Map
370
Pricing Strategies
advantages and a relatively low risk of imitation, and “razor-and-blade” pricing, sometimes called “freebie
relatively high market-level barriers to entry (see marketing.” Economist call this a “cross subsidy;”
Table 3). Essentially, skimming is possible when the discount or “freebie” is subsidized by the mar-
the producer has power: a product with real advan- gins on required supplies. Traditionally, dating back
tages that customers want and will pay for and that to King Gillette, the inventor of the safety razor,
others can’t copy. manufacturers have discounted or given away the
A penetration pricing strategy, on the other razors (the handles) with the expectation that those
hand, aims at quickly gaining substantial market handles would lead to future, plentiful, and prof-
share with a relatively low price. It is used when itable sales of the full-margin blades (razor handles
economies of scale and experience curve effects are are usually cheap, relatively simple to manufacture,
available, when a substantial number of customers and durable, while blades are more expensive, pre-
are price sensitive, when imitation or substitution cision manufactured from higher-value materials
risk is high, when competitors face low barriers to and need to be replaced frequently).13 Today, cell
entry, and when the company is financially strong phones, water-purification systems, and single-serve
(because, with a penetration price, contribution “pod” coffee brewing machines are all discounted
margins are lower and, therefore, breakeven volume below costs (and are sometimes free) in strategies
is high). A penetration strategy basically sets a price designed to lock in a stream of revenues from
that doesn’t attract competition and sets production monthly-calling plans for those cell phones, filters
objectives that achieve the cost benefits of volume for the water purification systems, and coffee pods
quickly (which then further dissuades competitors), for the brewing machines.
and requires subsidizing the introductory stage— Some contemporary strategies are variations
when costs are still high—in order to gain market of that basic razorblade pricing model. For example,
presence and the long-term advantages of scale. Skype gives away its Voice-over-Internet-Protocol
(or VoIP) telephone software and service, anticipating
“RAZORBLADE” PRICING. Another strategic that sufficient customers will upgrade to its premium,
pricing idea that can be powerful in certain indus- for-fee versions to create overall profitability, but
tries and for certain products is “razorblade” or there is no requirement that any customer upgrade to
TABLE 3 Skimming versus Penetration Strategy
Skimming Penetration
Costs • Economies of scale and experience • High economies of scale
curve effects unimportant • High experience-curve effects
Customer • Low price sensitivity • Very price sensitive
• Price is indicator for quality • Innovation aversive
• Early adopter of innovations • Trial purchase should be stimulated
Competition • High prices of competitors • Low prices of competitors
• Low risk of imitation • High risk of imitation
• Low risk of substitution • High risk of substitution
• Short product lifecycle (risk of • Long product lifecycle
obsolescence before break even) • Low market-entry barriers
• High market-entry barriers
Company • Highly innovative product • Large capacities
• Differentiation strategy • Strong distribution network
• High-quality and premium brands • Financially strong (low contribution margins,
• Small capacities high investments in capacity)
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Pricing Strategies
use and take full value from its basic product. RyanAir, annual sales rather than to longer-term brand building.
the European discount airline, charges below-cost Nevertheless, price-based promotions deteriorate
fares—many flights are essentially “free” except for more quickly than investments in brand-building tools
required taxes—but then it charges for almost every like advertising, public relations, experiential promo-
additional service, from baggage check-in to snacks, tions, and even sampling. Price-based promotions have
and bombards passengers with offers and advertise- certain obvious short-term costs: lost revenue and
ments throughout their travel experience; neverthe- margins, and the sales lift of price-based promotions
less, the traveler who doesn’t require checked baggage are more short-lived than other investments. Price-
service, who isn’t hungry, and who ignores the sales based promotions can even have negative effects on
pitches and promotions can take advantage of the sales in the long term. Reasons for those long-term and
travel service itself at the low fare. potentially harmful effects of price-based promotions
on sales and the brand include
Price Promotions versus Brand Building • The Price–Quality Relationship. Customers
often use price as a signal of quality, so dis-
An important tension that must be considered relates
counting the product lowers their perceptions
to the short-term benefits of price-based promo-
of the product’s price and, therefore, its quality;
tions—things like price-off specials at the point of pur-
chase, coupons, and volume deals (buy-one-get-one- • Resentment. Customers come to expect the
reduced price and may resent the “price in-
free deals or “BOGOs,” extra-volume packs, and the
crease” to what the manufacturer believes is
like)—and weighing those benefits against their costs
the “regular” price; and
and their long-term effects and against alternative in-
vestments in promotions that may have more muted • Accelerating/Waiting. Customers learn to buy
ahead when a product is on discount and to
but more enduring positive effects. Price-based pro-
wait when it is not. That is, they shift purchases
motions do have an immediate and often dramatic
across time in order to take advantage of price-
effect on customer behaviors—stuff moves off the
based promotions.
shelf on discount—but those are short-term effects.
Unfortunately, those short-term effects are made all As shown in Figure 3, although brand-building
the more attractive because of the incentive and investments such as advertising do decay over time,
evaluation systems within which many product those effects are long term and gradual and do not
managers work, which are often tied to quarterly or decay at the same rate or to the same degree.
Brand-Building
Promotions
Sales
Baseline
Price-Based
Promotions
Promotion Period Post Promotion

Time
FIGURE 3 Short- and Long-Term Effects of Price Promotions
372
Pricing Strategies
Another pricing strategy, appropriate for cer- an elegant, fruity and pricey spirit of considerable
tain brands in certain product categories and for cer- appeal to the affluent, urbane international con-
tain customers, prestige pricing, the use of price as an sumer.”15 Prestige pricing is about understanding
indicator of quality, performance, and status. Quality when and how consumers use price as a cue for qual-
and performance refer to the actual, physical quality ity, scarcity, and prestige, and then using price along
of the product. Status refers to the use of products to with the other elements of the marketing mix to
seek or communicate social standing or “success.” achieve that premium positioning.
Inferences about both quality/performance and sta-
tus are drawn from a variety of product-related cues
ranging from spokespeople, advertising content, and SETTING AND ADJUSTING THE PRICE
other consumers of the product to its places of distri- The final price must be consistent with the core strat-
bution, packaging, and price. egy and with the pricing objectives. Competitive re-
Consumers are frequently unable to judge the actions, changes in consumer and buyer behavior,
“actual” quality of various products due to a lack of variations in demand and in costs, and other
expertise or the inability to inspect or try a product changes, however, require that a company adapts
in advance of purchase. Wine is a good example; prices to changing circumstances. There are a num-
most consumers do not understand France’s tradi- ber of tactics that can be used to respond to such
tional Appellation d’origine contrôlée (AOC) wine challenges,16 such as:
certification and quality system, nor can they be fa-
miliar with the innumerable varieties, vintages, and • Price discounts and allowances (e.g., quantity
brands produced across the many wine-making re- discounts, seasonal discounts);
gions of the world. By necessity, many consumers • Promotional pricing (e.g., cash rebates, low-
rely on a small set of familiar brands, on point-of- interest financing, longer payment terms; dis-
purchase merchandising and in-store information, cussed above);
and on price. In this case, rather than reviewing price • Price differentiation (e.g., customer segment,
with simple “minimization” criteria, wine shoppers channel, location, or time differentiation);
use price as an indicator of quality. This is true across • Price bundling and complementary
a variety of other product categories as well. pricing (e.g., low price for inkjet printers, high
An illustrative case of prestige pricing com- price for ink cartridges); and
bined with packaging and selective distribution to • Yield management (e.g., setting prices de-
create a exclusive status image is grappa. Grappa is a pending on the booking situation of an airline,
brandy made from grape pomace—the dregs of wine i.e., low prices for travelers who buy the ticket
making, including grape skins, seeds, and stems— well in advance, and high prices for those who
drunk by Italian peasants since the twelfth century. book later)
In the late 1980s, producers softened grappa a little,
to make it more palatable to upscale tastes, packaged The short- versus long-term implications of dis-
it in elegant designer bottles (including some in counts and price-based promotions were discussed
hand-blown Murano glass), and put outlandish above; in general, discounting is very persuasive
prices on it (often more than $150 per bottle in the with regard to motivating purchase behavior but
United States). One grappa, Fratelli Marolo, was can be damaging to the long-term health of the
packaged in “heavy Baccarat crystal decanter deco- brand and the firm. When price adjustments are ap-
rated with 18-karat gold” and sold in the early plied, it is of utmost importance that its effects on
1990s for as much as $2,800 a bottle.14 Grappa demand and on profits are estimated. Depending on
quickly became a fashionable and trendy drink in the the contribution margin, it may well be that a 10
New York and Hollywood high society. As one percent discount requires a 50 percent increase of
restaurateur observed, grappa was transformed from sales volume if overall profits are to be maintained
a “hard liquor for strong, poor, earthbound people to (see CVP analysis, above).
373
Pricing Strategies
Summary
Pricing is too often an afterthought to strategic planning. relationships. Price can signal quality, and price-based pro-
Managers routinely rely on their cost structure or market motions can signal mediocrity and teach customers to
norms to set prices, but pricing can be a powerful element shop by price rather than for benefits. As this note has
of a coherent strategy. Prices can accelerate cash flow or reviewed, effective pricing strategies consider costs, cus-
hasten the benefits of scale. Price can attract customers and tomers, competitors, and positioning objectives to maxi-
price can engage customers in long-term and profitable mize profits within long-term relationships.
Dolan, Robert J. and Hermann Simon. Power Pricing. New Thomas T. Nagle, John Hogan, and Joseph Zale. The Strategy
York: Simon & Schuster, 1996. and Tactics of Pricing: A Guide to Growing More Profitably,
Guidry, F., J. Horrigan, and C. Craycraft. “CVP analysis—A 5th ed. Upper Saddle River, NJ, Prentice Hall, 2010.
New Look,” Journal of Managerial Issues. 74–85, 10 , no. 1 Hinterhuber, Andreas. “Towards Value-Based Pricing—An
(1998). Integrative Framework for Decision Making.” Industrial
Marketing Management 33 (2004): 765–778.
Endnotes
1. Robert J. Dolan and Hermann Simon, Power Pricing 9. See, for example, “Shop-worn arguments,” The
(New York: Simon & Schuster, 1996). Economist 386, no. 8561 (January 2008): 46.
2. Andreas Hinterhuber, “Towards Value-Based 10. See Mark Downie, “Pinto Madness,” Mother Jones 2
Pricing—An Integrative Framework for Decision (September–October, 1977): 18–32; and, Matthew T.
Making,” Industrial Marketing Management 33 Lee, “The Ford Pinto Case and the Development of
(2004): 765–778. Auto Safety Regulations, 1893-1978,” Business and
3. Adapted from Philip Kotler and Kevin L. Keller, Economic History 27, no. 2 (Winter 1998): 390–401.
Marketing Management, 13th ed. (Upper Saddle 11. Ibid.
River, NJ: Pearson Education, 2009). 12. Ibid.
4. Adapted from David W. Cravens and Nigel F. Piercy, 13. Gordon McKibben, Cutting edge: Gillette’s Journey to
Strategic Marketing, 8th ed. (Boston: McGraw Hill, Global Leadership (Boston: Harvard Business Press,
2006). And Hinterhuber, “Towards Value-based 1998)
Pricing.” 14. G. Buchalter and J. Levine, “Italian White Lightning,”
5. F. Guidry, J. Horrigan, and C. Craycraft, “CVP Forbes 147, no. 4 (1991): 94–95. Online database
Analysis—A New Look,” Journal of Managerial EBSCOhost, Academic Search Premier., www.epnet.
Issues 10, no. 1 (1998): 74–85. com/ehost/login.html. Last accessed on July 10, 2010.
6. Source: Simon, Kucher & Partners, a Germany- 15. Al Bassano, “Grappa: Italian ‘White Lightning’ Goes
based consulting firm Upscale,” Beverage Network, (March 2005) available
7. See James Surowiecki, “Priced to Go,” The New at www.bevnetwork.com/pdf/mar05_grappa.pdf
Yorker 85, no. 36 (November 9, 2009), and Brad and www.bevnetwork.com/monthly_issue_article.
Stone and Stephanie Rosenbloom, “Price War Brews asp?ID⫽106. Last accessed (both) on July 10, 2010.
Between Amazon and Wal-Mart,” The New York 16. See for example Philip Kotler and Gary Armstrong,
Times, November 24, 2009, page A1. Principles of Marketing (Upper Saddle River, NJ:
8. Leegin Creative Leather Products, Inc. v. PSKS, Inc. Prentice Hall, 2005).
[2007] 551 U.S. 877.
374
Promotion and People—
Integrated Marketing
Communications
“Doing business without advertising is like winking at a
girl in the dark. You know what you are doing, but
nobody else does.”
STUART HENDERSON BRITT, 19561
Today, Professor Britt’s observation about advertising applies more accurately to the
whole assortment of marketing communications tools, which includes everything from
advertising, point-of-purchase displays, and price-off coupons to press releases, the
“placement” of products in movies, and consultative sales initiatives. Doing business
without an effective program to communicate the firm’s value proposition to customers
is like “winking in the dark.” Integrated marketing communications—how the firm tells
its target customers about its offerings and value propositions and moves customers to
purchase—are essential to strategic success. The “integrated” characterization empha-
sizes the fact that customers have many “points of contact” with a firm across a variety of
occasions and a variety of media. Each of those occasions is an opportunity to build
equity with the customer. In an effective strategy, each of these points of contact will
deliver consistent, even synergistic messages and experiences that build on each other to
develop and reinforce a singular position for the brand. Entire courses and texts are
available on these topics.2 This note is a strategic overview highlighting the range of
tools and basic strategic frameworks of integrated marketing communications.
THE COMMUNICATIONS MIX

Although consumers watch more television than ever (today Americans averaged more
than four-and-a-half hours of television per day3), mass media has fragmented, and
media habits have changed. Television channels have proliferated—the average
American home receives almost 125 channels4—and “viewing,” which was once a family
event, now may mean anything from having the television on as “background” for other
activities to recording shows to watch at different times and on different devices. Other
375
Promotion and People—Integrated Marketing Communications
technologies, including the Internet, personal music customer contact information and to buy sim-
players, satellite radio, and video games have all taken ilar customer data from a variety of vendors.
consumers’ time away from traditional broadcast Using those data to target customers with mes-
media. In this fragmented media environment, mar- sages as well as to customize offerings is a power-
keters can no longer rely on advertising to reach mass ful tool, but it has also spawned overwhelming
audiences efficiently; instead, they utilize an increas- clutter and increasing resentment. Direct mar-
ingly diverse set of communications tools appropri- keting messages, especially electronic points of
ately mixed to develop truly integrated marketing contact, are unique in their ability to track
communication programs. responses and to connect directly with order
The communications mix has traditionally taking and fulfillment.
been defined as comprising advertising, personal • Sales. Sales or “personal selling” involves indi-
selling, sales promotions, and public relations. In ad- vidualized and interactive (two-way) commu-
dition, new hybrid tools have emerged, including nications, including one-on-one meetings,
event and “experiential” promotions,“brand ambassa- presentations, and personal communications
dor” programs, and the Internet. Labeling or catego- targeted to the individual customer or “ac-
rizing these and other new tactics is not particularly count.” Sales programs are capable of com-
important and novel sorts of communications appear municating and customizing large amounts
everyday, but understanding differences in the way the of information (from the marketer to target
tools affect customers is invaluable. Table 1 pres- customer and from the customer to the marketer
ents basic characteristics of the core elements of the and firm). Personal selling is effective at moving
communication mix and summarizes their strengths customers to trial and adoption—that is, per-
and weaknesses: sonal selling is capable of “closing the deal” and
follow-on support. Personal selling is poorly
• Advertising. Advertising entails communicat- suited to creating broad awareness or interest
ing messages via paid-for, impersonal media because, although absolute costs of sales pro-
(television, radio, newspapers, etc.) in which grams can be modest, especially compared with
the sponsor is identified or known. Because those for advertising, the cost per exposure (the
advertising includes everything from multi- cost of each sales call or contact) is generally
million-dollar television commercials shown high. The structure of sales relationships for
on the Super Bowl to weekly grocery inserts in many business-to-business products has deep-
local newspapers, it is a very broad category, ened toward consultative “partnerships,” with
and difficult to treat as one. In general, it is ef- sales engineers working closely with customers
fective at building awareness and interest and to create customized solutions to their prob-
for communicating vivid images and ineffec- lems, sometimes even maintaining offices in
tive at communicating extensive information. the customers’ facilities.
Advertising suffers from significant waste, clut- • Sales Promotions. Sales promotions are
ter, and consumer skepticism. short-term incentives intended to move cus-
• Direct. Direct communications such as direct tomers to “action” (to purchase). Sales pro-
mail, telemarketing, and e-mail contacts are motions include offers to consumers and to
perhaps a form of advertising. However, they retail partners or “the trade.” The variety of
are distinct in that they take advantage of ad- creative sales promotions has expanded a
vances in computer and database power to great deal and the distinction between sales
target customers with communications that are promotions and other promotion mix ele-
“personalized” (but usually not truly personal) ments, including advertising, has blurred.
and to track customer responses to those com- Price-based consumer sales promotions
munications. Marketers have the ability to col- (coupons, deals, and volume deals such as
lect, maintain, and analyze large databases of “bonus packs”) are effective at increasing
376
TABLE 1 Characteristics of the Elements of the Communications Mix
INTER-
ADVERTISING DIRECT PROMOTION PERSONAL
Word-of-Mouth
Viral
Consumer Price
Promotions
Sampling
Trade Promotions
PERSONAL SELLING
PUBLIC RELATIONS
Point of
Purchase
Mass v. Addressable Mass Mass Mass Mass Mass Mass Address- Mass Individual Mass Address- Mass
able able
Paid/Unpaid Media Paid Paid Paid Paid Paid Paid Paid Paid Paid Unpaid Paid Paid
One-Way v Interactive One- One- One- One- One- Two-
Way Way Trackable Interactive Way Way Way Trackable Interactive One-Way — Way
Awareness ✫
Interest
Decision/Trial ✫ ✫ ✫ ✫ ✫
Persuasive
Adoption
Information Content
Vivid/Image ✫ ✫
Credibility ✫ ✫
CHARACTERISTICS
Control
Reach ✫ ✫
Waste ✫ ✫
Clutter
Absolute Expense
Cost per exposure
✫ - Outstanding strength.
Weakness Strength
377
sales in the short term but also have notewor- Each of these categories of tools in the mar-
thy shortcomings in the longer term. These keter’s repertoire perform some tasks well and other
shortcomings include foregone revenue, tasks less well (see Table 1). For example, point-of-
degradation of brand image (due to purchase promotions , which encompass in-store
price–quality inferences), and “training” cus- merchandising (e.g., displays, shelf-coupons, and sig-
tomers to expect deals and to hasten or delay nage), are good at influencing cross-brand decisions
purchases (i.e., to buy earlier or later to take and moving consumers to act, but they are not good
advantage of promotions). The trade-offs at creating awareness or building category demand,
between brand building and price-based pro- and they can get lost in the clutter of the contempo-
motions will be discussed further below. rary shopping environment. Imaginative and re-
• Public Relations. Public relations encom- sourceful new tactics are being devised everyday that
passes the management of the firm’s complex do not necessarily fit neatly into a single category in
relationships with its many “publics” or con- the traditional communication-mix framework but
stituencies, including regulators, public inter- that are, nevertheless, persuasive and effective. Today,
est groups, the media, and customers. Public few communication programs rely on only one or
relations includes “publicity,” which specifi- even just a couple of the tools in the communication
cally entails efforts to gain mediated coverage, mix. The best are truly “integrated” campaigns in
especially by journalists (i.e., “press coverage”), which multiple tools are used and coordinated so that
that appears as articles or segments in unpaid- customers’ contacts with the firm are consistent and
for space (in newspapers or electronic media) “on strategy” and so that the tools interact to create
rather than in paid-for (advertising) space. and reinforce a strong message and to claim a singular
Publicity has great credibility because of its position in consumer perceptions.
mediated quality but there is an intractable loss For example, in 2007 Unilever’s AXE® brand
of control with that mediation; journalists can of men’s hygiene products—which targets men from
report negative stories as easily as they can pos- 11 to 24—created carnival-like “experiences” on
itive stories. Publicity is most effective for in- university campuses across the United States, invit-
novations that compel interest; the press is less ing students to, among other things, jump into (and
likely to cover more mature products. become part of ) an enormous ice cream sundae
• Inter-Customer Communications. The impor- complete with sauces and whipped cream, to mud
tance of communications between customers has wrestle, and to take part in an enormous food fight.
increased in the contemporary climate of media Afterwards, students washed off in glass-walled
fragmentation, clutter, and filtering. “Buzz” showers using AXE® shower gel and received AXE®
marketing includes interpersonal communica- samples and gifts (see Figure 1). The events were
tions (literally word of mouth), electronic tied to a campaign that included the creation of the
inter-customer communications, including the World’s Dirtiest Film starring David Spade and featur-
mass forwarding of content and messages ing video segments submitted online by consumers,
(“viral” marketing) and inter-customer obser- and product placement on relevant television shows,
vations, which are especially important in the such as “Jimmy Kimmel Live” as well as print and
diffusion of new-to-the-world, disruptive inno- television advertising designed to drive traffic to as-
vations. Inter-consumer communications are sociated Web sites. The events spawned buzz and
powerful—buyers trust and respond to recom- newspaper coverage on campuses. College papers
mendations and to complaints heard from major national media, including the New York
other customers far more readily than they re- Times,5 wrote articles about the on-campus events
spond to paid-for communications from mar- surrounding the AXE campaign. Were these events
keters—but inter-consumer communications and online collaborations “advertising,” “sales pro-
are also the least controllable element of the motions,” or “publicity”? It didn’t matter! They were
communication mix. imaginative (and a bit risqué), they cut through the
378
FIGURE 1 AXE® Campus Event
clutter, they reinforced a consistent message claim- 1 Specifying the Target Market
ing a unique place in the target consumers’ percep- and Segments
tions (“fun in the ‘mating game’”), and importantly,
Targeting is the “matching” of some segment of cus-
the program increased brand awareness, brand un-
tomers and their specific needs with the firm and its
derstanding, and sales.
sustainable competitive advantages. The crucial
question in targeting is: What specific needs of which
THE COMMUNICATIONS specific customers can the firm meet better than the
MANAGEMENT PROCESS competition at a profit? Spelling out the target market
and target segments/needs is the essential first step in
In order to create, manage, and evaluate a successful any communication program. A number of basic
integrated marketing campaign, the manager should characteristics of the target market, buyer behavior,
proceed through a process of specifying the target and the product itself dictate fundamental differ-
segments, gauging those customers’ current relation- ences in appropriate and effective communication
ship with the product or brand, establishing strategic mixes available to the marketer:
objectives, setting the campaign budget, implement-
ing the program, and finally evaluating the effort. • Type of Market. Businesses buy differently
Even ongoing, continuous communications pro- than consumers, and, as a result, B2B markets
grams, such as routine sales activities, will benefit are different than consumer markets.
from periodically going through these steps. Businesses use purchasing agents and “buy
379
centers,” teams of users and experts, to make tailoring are also a good fit with personal sell-
large, generally more expensive purchases ing and less well-suited to mass communica-
often based on technical specifications and tions. Marketers of low-cost, low-tech, low-risk,
explicit procurement procedures. B2B com- and low-involvement products, on the other
munications are, therefore, dominated by hand, may well use mass forms of communi-
personal selling. cations to remind consumers of the brand
• Target Market Concentration and and can give the brand with emotional or so-
Addressability. The more concentrated a cial meaning.
market is and the more easily addressed the en- • The Stage in the Product Lifecycle.
tities in the market are, the more likely it is that Innovations in the early stages of the product
personal selling can be used to engage the mar- lifecycle require more “hand-holding” and
ket. “Addressability” refers to the ability of the technical support. As the product lifecycle
marketer to identify and list or catalogue the evolves, customers gain experience and expert-
members of a target market segment. For ex- ise and need less sales and service support or
ample, a pharmaceutical marketer can easily hand-holding. At the same time, in the intro-
obtain a list of medical practices and doctors, ductory stage, innovations may command
complete with contact information and spe- greater attention from the media, making the
cialization such as pediatrics or geriatrics. On use of publicity viable, and from customers
the other hand, it would be nearly impossible who will more readily engage in inter-customer
to create a similar database of all mothers of ill communications. Later in the lifecycle core
toddlers or all elderly citizens. The physicians benefits become widely available across prod-
market is highly addressable while the patient uct alternatives, peripheral benefits and at-
market is not easily addressed. tributes, including brand image become more
• Order Size/Cost. Within both business and important, and advertising can serve to build
consumer markets, the size of a typical order brand image and to remind customers of the
and especially the total cost and margin of or- need and of the brand.
ders drive differences in the way buyers behave • Available Commercial Infrastructure and
and the sorts of communications that can be Cultural Differences. In adapting communi-
used to connect with consumers. Expensive cations to the international markets or in de-
goods and high total-cost orders often require veloping global campaigns, it is important to
personal sales, and their margins justify and recognize that many economies lack the com-
support sales efforts. Lower-cost goods are less munications infrastructure enjoyed in the de-
well-suited to personal selling but do respond to veloped world. In the developing world, mass
wide reach, low-cost-per-exposure communica- media are gaining penetration and more and
tions such as advertising and sales promotions. more of the population has access to radio,
• Type of Product. Not only do the cost, typical television, and newspapers, but that reach is
order size, and typical margin influence the still far lower than it is in the developed
types of communications programs that can world. Similarly, direct communications that
and should be used effectively, so do other rely on the Internet or postal services are less
characteristics of the product such as techno- reliable and have lower reach in the develop-
logical sophistication or complexity, required ing world. Even across developed, industrial-
customer support and installation, and the ized economies, customers respond differently
need for customization. Complex products to different promotion mix elements and cer-
require more information and significant tainly to different “copy” or arguments in per-
training (or “hand holding”), and information suasive messages, and those cultural differences
and training are best delivered via personal will also drive differences in effective commu-
selling. Products that require customization or nication programs.
380
TABLE 2 Customer Readiness/Response Hierarchy Models
Business to Business Consumer

Hierarchy of Consumer Decision Adoption
Decision Process6 Sales Funnel7 Effects8 Making Process9 Process10
Problem Recognition Awareness Need/Problem Recognition Awareness
Leads
General Need Description Knowledge Information Search Interest
Product Specification Liking Evaluation of
Suspects Evaluation
Supplier Search Preference Alternatives
Proposal Solicitation Prospects Conviction

Trial
Supplier Selection
Decision
Order Routine Customers Purchase
Specification Adoption
Performance Review Post-Purchase Behaviors
2 Determining Customers’ Current It is also important to gauge the customers’

Relationships with the Product/Brand psychological relationship with the need, the product
or brand, and the purchase. What are the customers’
Shaping integrated communications programs within
motives for making purchases? How do consumers
the context of the overarching marketing strategy, set-
go about making decisions in this product category?
ting appropriate objectives, and evaluating results all re-
A variety of frameworks for categorizing customer
quire gauging the consumers’ current (pre-program)
motives and linking those motives to communica-
relationships with the product/brand and the purchase
tions efforts have been proposed, most of which ad-
decision (consumer “readiness to buy” or readiness).
dress, in one way or another, differences in consumer
Table 2 presents some “hierarchical” or process
involvement with the product and the decision and
models of consumer decision making for both busi-
distinguish elements of both thinking and feeling in
ness-to-business and consumer markets. Although
the way consumers relate to the need and the prod-
many such models have been proposed in the literature,
uct. One of the best known, the FCB Grid, will be
they all break down the customer–product relationship
presented in a little more detail below.
into phases or steps, from unaware of the product or the
need through awareness and evaluation toward pur-
3 Setting Objectives
chase and, ultimately, adoption and “loyalty.”
Some strategies and associated communica- Any integrated marketing campaign should specify
tions programs will involve reinforcing or changing a objectives in measurable and specific terms. As a core
brand’s position in consumers’ perceptions; in those objective, many communications programs will have
cases, objectives should be specified in terms of con- customers moving from their current readiness or re-
sumers’ perceptions and changes in those percep- lationship with the decision, established above, to-
tions, often captured within perceptual maps. ward some desired state of readiness, whether that is
Positioning is a combination of several factors, in- greater awareness, heightened interest, more in-
cluding the targeted customers and their needs, the quiries, greater preference, or simply increased sales.
firm’s value proposition, and the intended brand As noted, objectives may also include the desired
definition—what the brand will promise to deliver position in customer perceptions that the product or
better than the competition. brand will claim or “own.” Objectives for an integrated
381
communications program should be specific and can be easily compared with increased profits from
measurable and almost always require that baseline enhanced customer retention.
or “before” levels be well established.
5 Implementing the Program
4 Setting the Budget From a strategic perspective, the critical tasks in inte-
grated communications management focus on spec-
There are a few basic approaches to setting commu-
ifying the target markets/segments, determining
nications budgets. Many of these are “reactive”—
where the target customers are in relationship to the
spending all that the firm can afford, spending a
decision and the purchase, and establishing the
stipulated percentage of sales, or matching the com-
strategic objectives and budgets. Implementing a
petition (competitive parity). Another approach,
communications program is tactical—and complex.
objective-based or task-based budgeting, is more
There are whole industries devoted to providing
proactive, although the resulting budgets are usually
communications services, including advertising and
modified by the reality of scarce resources and com-
public relations firms, direct marketing agencies,
peting priorities within the firm. Task-based budget-
media brokers, and agents and distributors who will
ing begins with a set of tasks or objectives that the
handle sales as well as distribution functions. It is,
strategy seeks to accomplish, such as increasing con-
nevertheless, important for the strategist to under-
sumer awareness, generating sales leads, or simply
stand the whole communications process and to
boosting sales, and then “backs-up” to the communi-
oversee the tactical implementation of the campaign
cations activities necessary to accomplish those tasks.
with emphasis on staying “on strategy.”
Those activities might include things like advertising
messages, “mail drops” (direct mailings), or cold calls
6 Evaluating the Communications Effort
by the sales force. Once objectives have been trans-
lated into specific tasks, it is relatively straightfor- Measuring the effectiveness and return on a communi-
ward to calculate the total budget. Task-based budg- cation program is essential for adjusting and improv-
eting is preferable to reactive methods such as ing communications and to justifying investments.
percent of sales from a strategic point of view be- One of the most difficult arguments to make within
cause it begins with strategy-related objectives and a firm is for long-term, brand-building investments.
works its way, via costing out specific activities, to the Although brand-building activities may not be
required resources. linked directly to immediate sales or profits, that
A second set of budgeting considerations is doesn’t mean that brand building doesn’t drive sales
across tools or elements of the promotion mix (for and financial results, especially long-term results,
example, between sales and advertising or between and it doesn’t mean that the long-term and short-
price promotions and brand-building activities) term effectiveness of communications programs
and between customer acquisition and customer re- can’t be measured or linked to financial contribu-
tention. Both of these allocations can be informed tions (i.e., “returns” or “return on investment”).
by comparing expected returns against costs. Evaluating the effectiveness of a communica-
Specifically, if the strategist understands the life- tions effort is predicated on specifically describing the
time value of its customers and knows or can esti- target markets and segments and the pre-campaign re-
mate the number of customers acquired by each lationship of those customers with the product or
tool under consideration, it is relatively straightfor- brand (steps one and two above) and setting detailed,
ward to compute the expected Return on measureable objectives for the campaign (step three
Investment (ROI) for each tool (advertisements, above). Establishing customers’ pre- and post-cam-
promotions, etc.) and to make informed choices paign relationship with the product generally requires
about investments in those activities. Similarly, if marketing research and, specifically, survey research.
those “yields” and returns are known for elements Marketing ROI, or “return on marketing” is a
of an integrated communications program, they powerful tool for marketing strategists. Return on
382
Investment is a ratio—the profit earned divided by at the consumer level it is a “pull” strategy; the con-
the investment made to achieve that profit: sumer demand pulls the product through the chan-
nel of distribution. That is, distributors, wholesalers,
Profits
Marketing ROI = and retailers are motivated to stock and sell the prod-
Investment (Costs) uct because of the downstream demand. Sometimes
Profits are not simply sales or gross revenues—profits that demand will manifest itself in actual requests
are net contribution or units sold multiplied by aver- from consumers to retailers to stock a product; re-
age margins (margin being price minus unit costs). tailers would then ask their wholesalers for the
From a strategic perspective, these computations product, wholesalers would ask their distributors or
should take into account the lifetime value of the brokers, and so forth. While the idea that consumers
customer—how much does each acquired customer literally request the product may help illustrate the
provide for the firm across the lifetime of his or her idea underlying a “pull” strategy, actual consumer re-
relationship with the brand? This computation—the quests aren’t necessary or even typical. Usually a pull
lifetime value of a customer—can be done for differ- campaign builds demand at the level of the ultimate
ent levels of “readiness” (such as awareness, liking, or consumer using mass communications tools like ad-
commitment; See Table 2, above). How much is a vertising while also selling to distributors, whole-
percentage gain in awareness worth in increased sales salers, and retailers to persuade them to stock and
and in increased margins? Knowing what a percent- sell the product, often using evidence from research
age change in a level of readiness is worth in sales and other markets to show that consumers will buy
across time (the lifetime value of those customers) the product once it’s on the shelves. It is the relative
allows communications campaigns to be expressed emphasis on generating demand at the consumer
in Return on Investment (ROI) or Return on level that distinguishes a “pull” strategy.
Marketing Investment (ROMI). If the firm invests A “push” strategy, on the other hand, empha-
$10 million in a campaign that increases awareness sizes building demand in the channel of distribution,
by 1 percent, which might for example equal 10,000 especially at the next level “down” the channel. The
customers becoming aware of the brand, and each manufacturer emphasizes sales efforts directed to-
customer who is aware of the brand has a lifetime ward distributors; distributors then sell to whole-
value of $150, than the campaign would have a ROI salers who sell to customers or retailers (who sell to
or ROMI of 1.5 (15 million divided by 10 million). consumers). Those selling efforts persuade the chan-
This ROI can be compared to alternative uses of the nel members to stock and sell the product and then
resources (the $10 million), including other commu- the channel members’ sales force works to sell the
nications campaigns or alternative investments. product to the next channel entities. Push strategies
emphasize direct selling and trade promotions, and
are typically found in B2B markets.
SOME SPECIFIC STRATEGIC
Although “push versus pull” makes for a neat di-
COMMUNICATIONS ISSUES chotomy, most marketing communications campaigns
The following sections detail four specific strategic include elements of both, and the real distinction is a
communications issues, including (1) push versus matter of degree. For example, Coca-Cola, an iconic
pull, (2) promotions versus brand building, (3) cus- global consumer brand famous for massive advertising
tomer motives and decision making, and (4) business- and consumer-marketing programs, also has an elabo-
to-business (B2B) motives and buyer behavior. rate and highly regarded sales organization working
closely with channel members, from bottlers to distrib-
utors, retailers, and restaurateurs, to build distribution
Push versus Pull
and facilitate consumption. Similarly, although selling
A basic distinction in marketing communications is military planes is a long, intensive “push” process of
between “push” and “pull” strategies. When the focus lobbying and bidding to governments, Northrop
of a communications program is on building demand Grumman, Boeing, and other large defense contractors
383
in the United States also uses mass media, including bottom line, and some channel members “divert”
advertising in major national newspapers, to reinforce promotions to other retailers and to other markets. In
the brand and to build goodwill amongst opinion lead- fact, an entire industry called “diverting” has emerged
ers, lawmakers, and the general public. in which one retailer will take advantage of a trade
promotion offered to it, such as discounts for volume
orders, and then resell inventory via intermediates
Promotions versus Brand Building
(“diverters”) who then resell to other retailers and to
Another basic distinction can be drawn between other geographic markets for whom the promotion
“brand-building” efforts, including advertising, on was never intended. The fact that trade promotions
the one hand, and price-based promotions. Price become expected rather than exceptional and moti-
promotions such as deals (price-off programs), vating, and that many customers misdirect trade pro-
coupons, and bonus packs tend to have an immedi- motions, doesn’t make it easy for manufacturers to
ate and marked impact on sales—there is no ques- decline to participate—trade promotions have be-
tion but that consumers do buy products “on deal” come part of the “ante,” a necessary prerequisites of
(i.e., when those products are offered with special doing business with some retailers. Some large retail-
price deals). Nevertheless, price promotions can have ers, including Wal-Mart, have recognized that trade
important negative effects in the long term. The first promotions distort their business model and may dis-
and most obvious negative effect is the inherent loss tract energies from core value propositions. Wal-Mart
of revenue—price promotions, by lowering the accepts no trade promotions (and doesn’t allow its
price, lower the revenue realized for the product. buyers to accept gifts or other consideration from its
Other possible negative effects are more subtle and vendors). The company which is the largest retailer in
less immediate. Lowering the price for a specific pe- the world has been able to “own” the position of
riod of time may shift sales forward in time; that is, “everyday low prices” in the marketplace while other
some customers who buy on deal would have bought retailers deal and do time-specific promotions.
later (when the product would be offered at full
price). As price promotions become more common
Customer Motives and Decision Making
and predictable, consumers may also shift purchases
out in time to wait for the next deal rather than buy Customers are motivated by different things and to
at full price. This purchase shifting may compound different degrees depending on the product category
the loss of revenue, distort demand, and disrupt pro- and occasion as well as on the customers themselves.
duction planning. Additionally, price is an important Some consumers react more to emotional messages
signal of quality—especially in some product cate- while others respond to rational appeals (the “facts
gories where consumers lack the ability or expertise and figures”). Similarly, customers do not bring the
to judge substantive quality. By lowering the effective same level of interest or attention to all purchases or to
price, price promotions can diminish consumers’ all product categories. Some products, such as laundry
perceptions of the product’s quality in the long term. detergent, are inherently uninteresting—marketers
Another set of long-term and undesirable ef- call that level of interest, involvement, or enthusiasm
fects of price promotions relates to “trade promotions,” for a purchase or a product “involvement”—while
deals offered to channel partners, especially retailers, others are inherently engaging, such as cars and
such as price reductions (“case allowances” and extra movies. Even though some products may be more en-
product deals), as well as cooperative advertising gaging, customers also vary in their degree of involve-
participation, contests, and slotting or shelving fees ment within product categories; some people are
(direct payments for stocking consideration). Trade movie junkies or car enthusiasts while others far less
promotions can quickly become expected, a neces- engaged, even uninvolved with these products.
sary part of doing business with the retailers, and are Many frameworks have been proposed to
hard to control. It is hard to insure that consumers gauge consumers’ purchase and consumption motives
get some or any of the benefit of trade promotions. in order to develop appropriate communications mes-
Often retailers drop incentives directly to their own sages. One of the best known is the FCB Grid, which
384
Thinking Feeling It is also true that different customers on different

(Rational) (Emotional) occasions are going to be motivated by different
things; for example, there are certainly some occa-
Involvement
sions where some customers will purchase candy in a

High
House very rational (thinking) and highly involved manner.

Apparel
Computer
These motives are generally consumer motives—
they apply less well to B2B products, most of which
are fairly rational or “thinking” products and are
purchased initially in a highly analytic fashion even if
Involvement
they later become “straight rebuys” (or habitual pur-

Low
Laundry chases); B2B motives are discussed below.

Beer
Detergent Understanding customer needs, customer
motives, and the purchase decision process of the
product’s customers informs the development of the
integrated marketing communications program.
FIGURE 2 The FCB Grid
Vaughn linked the FCB Grid to advertising copy
(messages and creative content): Messages focus on
makes basic distinctions between thinking and feeling the decision process (e.g., thinking-feeling-doing)
products on one axes and high versus low involvement and persuasive content expected to influence the rel-
products on the other (Figure 2). Richard Vaughn evant processes. Understanding the motives and de-
introduced this now-well-known framework while he cision-making process can also influence decisions
was the director of research at Foote Cone & Belding about the overall promotions mix; for example, sales
advertising agency.11 In this framework, products like are effective in influencing rational, thinking pur-
cameras and life insurance are high-involvement/ chases but are usually less persuasive with regard to
thinking products; customers generally learn (think) feeling decisions or low-involvement purchases.
about these products, form a preference (feel), and
then buy or “act.” Perfume and apparel are examples
B2B Motives and Buyer Behavior
of high-involvement/feeling products; the purchase
process for these “affective” product categories usually Most industrial or B2B purchases are approached in a
follows a “feel-learn-act” flow in which customers’ relatively high-involvement (at least for the initial
emotions are the primary and most influential fac- purchase) and highly rational/thinking manner, but
tor. Low-involvement/thinking products, or “habitual” there are important distinctions in the B2B sector just
purchases, including mundane household consum- as there are in consumer products and purchase deci-
ables such as detergent and groceries, follow a “do, sions. Understanding how B2B customers make deci-
learn, feel” process in which trial may precede evalua- sions, how they fashion specifications and proceed
tion and feelings (and feelings are low-intensity pref- through the buying process, and what motivates or
erences). Finally, low-involvement/feeling products drives B2B purchases is important. Buying processes
are items such as liquor and candy, and the consumer and motives will be different by product category and
decision process is most often do-feel-think; rational by firm (or segment of firms). When purchasing the
evaluations come after the act and the feelings (which same products, for example, some firms will use a
often involve satisfaction or self-indulgent pleasure). purchasing agent from the outset (and those pur-
The FCB Grid is just one prominent frame- chases will, therefore, be driven by price and efficien-
work for classifying and understanding customer cies such as delivery time and quantity) while other
motivations and tying those motives to differences firms will begin with “buying centers” to determine
in suitable and effective communications programs. requirements, set specifications, issue requests for
Many other frameworks have been proposed,12 but proposals (or “RFPs”), and ultimately to make the
the basic implication of these tools is that customers purchase decision. Buying centers are teams work-
are motivated by different things for different products. ing, either formally or informally, to make purchase
385
decisions for an organization. There are many roles in of information in the organization), and “buyers,” the
buying centers, from “users” (the people who will ul- people who will ultimately commit the organization
timately make use of the purchased good or service to the purchase. In order to communicate with orga-
and who influence the purchase through that applica- nizational buyers effectively, it is necessary to under-
tion role), influencers (experts in some aspect of the stand the buying criteria, the buying process, and the
purchase), gatekeepers (people who control the flow various roles in that buying process.
Summary
Managing the communications mix and integrated mar- ing and evaluating communications programs that build
keting communications is an essential part of marketing on and reinforce a unique and valued position in con-
strategy; the strategist must understand integrated market- sumer perceptions. Integrated marketing communications
ing communications at the strategic level. This includes require deep and broad understandings of consumer mo-
understanding the variety of communications tools, the tives, buying behaviors, and relationships with the need,
integration of these tools, and basic processes for manag- the product, the brand, and the purchase decision.
Clow, Kenneth E., and Donald E. Baack. Integrated Lenderman, Max. Experience the Message: How Experiential
Advertising, Promotion and Marketing Communications, Marketing Is Changing the Brand World. New York:
4th ed. Upper Saddle River, NJ: Prentice Hall, 2010. Carroll & Graf, 2006.
Dye, Renée. “The Buzz on Buzz,” Harvard Business Review
78, no. 6 (November-December, 2000): 139–146.
Endnotes
1. The New York Herald Tribune, October 30, 1956. 7. D. J. Dalrymple, W. L. Cron, and T. E. DeCarlo, Sales
2. Kenneth E. Clow and Donald E Baack, “Integrated Management (Hoboken, NJ: John Wiley & Sons,
Advertising, Promotion and Marketing Com- 2004).
munications,” 4th ed. (Upper Saddle River, NJ: 8. Robert J. Lavidge, and Gary A. Steiner, “A Model of
Prentice Hall, 2009). Predictive Measurements of Advertising Effectiveness,”
3. www.screentime.org/index.php?option=com_content Journal of Marketing (October 1961): 59–62.
&task=view&id=7&Itemid=14. Last accessed on 9. F. Nicosia, Consumer Decision Processes (Englewood
July 10, 2010. Cliffs: Prentice Hall, 1966).
4. See “Average U.S. Home Now Receives a Record 10. Everett M. Rogers, Diffusion of Innovation (New
118.6 TV Channels” at: www.nielsenmedia.com/nc/ York: Free Press, 1962); also see Note II-9: New
portal/site/Public/menuitem.55dc65b4a7d5adff3f6 Products and the Diffusion of Innovations.
5936147a062a0/?vgnextoid=fa7e220af4e5a110Vgn 11. See Richard Vaughn, “How Advertising Works: A
VCM100000ac0a260aRCRD. Last accessed on July 10, Planning Model . . . Putting It all Together,” Journal
2010. of Advertising Research 20, no. 5 (1980): 27–33 and
5. See Shain Bergan, “UA Students Take AXE to Richard Vaughn, “How Advertising Works: A
Dirtied Selves on Mall,” The Arizona Daily Wildcat, Planning Model Revisited,” Journal of Advertising
November 7, 2007; and Louise Story, “Advertising; Research 26, no. 1 (1986): 57–66.
The Campaign Is Clean, The Stunts, Fairly Dirty,” 12. See, for example, John R. Rossiter, Larry Percy, and
The New York Times, September 28, 2007. Robert J. Donovan, “A Better Advertising Planning
6. Patrick J. Robinson, Charles W. Faris, and Yoram Grid,” Journal of Advertising Research 31
Wind, Industrial Buying Behavior and Creative (October–November, 1991): 11–21.
Marketing (Boston: Allyn & Bacon, 1967).
386
Channels of distribution involve how a product is delivered from the producer to the cus-
tomer and all the functions that add value within that process. Traditionally, the marketing
management literature has emphasized the distribution of goods (physically tangible
products) toward end consumers via wholesalers, distributors, agents, brokers, and re-
tailers. Advances in technology and in logistics along with the increased importance of
services (intangible products) in modern economies have reshaped and, in particular,
shortened many channels. Multiple channels, in which the same product is made avail-
able through different and sometimes competing distribution paths, have proliferated
as have hybrid channels in which different paths deliver different parts of the overall
bundle of value-adding functions. Charles Schwab, for example, not only offers the
convenience of trading online, by phone or in person, but—using offline and online
tools—also provides advice and information through online portfolio consultation,
along with investment courses that their Learning Center hosts. Airlines sell their tick-
ets online, through their own sales offices, independent travel agencies, tour operators
and brokers. An example for hybrid channels is Nestlé’s revolutionary coffee brand
Nespresso. The coffee machine, developed by Nestlé and licensed to leading producers
of household appliances, is mainly sold through household appliance retailers and the
Internet. The individually portioned aluminium coffee capsules, however, are exclu-
sively sold through the Internet-based Nespresso Clubs, and through the Nespresso
Boutiques, and a limited number of brick-and-mortar stores.
In many industries, the Internet has revolutionized distribution systems by not
only lowering costs, allowing for more effective direct marketing, and addressing new
customers segments, but also increasing market transparency and reducing customer’s
switching costs. In the Airline industry, for instance, the Internet has saved airlines
roughly $10 to $15 per booking. The increased price transparency, however, forces
some Airlines to sell a ticket on the Internet an estimated $50 to $100 lower than tickets
purchased through other channels.1
Distribution issues are too often treated as mundane or as established “givens,”
and the literature commonly treats “place” as a one-way, producer-toward-the-consumer
flow, usually adopting the producer’s “downstream” perspective. These viewpoints
overlook important aspects of and opportunities in distribution in contemporary
marketing strategy. Precipitating or at least anticipating changes in distribution sys-
tems has created substantial competitive advantages for many firms. For example,
being the first mover into valuable distribution space can fashion a barrier to entry
for later movers. Coca-Cola’s’ early move into vending-machine distribution in Japan
created a long-lived advantage—today Coke has more than a million vending ma-
chines in Japan, and enjoys a 50 percent market share.2 When Netscape entered the
software market with its Navigator® browser, it also innovated in the way software
387
was distributed (and priced). Rather than battle es- perspective that’s what they are—but their overall
tablished software vendors for space in bricks-and- strategy is as an efficient value-adding player within
mortar retailers, Netscape offered the Navigator® the channel from manufacturer to customer.
browser for “free but not free” via download over In summary, many strategists have found ad-
the Internet:3 Navigator® was “officially” priced at vantage by challenging assumptions about and antici-
$39, but many target segments—including educa- pating changes in the manner via which products are
tors, students, and not for profits—were given free distributed. Marketers continue to face challenges and
copies and everyone was offered a 90-day free trial. to find opportunities in getting the product to the cus-
Netscape’s business model was based on revenue tomer. A foundation to understanding how channels
from sales of their business and Web-server soft- work and to identifying opportunities and threats in
ware. Meanwhile, competitors whose business distribution is an understanding of the basic functions
models were tied to traditional channels and to rev- of value-adding activities that channels perform. This
enue from software sales were slow to respond. note reviews those basic value-adding functions and
Between its launch in 1994 and early 1998, more how technology and other dynamics are changing the
than 94 million users had downloaded Navigator®4. way those functions are performed, and then outlines
Many firms’ core business models and strategies strategic considerations and alternatives in channels of
center on their own roles in distribution and the distribution.
manner in which they add value within larger chan-
nel systems. Dell Computers’ “Dell Direct” model is a
CHANNEL FUNCTIONS
noteworthy example of a strategy based on the firm’s
role within a larger supply chain. As the personal-com- To get a product from the manufacturer to the cus-
puter (PC) market evolved, Michael Dell recognized tomer, regardless of the length of the channel, the
that consumers no longer required “hand holding”; as number of entities in the channel, the type of prod-
the PC product lifecycle evolved customers were will- uct, or the type of customer, certain things have to
ing and able to buy direct but they wanted customized happen—somewhere in the channel these things
machines. In addition to selling customized products have to occur for an efficient and effective delivery of
directly to consumers, the Dell Direct model also in- the product to occur. For example, the product must
volves partnering closely with vendors to accelerate in- be physically moved to the customer; it must be
ventory. Michael Dell described that model: transported to the location where the customer
needs it when the customer needs it. The customer
The supplier effectively becomes our part-
must pay for the product, either in advance, on deliv-
ner. They assign their engineers to our de-
ery, or on terms. Also, the assortment of complimen-
sign team, and we start to treat them as if
tary products and services required to use and derive
they were part of the company. For exam-
value from the product must be made available. All
ple, when we launch a new product, their
of these and more are the essential “channel func-
engineers are stationed right in our plants.
tions”; valuable benefits that a channel of distribu-
. . . So it’s not, “Well, every two weeks de-
tion as a whole provides to the customer and the
liver 5,000 to this warehouse, and we’ll put
marketer. Some of these functions are not relevant to
them on the shelf, and then we’ll take
some products or for some customers, and a single
them off the shelf.” It’s, “Tomorrow morn-
channel member doesn’t necessarily even often
ing we need 8,562 and deliver them to
provide all of these functions—but these things need
door number seven by 7 A.M.”5
to be done somewhere in most channels.
The Dell Direct model is so efficient that Dell makes Different channel members may provide dif-
money on the “float”; customers’ payments are re- ferent channel functions depending on the product
ceived almost immediately (via credit card payments category and even the brand within a product cate-
and transfers) while vendors are paid on terms.6 To gory. For example, Dell customizes and ships PCs
customers Dell looks like the customized/direct alter- directly to customers using delivery services such as
native in the PC market—and from the customers’ UPS to physically move its computers from the
388
manufacturer to the customer; Dell’s logistics part- Understanding the strategic issues involved in
ners even assort various components of the order, channels of distribution begins with an understand-
such as workstations and screens, from vendors for ing of the functions channels provide or can provide.
Dell—and Dell uses direct communications, includ- There have been many comprehensive lists and
ing the Internet and toll-free telephone services, to frameworks of channel functions proposed in the
provide customer support. Hewlett Packard (HP) marketing literature; they all emphasize the breadth
competes directly with Dell in the PC market, but and diversity of value-added activities that take place
unlike Dell, HP distributes its computers through between the manufacturer or marketer and the cus-
retail stores, delivering computers in bulk to distri- tomer. Table 1 is an inclusive list of channel functions
bution centers from which they are shipped to indi- organized into three overarching categories: transac-
vidual stores, and using retail sales personnel and tional functions, logistical functions, and facilitating
the retailers’ customer-service staff for selling and functions. Some of these “functions” overlap—for ex-
support. Both of these strategies are viable and have ample, financing is often a part of selling and involves
been successful, but they approach distribution and risk taking—but this extensive inventory provides a
service in very different ways that create very differ- thorough conceptual perspective on the sorts of value-
ent value propositions for the PC customer. adding activities the channels provide.
TABLE 1 Functions Performed by Channels of Distribution and Channel Entities7
Transactional Functions
• Buying—Taking title (possession) and making payment to vendor/manufacturer
• Selling—Providing title to buyer, accounting and managing receivables
• Risk Taking—Assuming ownership risks of obsolescence, spoilage, shrinkage, etc. as well as other risks asso-
ciated with other functions below (e.g., credit risks associated with financing)
Logistical Functions
• Transporting—Physically moving products toward the customer and place of need
• Assorting—Bringing together diverse products (creating assortments) to meet simultaneous or related needs
• Storing—Holding products until needed (time convenience)
• Location—Locating products where needed (place convenience)
• Sorting or “breaking bulk”—making product available in desired quantities or volume
Facilitating Functions
• Financing—Providing and managing credit and assuming credit risk
• Grading—Converting heterogeneous supply into homogeneous supply
• Assuring—Providing and backing warranties, guarantees, promised repairs and replacements, etc.
• Maintenance and Repair—Regular or scheduled maintenance and exceptional repair
• Installing and Tailoring—Installation, customization, fitting, etc.
• Promoting—Marketing communications, including advertising, personal selling, and promotions and pro-
vision of required customer information to persuade customers to buy and rebuy
• Negotiating—Creating dialogue and bargaining to identify interests and reach agreement
• Matching—Fitting diverse customers with diverse product alternative in conditions of scarcity
• Training—Technical training for customers and staff, help-desk support, etc.
• Marketing Research—Understanding the customers, competition, and market and communicating that infor-
mation to manufacturers, suppliers, and other channel partners
• Disposal—The repurchase and disposal of customers’ previous equipment or product
389
TRANSACTIONAL FUNCTIONS. Taking possession have enjoyed the increased margins while also as-
and then selling goods involves managing numerous suming the increased headaches of assorting, selling
specific transactions and tying up capital and cash and promoting, logistics, dealing with spoilage, and
flow. Having layers of distributors is valuable for the providing customer service.
manufacturer because it reduces the number of trans-
actions (and therefore the bookkeeping and overhead)
and it accelerates cash flow; the manufacturer usually
receives payment before the ultimate customer buys
the product. Taking possession of goods also involves
inherent possession-related risks including spoilage,
obsolesce/changes in tastes, and shrinkage (theft).
LOGISTICAL FUNCTIONS. A fundamental func-

tion of channels is the physical distribution of the
product. Logistical functions (i.e., “logistics”) en-
compass the following: (1) getting the product to
the place the customer experiences or meets the
need (2) providing service at the time the customer
experiences the need (3) providing the right size or
quantity of the product that meets the customer’s
needs, and (4) providing other products and acces-
sories required to meet the need or set of needs.
FACILITATING FUNCTIONS. Although transac-

tional and logistical functions may be the traditional
core functions of distributors—the “nuts and bolts” of
channels—facilitating functions such as financing,
promoting, and servicing and supporting the installed
base can be the most valuable and the hardest-to-
bypass functions that channel members perform.
Many distributors and retailers “own the relationship”
with the customer via these value-added activities. Changes in the competitive environment
and, especially, in technology have caused channel
structures to change and some channel members
DISTRIBUTION DYNAMICS
have become obsolete or redundant. Modern com-
Although sometimes disparaged as redundant or putational and database power, the proliferation of
noncontributing profiteers—as in this vintage 1920 consumer credit cards and electronic banking, the
headline from the New York Times—channel entities wide-availability of rapid-delivery services such as UPS
(“middlemen”) invariably provide valuable func- and FedEx, along with the emergence of the Internet as
tions or they are circumvented or replaced by market a widely available two-way tool for marketing and
dynamics. If manufacturers find that they can pro- communications have allowed many organizations to
vide a function or bundle of functions on their own sell directly to their customers and to manage those
and no longer require a distributor or agent, they numerous accounts themselves. At the same time, the
integrate forward. If a retailer finds that it can deal emergence of huge retailers such as Aldi in Europe and
directly with manufactures and therefore does not Wal-Mart in the United States has consolidated channel
need distributors, it deals directly with manufactur- “power” at the retail level and increased the importance
ers. Farmers, for example, have organized into coop- of key account management—that is, the emphasis on a
eratives to integrate forward into distribution—and few large retail accounts that comprise the vast majority
390
of sales. This has decreased the ability of small retailers retailers and could set the terms of trade.
to compete and made “jobbers,” small distributors who Consolidation in the grocery trade and the
called on individual retail accounts and assisted in the emergence of Wal-Mart, Target, and others as re-
management of inventory and merchandising, obso- tailing behemoths has shifted that power toward
lete. While these changes threaten small players, such those fewer retail “key accounts.” Understanding
shifts also create opportunities, especially for firms that where power resides in a channel and why is im-
consolidate across a level of the channel (horizontal in- portant to managing distribution and to identi-
tegration, i.e., taking over or merging with another fying opportunities for channel-structure shifts.
firm in the same industry) or integrated backwards • Channel Control. Channel control, “the ac-
and/or forwards (vertical integration, i.e., owning its tual impact that a channel member achieves on
upstream suppliers or its downstream buyers). an associated channel member’s beliefs, atti-
Channel structures continue to evolve due to tudes, and behavior”9 varies as an outcome of
technological and competitive forces. Channel struc- channel power and as a function of prices and
tures are also influenced by factors like the emergence margins for the product, and the length of the
of large, efficient third-party logistics suppliers (3PLs), channels. Many firms that require close control
the maturation of many consumer products (e.g., con- forge direct or exclusive channels but others
sumer electronics and personal computers) toward distribute through arms-length channels but
lifecycle stages at which consumers are comfortable provide control through intensive, company-
with lower and less hands-on service and with purchas- owned services. Frito-Lay, for example, sells
ing items without personal inspection. These changes through groceries, discounters, and conven-
have led some channel entities to lose share and ience stores but controls product quality, mer-
profitability—their basic business models have been chandising, and inventories via its intensive
challenged—but others have grown and profited. network of 10,000 route salespeople who call
Thus, the creative marketing strategist may find oppor- directly on stores on a daily basis.
tunities as well as hazards in the changing dynamics of • Channel Conflict. Channel conflict, “disagree-
marketing channels. Three related forces underlie ment among marketing channel members on
channel dynamics and distribution outcomes for firms: goals and roles—who should do what and for
channel power, channel control, and channel conflict. what rewards,”10can occur between levels of the
channel (e.g., between manufacturer and dis-
• Channel Power. Channel power is “the ability tributor), between members at the same level in
of a particular channel member to control or in- a channel (amongst distributors), or between
fluence the decision making and behavior of an- different channels. Conflict can arise from dif-
other channel member, or one channel mem- ferent objectives. For example, in fast-food
ber’s potential for influence with another franchise systems conflict arises because of
channel member.”8 There are several types of or conflicting goals: the franchisor (the brand)
sources of channel power: (1) reward, that is, of- wants to maintain and grow market share and
fering positive outcomes such as payment, mar- absolute sales levels—franchisor revenues are
gins, or traffic, (2) coercive, that is, punishments tied to franchisee’s gross sales and royalty
such as withdrawal of products or of support, rates—but franchisees need to maintain mar-
(3) expert, that is, the ability to provide scarce gins rather than top-line revenues. Conflict can
and valuable expertise, (4) legitimate, that is, also arise from perceived competition. When
ownership, legal/contractual, etc., and (5) refer- Nike opened its Niketown retail outlets, moti-
ent, that is, offering benefits via affiliation such vated as much by its interest in building the
as prestige. In consumer goods, large manufac- brand through consumer experience, retailers
turers once had channel power over their retail carrying the brand perceived Niketown as com-
partners (the “trade”)—every grocer needed to petition.11 Channel conflict can be expensive in
have Coca-Cola in its assortment to meet their terms of lost support and goodwill as well as in
consumers’ needs, so Coke had power over those lost sales and reduced channel coverage.
391
STRATEGIC CHANNEL by the entities in the channel (such as whole-

CONSIDERATIONS salers, distributors, and retailers) as they resell
and mark up the marketing organization’s
There are a variety of issues to be considered in estab- products. Direct channel-management costs in-
lishing and managing channels of distribution, includ- clude selling expenses, logistics expenses, and
ing especially customer needs as well as the desired promotions to channel members’ sales forces
brand position, and costs and margin structures: and service personnel. Prominent costs in-
• Customer Needs and Behaviors. One essential curred by channel members in delivering value-
driver of the channels required by a firm, a adding functions include transportation and
product, or a brand is the target customer needs, handling, order processing and account man-
especially (a) needs for information, guidance, agement, accounts receivable management, and
customization, and installation at the time of the inventory management and carrying costs.
purchase, (b) needs for the provision of or avail- These considerations influence choices across distri-
ability of service and support after the purchase, bution alternatives, discussed next.
and (c) needs for convenience and extensive
availability. Needs for selling and service support
correspond with more limited, exclusive distri- STRATEGIC CHANNEL ALTERNATIVES
bution. Needs for convenience and availability Structuring channels within any given marketing strat-
drive broader, “intensive” distribution. egy entails consideration of at least two parameters:
• Brand Positioning. Just as people are known by distribution intensity and channel structure and own-
the company they keep, brands are known by the ership. These “decisions,” which may be constrained for
company they keep, and choosing channel part- a number of reasons such as being late to market (pre-
ners connects the brand with channel partners ferred channels are “taken”) or available resources, are
(distributors and retailers) and with the other shaped by the considerations outlined above: customer
brands in the channel partners’ assortments. needs, desired brand positioning, and cost structures as
Premium hair care products, for example, often well as channel power, control, and conflict.
choose to distribute only through salons to affil-
iate with the salons’ perceived expertise, exclusiv- • Distribution Intensity. Channel coverage can
ity, and style. Those same brands might decline vary from exclusive distribution systems in
to distribute through discounters to avoid being which only selected stores carry a product, such
perceived as ordinary or cheap. as that for Rolex watches, to intensive distri-
Choosing channel partners also links the bution that can approach being iniquitous
brand, the firm, and the firm’s business model to (seeming to be available “everywhere),” such
the channel partner and its business model. as Coca-Cola’s objective of having every con-
Firms selling through Walmart, for instance, sumer be “within arm’s reach of desire” (i.e.,
often claim that Walmart forces a continued em- within an arm’s reach of a Coca-Cola product).12
phasis on cost reduction at the expense of quality. Generally, four factors drive greater exclusivity
• Costs and Margin Structures. Consideration in distribution: the amount of effort buyers
of the costs of distribution—and deliberation of will expend in “shopping” for a product, the
possible savings in distribution—should begin required service and support from channel
with consideration of the functions that are per- members required by customers, the degree of
formed in the channel, where they are per- “prestige” positioning sought, and the desire to
formed, how well they are performed, and how maintain price points and margins.
well they meet customer needs. The marketing • Channel Structure/Ownership. There are sev-
organization “pays” for distribution in two eral sorts of relationships and bases for cooper-
ways: directly in the actual expenses associated ation that a marketer can forge with channel
with managing and maintaining distribution, partners, ranging from fully independent
and indirectly in the form of margins retained (arms-length) to full ownership. In traditional,
392
arms-length channels the various channel

members act independently, motivated by self-
interest (profits, margins, etc.), and do not coor-
dinate activities other than as mutual interests
and transactions dictate. These channels require Manufacturer/Marketer
investment in selling and account management,
but do not require large capital investments and Distributor Internet Stores
are generally cheaper to establish. At the other
extreme are company-owned channels. Control
is highest in company-owned channels; in fact, Specialty Stores Discount Stores
control is absolute within parameters of organi-
zational control. Company owned systems such
as Red Lobster restaurants and Starbuck’s cafés
enjoy greater control than franchised competi- A B C D E F
tors, such as McDonald’s and Dunkin’ Donuts,

and far greater control and market presence
than firms selling through independent chan-
nels. On the other hand, capital investments are
much greater and costs are generally higher, too, FIGURE 1 Multiple Channels of Distribution
to operate company-owned channels and flexi-
bility is constrained. that tactic introduces a real threat of brand di-
• Multiple Channels. An alternative to design a lution and consumer confusion.
single distribution system that is becoming • Hybrid Channels. “Hybrid” is sometimes
more common, given changes in competition used to refer to multiple-channel systems (de-
and technology, is for firms to distribute scribed above), but there are also emerging
through more than one channel at the same channel structures in which different, comple-
time (Figure 1). In a multiple-channel set up mentary functions are delivered to the same
customers may choose their channel, but, at customers through different, parallel channels
least in theory, they source all of the value- (Figure 2); this is conceptually and strategi-
adding channel functions from that specific cally different from delivering all functions
channel (which is the distinction between through alternative channels to different cus-
“multiple” and “hybrid” channels, discussed tomers. We use “hybrid” to refer to the latter,
below). In practice, many consumers use that is to the structuring of distribution so that
higher-service channel members for shopping the same customers receive different channel
(to benefit from sales advisory service) and functions—which add up to the complete
then resort to low-service discount channels bundle of customer requirements—via differ-
for purchase, leading to predictable channel ent channels.
conflict and inescapable channel modifica-
tions. In fact, channel conflict is a significant For example, high-end consumer electronics firms
problem with multiple channel distribution. such as Bose (consumer audio equipment),
Partners who add value see discount and direct Lexmark (printers), and Linksys (computer periph-
channels as unfair competition. To deal with erals) distribute through the Army and Air Force
this conflict, some brands have created differ- Exchange Service (AAFES, the on base “PX” stores),
ent products for different channels. Levi’s, for but those stores do not provide adequate selling or
example, has created lower-quality jeans for service support at the point of purchase. Customers re-
sale through discounters like Wal-Mart while quire information and support to understand the
continuing to offer higher-quality jeans through product benefits, to make informed choices across al-
department and clothing stores. Of course, ternatives, and to use the products once purchased.
393
TABLE 2 Hypothetical Needs and

Importance for Two Segments
Repair Trade (Mom & Pop Plumbers)

Manufacturer/Marketer Availibility 1
Assortment (Breadth of inventory) 2
Location 3
Service Provider
Customer Service 4
Internet Site
and Toll-Free Price 5
Call Center
Stores DIY (Do-it-Yourself Customers)
Price 1
Customer Service 2
Assortment (Complementary products) 3
Point-of-Purchase Delivery Detailed information
Support Display, and and After Sale Location 4
Support Products Service Support Availability 5
segments: small plumbing repair contractors (“Mom

A Z and Pops”) and Do It Yourselfers (DIYs). These seg-
ments’ needs are different (Table 2). Small plumbing
FIGURE 2 Hybrid Channels of Distribution
repair contractors need the exact part for a problem
quickly—their time is money, to them and to their
These brands contract with Military Sales and Service
customers. Many of their customers are in emergency
(MSS) to provide point-of-sale support (simplified
situations requiring immediate remedy; they can’t
graphically in Figure 2). Therefore, the clerks working
wait for a part to come in. In addition, when a
with the customers on the floor are not AAFES em-
plumber is charging $45 an hour (or more) and pass-
ployees; they’re MSS staff working on behalf of Bose,
ing parts costs through to the customer (who has a
Lexmark, Linksys or other contracted brands.
leaking toilet or water all over the kitchen floor), the
price of a part or fixture is not a prominent considera-
STRATEGIC DISTRIBUTION DECISIONS13
tion. On the other hand, DIYs are less likely to be re-
Making strategic channel decisions—including de- pairing urgent plumbing problems, but they are, al-
signing new channels and making reorienting existing most by definition, price conscious; they’re doing this
channels—begins with thorough analysis of customer job themselves and often to save the money. The DIY
needs with regard to the functions that channels pro- segment also needs and expects customer service and
vide. What do customers need and want from the prod- informative sales assistance. DIY consumers are not
uct’s distribution system? Thus, the first step in this “on the clock” and, although convenience matters,
process is to describe the firm’s target segments with plumbing supplies are shopping goods to them; loca-
regard to their channel-function needs. Because needs tion and immediate availability are less important.
are an essential descriptor in any segmentation classifi- These priorities are shown in Table 2 as rank order-
cation, it is likely that differences in channel-function- ings for both segments.
related needs influenced the segmentation scheme The next step in designing or modifying distri-
adopted in the firm’s strategy development but, in de- bution systems is to benchmark both the firm’s and its
signing channels, those segments’ specific channel- competitors’ capabilities at delivering those salient cus-
function-related needs should be analyzed or re-ana- tomer needs. The big-box retailer might well determine
lyzed in detail and each segment’s priorities, or that it delivers superior customer service—especially
rank-ordered needs should be spelled out. vis-à-vis plumbing supply houses that are not geared
A “big box” home improvements retailer might, toward consumer retail merchandising, and the big
for example, have identified two key plumbing-supply box likely offers lower prices. Nevertheless, the big
394
Repair Trade (Mom & Pop Plumbers)

Availibility 1 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
Assortment (Breadth of inventory) 2 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
Location 3 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
Customer Service 4 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
Price 5 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
DIY (Do-it-Yourself Customers)
Price 1 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
Customer Service 2 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
Assortment (Complementary products) 3 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
Location 4 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
Availability 5 High←7 ⫺ 6 ⫺ 5 ⫺ 4 ⫺ 3 ⫺ 2 ⫺ 1→Low
⫽ “Big Box” Discount Home Improvement Retailer
⫽ Plumbing Supply Houses
FIGURE 3 Firm and Competitor Capabilities on Functions by Segment and Priorities
box’s assortment and availability—the breadth of benefits. What do the various options cost in financial
parts available and on-site—are inferior to those spe- terms, in terms of managerial resources and attention,
cialized plumbing-supply houses, and that its loca- and in terms of channel conflict and motivation? For
tions are only slightly more convenient than those of example, investments in broader availability (stocking
the plumbing-supply houses. Figure 3 shows a format more parts in each store) are mostly about space and in-
for making these comparisons graphically. The big- ventory carrying costs—things that can be readily
box retailer’s capabilities are shown in circles, plumb- quantified. Offering express/dedicated check-out and
ing-supply houses’ capabilities in squares. special contractor pricing may, on the other hand, have
The next step is to generate alternatives. both monetary and consumer-goodwill costs; cus-
Looking at the Mom and Pop’s requirements, for ex- tomers who are not offered discounts or special services
ample, it is clear that inventory and convenience are may resent that lack of consideration. Channel conflict
the driving forces. Possible solutions would center on may be a greater threat in channels where members pre-
improving the availability of parts in a product cate- viously enjoyed exclusive rights to sell a product in cer-
gory that can involve numerous low-priced SKUs tain markets; they will resent new programs that create
(“stock keeping units,” i.e., distinct items in the in- multiple-channels targeting customers who they had
ventory). Investments in increased inventory, in- invested in and that they believed were theirs. Of
ventory management/warehousing technology, and course, cost-benefit analyses also require careful quan-
logistics as well as innovations such as single parts tification of the benefits of each alternative. Benefits
that can be adapted to fit many repair needs might all may include greater customer satisfaction and loyalty,
be viable alternatives to consider. These alternatives enhanced reputation and value, and increased sales but
may well include both multiple- and hybrid-channel all those benefits should, in the final analysis, be quanti-
configurations. This step should begin with the seg- fied as increased margins and profits. Finally, decisions
ment-by-segment analysis of customer needs vis-à- can be made based on those “costed-out” analyses. That
vis channel functions and generate as wide-ranging is, this process should facilitate informed and systematic
and inclusive a set of alternatives as possible. choices across feasible distribution alternatives and
Next, those various and numerous alternatives should lead to systems that optimally meet customers’
should be analyzed against their expected costs and real needs for the values created by channel functions.
395
Summary
Channels of distribution are rapidly changing due to control, and conflict—understanding who has power and
competitive and customer considerations as well as control and anticipating and managing conflict are im-
changes in technology. Understanding those changes and portant to effective distribution. Finally, managing chan-
the strategic opportunities they present begins with an nels and making choices across channel alternatives
understanding of the value-adding functions performed should begin with careful assessment of customer needs
by channels—the entities that don’t provide real value in relation to channel functions and analysis of alterna-
and irreplaceable value are likely to be bypassed and tive mechanisms for delivering those value-adding func-
eliminated. Channel dynamics include issues of power, tions to various segments.
Coughlan, Anne, Erin Anderson, Louis W. Stern, and Adel Management. Boston: Harvard Business School
El-Ansary, Marketing Channels, 7th ed. Upper Saddle Publishing, 2006.
River, NJ: Pearson/Prentice Hall, 2006. Rolnicki, Kenneth. Managing Channels of Distribution: The
Kasturi Rangan, V. with Marie Bell. Transforming Your Go- Marketing Executive’s Complete Guide. New York: AMA-
to-Market Strategy: The Three Disciplines of Channel COM, 1997.
Endnotes
1. Joseph B. Myers, Andrew D. Pickersgill, and Evan S. on those eight “flows”, adapting from: from V.
Van Metre, “Steering customers to the right chan- Kasturi Rangan, Designing Channels of Distribution,
nels,” McKinsey Quarterly 4 (December 2004): 36–47. Note - 9-594-116 (Boston, MA,: Harvard Business
2. The Coca-Cola Company, “Coca-Cola Celebrates 50 School Press 1994); Gary Armstrong and Philip
Years of Innovation in Japan,” news release, June 26, Kotler, Marketing: An Introduction, 9th ed. (Upper
2007; David B. Yoffie,“Cola Wars Continue: Coke and Saddle River NJ: Pearson/Prentice Hall, 2009), 295;
Pepsi in the Twenty-First Century,” Harvard Business and Roger A. Kerin, et al., Marketing, 8th ed. (New
School case no. 9-702-442 (Boston, MA, 2002) York: McGraw-Hill Higher Education, 2005).
3. David B. Yoffie and Michael A. Cusumano, “Building 8. www.marketingpower.com/_layouts/Dictionary.aspx?
a Company on Internet Time: Lessons from dLetter=C#channel+power. Last accessed on July 10,
Netscape,” California Management Review 41, no. 3 2010.
(1999): 8–28; and David B. Yoffie and Michael A. 9. www.marketingpower.com/_layouts/Dictionary.aspx?
Cusumano, “Judo Strategy: The Competitive dLetter=C#channel+control. Last accessed on July 10,
Dynamics of Internet Time,” Harvard Business 2010
Review 77, no. 1 (January–February, 1999): 70–81. 10. Armstrong and Kotler, Marketing, page 297.
4. Ibid. 11. T. Collinger, “Lines Separating Sales Channels Blur:
5. Joan Magretta, “The Power of Virtual Integration: Manufacturers, Direct Sellers, Retailers Invade Each
An Interview with Dell Computer’s Michael Dell,” Other’s Turf,” Advertising Age 34 (March 30, 1998).
Harvard Business Review 76, no. 2 (March–April, 12. Mark Pendergrast, For God, Country and Coca-Cola
1998): 72–84, see page 75. (New York: Basic Books, 2000), 9
6. www.crn.com/it-channel/193200086;jsessionid= 13. This section is adapted from the work of Professor V.
IBCNVLJSLFFNCQSNDLPSKHSCJUNN2JVN. Last Kasturi Rangan. See V. Kasturi Rangan, Reorienting
accessed on July 10, 2010 Channels of Distribution, Note 9-594-118 (Boston,
7. The American Marketing Association specifies eight MA: Harvard Business School Press, 1994); Kasturi
“universal channel flows: physical possession, own- Rangan, Designing Channels of Distribution; and Erin
ership, promotion, negotiation, financing, risking, Anderson, George Day, and V. Kasturi Rangan,
ordering, and payment,” www.marketingpower.com/ “Strategic Channel Design,” MIT Sloan Management
_layouts/Dictionary.aspx?dLetter=C#channel+flows. Review 38, no. 4 (Summer 1997): 59–69.
Last accessed on July 10, 2010); This table elaborates
396
Budgets, Forecasts,
and Objectives
Executing a marketing strategy and implementing a marketing mix requires resources—
the strategy and mix are, of course, expected to generate revenues that more than offset
the associated expenditures, but they will nevertheless also necessitate investments.
Therefore, a strategy and marketing-mix plan must be translated into the specific ex-
penses expected to be associated with the activities (budgets) and projected revenues
expected to result from those activities (sales forecasts). Once those plans have been
established they should be translated into desired outcomes and measures of those out-
comes (objectives and metrics). Whereas “goals” are the general, long-term desired con-
ditions (often part of or implicit in corporate mission and visions), “objectives” are the
more specific and desired results tied to specific timeframes (These two words are syn-
onyms in the common English-language dictionary, but they are typically used to de-
note this “general” versus “specific” distinction in the strategy literature).
MARKETING PLANNING AS AN ITERATIVE PROCESS

The relationships of strategy to marketing mix implementation, budgets, forecasts, and
objectives underlie the strategic-marketing-management model that organizes this
text, summarized in Figure 1, and are emphasized in Figure 2: The organization’s
missions, vision, and goals shape its strategies, which, in turn, shape general objective
that drive the development of the marketing mix (i.e., specific tactics, including prod-
ucts, prices, promotions and people, and distribution or “place”). The marketing mix
must be elaborated into a budget and projected into forecasts of results, which lead to
specific objectives tied to definite metrics. At the same time, the objectives, which are
themselves related to the mission, vision, and goals and to the strategy, shape the devel-
opment of the marketing mix. This note focuses on forecasting, budgeting, and estab-
lishing specific objectives and metrics for moving forward to effective implementation
and to facilitate subsequent assessment and adjustment.
397
Budgets, Forecasts, and Objectives
Strategy Formation
Marketing Plan(s)
Risks &
Forecasts
Implementation:
Positioning
and the Marketing Mix
Budgets
FIGURE 1 Summary of the Strategic Marketing Process
Planning the marketing mix, budgeting, fore- forecasted outcomes (e.g., a number of new retail
casting, and objective setting are inseparable and accounts, or a specific level of increased sales and new
iterative processes. That iterative nature of these customers). That is, various activities and their associ-
processes is important to emphasize. Effective ated costs should be linked, as closely as possible, to
planning will link specific activities and investments— their forecast effects. Such links between inputs and
for example, the commitment of ten salespeople cost- outputs may be based on assumption—some assump-
ing $1 million, or four quarterly coupon/price promotions are inevitable in developing forecasts—but they
tions at $1 million—to specific expected benefits or may also be based on observations of past effects and
on marketing research. Then, marketing mix and
budget decisions can be adjusted to optimize their
Forecasts
Mission, Vision,
and Goals
Specific
Preliminary
Strategy Marketing Mix Objectives and
Objectives
Metrics
Situation
Assessment
Budgets
FIGURE 2 Planning the Marketing Mix, Forecasting, Budgets, and Objectives
398
forecasted effectiveness. Budget level and allocation secondary research. In primary research the firm
questions—Is an investment in new salespeople worth- develops its own forecast based on customer surveys,
while? Are 10 new salespeople more effective than four expert opinions, estimates of sales force, and the like.
quarterly coupon promotions? Should we commit or re- In secondary research, forecasts are acquired from
quest the resources to do both?—can be posed and tested specialized vendors (market research firms and in-
based on understandings of their forecasted impacts, dustry experts) that regularly estimate sales trends in
and the resolution of those iterative, maximization the industry. There are many methods that companies
analyses should be incorporated into resulting plans. use to forecast sales: They can be based on customer
Thus, marketing mix development, budgeting, data (e.g., assessment of buying intention), expert
and forecasting are inextricably linked and should be opinions (e.g., sales force estimates), or historical
done iteratively within pro forma analyses to develop data (e.g., time-series analysis). Table 1 gives an
and optimize investments and to arrive at effective overview of these sales forecasting methods with
objectives and metrics. The first step is to outline a their strengths and weaknesses.
preliminary marketing mix derived from strategic Sales forecasts are an essential input to the for-
planning. That outline specifies a certain set or “mix” mulation of marketing objectives and setting objec-
of activities, facilitating the estimation of the costs tives, but objectives and budgets also impact forecasts.
for those activities (a budget) and allowing the ef- Without realistic assumptions about market size and
fects of those activities to be estimated (a forecast). trends, it is impossible to set realistic sales targets. The
That mix is then adjusted or optimized within pro results of a sales forecast predict future sales given a
forma models, including forecasts, budget implica- specific marketing mix or effort; forecasts usually begin
tions, and resource constraints. Once an optimal mix by estimating how sales will evolve without changing
is determined, forecasts and budgets can be finalized the marketing mix or committing additional resources,
and a set of objectives established (Figure 3). or with a specific proposition about marketing mix ef-
fort based on strategic considerations. Subsequently, if
Forecasting sales forecasts are short of the strategic objectives, the
manager will consider additional and new marketing
A sales forecast usually contains two parts: the
initiatives and, therefore, revise the budget which will
market forecast, which estimates future sales for the
in turn influence sales forecasts. Thus, forecasting, set-
entire market or industry, and the sales forecast,
ting objectives, and budgeting are dynamic and itera-
which estimates the sales and the market share of the
tive rather than sequential activities.
particular company and its products. There are two
It is also invaluable to develop, as specifically as
ways to obtain those forecasts: primary research and
possible, estimates of the effects of specific mix ele-
ments and allocated resources on sales. For example,
historic data, managerial judgment, and/or market-
Forecasts
ing research can be used to develop an estimate of the
relationship between advertising expenditures and
sales, sales-force effort and sales, price promotions
and sales, and the like. In this way, specific marketing
Objectives and
Marketing Mix mixes and expenditures (budgets) can be forecast
Metrics
onto future sales, revenues, and profits at a more de-
tailed level. Such forecasts of “return on marketing in-
vestments” by marketing mix element are not always
Budgets possible and are not always precise, but these are the
basis for modeling the effects of different marketing
mix combinations and permutations and for thereby
FIGURE 3 Marketing Mix, Forecasts, performing pro forma analyses to optimize the effec-
Budgets, and Objectives tiveness of the marketing mix expenditures.
399
TABLE 1 Sales Forecast Methods1
Method Description Strength Weakness

1. Assessment of buyer’s In a representative survey, • Works well for products, • Requires
intentions customers are asked to which purchases are representative, and
indicate their intention to planned in advance (e.g., reliable market
buy a specific product in industrial products, research
the next period of time consumer durables) or • Can be costly and
for new products time consuming
• Forecasts are directly
derived from customers’
buying intentions
1. Sales force estimates Sales people estimate the • Sales people usually have • Estimates might be
future sales they can make important insights in biased, as sales
their markets, people want to have
competition etc. the objectives set low
• Estimates available for enough
individual sales territories
• Easy to do
2. Expert opinions (such Experts (e.g., dealers, • Utilizes “collective” • Can be costly
as “Delphi surveys” in distributors, trade wisdom of experts • Difficult to find and
which estimates are associations, consultants) • Relatively easy and quick motivate experts
aggregated, sent back, are asked to estimate future
refined in several sales
iterative rounds)
3. Market tests The company chooses • Works well for new • Expensive and time
representative markets products consuming
(e.g., cities, regions) where • Effectiveness of • Competitors get to
the product is introduced marketing activities can know your strategy
with the full marketing plan be tested
(or variations to test the
effect of single activities)
and tests the market
reaction
4. Time-series analysis Statistical methods (e.g., • Less subjective • Not suitable for
exponential smoothing, innovations (no
econometric models) are historical data)
used to predict future sales • Requires sophisticated
from historical data statistical skills
Budgeting marketing budget depends on the strategies, the

strategic objectives of the business unit and, un-
As noted, establishing marketing budgets, forecast-
avoidably, on the financial constraints of the com-
ing results, and setting marketing objectives go hand
pany. Basically, there are four ways to determine the
in hand. These activities make up the heart of the
marketing budget:
marketing plan. The marketing plan specifies what
the objectives are and how they should be achieved, • Extrapolation: Building upon the previous
and estimates the costs for each marketing task. The year’s budget as a base, those allocations are
400
either increased or decreased by a certain produces a loss, all other segments are profitable.
amount or are left unchanged. This approach Overall, the business unit targets are met. Marketing
is problematic as it does not explicitly consider budgets usually are established for one year. However,
marketing objectives, changes in strategies, market developments should be monitored in shorter
costs, or adjustments to the competition or to time intervals (e.g., on a monthly or quarterly basis),
evolving opportunities. so that the marketing managers can react if competi-
• Percentage of Sales/Profits: The marketing tor’s actions, changes in market demand, etc., require
budget is determined as a percentage of the pro- immediate action and a change in marketing plans.
jected sales or profits. This is an uncomplicated
method but it reverses “cause” and “effect.” Sales
Objectives
are a result of marketing activities, not vice versa.
• Target Costing: The company determines the To be effective, objectives should be Specific,
target sales volume and determines the target Measureable, Achievable, Relevant, and Time-specific,
profit. The remaining resources—after profits or “SMART.” That is, the more specific, measureable,
are taken from projected sales—are the de facto achievable, relevant, and time-specific an objective is,
marketing budget. This approach applies the the better it guides action and investment, the more
“all-you-can-afford method” and similar to the motivating it is, and the better it facilitates assessment
“percentage of sales approach” it does not con- and adjustment. Vague objectives lead to confused and
sider the causal relationship between market- ineffective effort, discourage initiative, and complicate
ing budget and the target sales or profits. diagnosis and remedial action.
• Bottom-up Budgeting: This approach de- The marketing function must contribute to
rives the required marketing budget from the the overarching objectives of the business unit; the
objectives of the business unit. It determines business unit in turn contributes to the overall vi-
all marketing activities that are needed, calcu- sion and mission of the company. This hierarchy of
lates the costs for each and the total marketing goals is important, as only marketing objectives that
budget is computed. The bottom-up approach are consistent with the business unit strategy and
requires a breakdown of all the specific expenses the overall company mission and vision contribute
for the marketing department, including sales- to the long-term success of the firm. Well-managed
force expenses, market research, advertising, companies translate visionary goals into long-term
public relations, promotions, and marketing strategic objectives of the business units, and sys-
overhead. Bottom-up budgeting is the most tematically derive objectives for the various business
effective but is also the most complex. It high- functions, including marketing, from those business
lights the need to integrate objective setting, unit objectives (see Figure 3). Hence, marketing
to develop the marketing mix, and to estab- objectives are derived from business unit objectives.
lish the budget based on those drivers. In the example shown in Table 3, business unit
objectives are specified in terms of profit, ROA, mar-
Costs for all marketing activities can be divided into ket share, and sales volume.
direct marketing costs (e.g., promotions, discounts, These business unit objectives now have to be
folders), semi-fixed marketing costs (such as media translated into marketing objectives. There are three
advertising, public relations), and fixed marketing types of marketing objectives which should be spec-
costs (including marketing department overhead, ified at the overall level and at the segment level:2
sales force management expenses, marketing research
and the like). Once all tasks and activities are deter- • Profit objectives (e.g., profits, return on assets,
mined, the costs are estimated. Table 2 contains return on sales, contribution margin, net mar-
the marketing budget of a business unit broken down keting contribution);
to marketing budgets for the single segments, and an • Sales objectives (e.g., sales volume, unit sales,
estimation of segment profitability. Segment four market share); and
401
TABLE 2 Sample Marketing Budget
Buaness Unit 1: Net Marketing Contribution

Segment 1 Segment 2 Segment 3 Segment 4 Total
Total market
Volume (units) 480,000 1 ,300,000 250,000 860,000 2,890,000
Average unit price ($) 120 145 120 125 133
Dollar sales (millions) 57,600,000 188,500,000 30,000,000 107,500,000 383,600,000
Company Sales
Average unit price ($) 125 138 118 126 130
Units sold 101,376 218,551 82,627 68,254 470,808
Market share (% units) 21.1 16.8 33.1 7.9 16.3
Sales revenue (millions) 12,672,000 30,160,000 9,750,000 8,600,000 61,182,000
Market share (% dollar sales) 22.0 16.0 32.5 8.0 15.9
Cost of Goods sold (millions) 8,236,800 19,604,000 6,337,500 5,590,000 39,768,300
Gross profit (millions) 4,435,200 10,556,000 3,412,500 3,010,000 21,413,700
Direct marketing costs
Promotions 120,000 350,000 60,000 120,000 650,000
Discounts 60,000 160,000 35,000 50,000 305,000
Folders and mailing 40,000 110,000 20,000 50,000 220,000
Misc. 50,000 100,000 25,000 45,000 220,000
Semi-fixed Marketing Costs
Media advertising 450,000 1,200,000 200,000 400,000 2,250,000
POS 100,000 250,000 60,000 95,000 505,000
Public relations 20,000 50,000 10,000 20,000 100,000
Fixed marketing costs
Marketing department 120,000 240,000 60,000 120,000 540,000
Salesforce 240,000 480,000 120,000 240,000 1,080,000
Market research 50,000 125,000 25,000 45,000 245,000
Misc. 10,000 30,000 5,000 10,000 55,000
Total marketing expenses 1,260,000 3,095,000 620,000 1,195,000 6,170,000
in % of sales sale revenue 9.94 10.26 6.36 13.90 10.08
Net Marketing Contribution 3,175,200 7,461,000 2,792,500 1,815,000 15243,700
Other operating expenses 2,150,000 6,900,000 1,450,000 1 ,900,000 12,400,000
Net profit (before taxes) 1,025,200 561,000 1,342,500 ⴚ85,000 2,843,700
Assets 11,200,000 19,800,000 5,200,000 10,900,000 47,100,000
Return on assets (%) 9.15 2.83 25.82 ⴚ0.78 6.04
Return on sales (%) 8.09 1.86 13.77 -0.99 4.65
• Customer objectives (e.g., brand awareness, to the overall objective. This requires three basic
positioning, customer satisfaction, loyalty, steps:
cross-buying, share of wallet).
1. Set profit objectives per segment;
The marketing manager now must specify how the 2. Determine sales volume and market share
single market segments, or customers, contribute needed to achieve that target profit; and
402
TABLE 3 Example of Business-Unit Objectives

• Brand Awareness—the percentage of the cus-
tomers of the actual market that are aware of
the brand;
Profit (before taxes): $ 2,800,000 • Brand Image—the percentage of customers
Return of Assets (ROA): 6% that know the brand and also find it attractive
Market share: 16% • Purchase Rate—the number of customers that
actually bought the product
Sales volume: $ 61,000,000
• Share of Wallet—the company’s share of the
customer’s annual purchase volume
3. Specifying levels of brand awareness, brand • Repurchase rate—the number of customers
image, purchase rates, customer satisfaction, who buy again
and customer loyalty needed to achieve the • Cross-Buying Rate—the number of customers
target market share. that buy more than one product category from
a specific supplier.
For step number three, specifying levels of hi-
erarchical customer “readiness,” staircase analysis is a Another powerful and systematic method for
useful framework. Staircase analysis estimates the hi- developing specific objectives is “Cost-Volume-
erarchical components that influence future sales Profit” logic (or the Net Marketing Contribution
volume (illustrated in Figure 4): (NMC) approach3). This framework decomposes
marketing strategy’s contribution to the overall prof-
• Market Potential—the maximum of all cus- its of a business unit into its subordinate parts and
tomers who could possibly purchase in the thereby helps to identify various possible measures
product category; to improve profits:
• Actual Market—the number of customers
who actually buy the product category; Profit ⫽ Contribution (or NMC) ⫺ Overhead
1. Corporate Objectives Vision & Mission
• Profit
• Return on Assets
2. Business Unit Objectives • Economic Value Added
• Growth
• ...
3. Marketing Objectives
(Overall and Per Segment)
Profit Objectives Sales Objectives Customer Objectives

• Profits • Sales Volume • Brand Awareness
• Return on Assets • Unit Sales • Positioning/Brand
• Return on Sales • Market Share Image
• Contribution • Customer
Margins Satisfaction
• Net Marketing • Loyalty
Contribution • Cross-Buying
• ... • Share-of -Wallet
FIGURE 4 The Hierarchy of Objectives
403
Contribution = Sales ⫺ Total Variable Costs • Sales revenue can be increased by increasing
⫽ [(Unit Volume ⫻ Unit Price) ⫺ sales in units or by increasing price;
(Unit Volume ⫻ Unit Variable Costs)] • Sales in units can be increased by increasing the
number of customers or by increasing those
Note that Unit Price minus Unit Variable Cost
customers purchase rate.
equals Unit Contribution Margin, another important
concept in marketing and managerial accounting. Other logical contributors to profitability via
Profits, or “Net Marketing Contribution,” can be this cost-volume-profit “tree” are not shown but can be
broken down to identify the universe of feasible strate- readily deduced to extend the reasoning. For example:
gies for increasing profits (see Figure 6). Each cell in
this tree represents an opportunity to increase overall • The number of customers can be increased by
profitability. For example: acquiring more new customers or by retaining
more of the firm’s existing customers;
• Overall profitability can be increased by increas- • Purchase rate can be increased by increasing av-
ing net marketing contribution or by decreasing erage purchase volume or by increasing pur-
overhead (expenses that do not vary with the chase frequency; and,
marketing strategy, e.g., R&D, corporate over- • Sales in units can be increased by increasing
head); overall market demand (i.e., increasing the size
• Net marketing contribution can be increased by of the ‘pie’) or by increasing market share (the
increasing sales revenue or by lowering total firm’s piece of that pie);
variable cost (or “costs of goods sold;” i.e., total • New customers can be acquired from competi-
cost or producing a product that varies directly tors or by converting nonusers.
with the volume sold, such as materials costs, di-
rect labor, transportation, and other direct vari- In this way the effects of various marketing tac-
able costs); tics can be linked to overall profitability and subordi-
Potential Actual Brand Brand Positive Purchase Share of Satisfied Repeat Cross
Market Market Awareness Awareness Brand Rate Wallet Customers Customers Selling
(Aided) (Unaided) Image
Recall Recall
FIGURE 5 Staircase Analysis
404
nate objectives through these cost-volume-profit rela- If the overall target market share is 16 percent,
tionships. It is important that objectives are specific, the target ROA 6 percent, and the target sales volume
measureable, achievable, relevant, and time-specific. is $ 61,000,000, the marketing manager has to specify
the objectives for each market segment and how they
should be achieved, for example:
Finalizing the Marketing Mix
• The amount of promotions to stimulate trial
Once specific objectives are formulated, the marketing purchases;
mix can be finalized. Note that the process of making • The amount of discounts;
forecasts, setting objectives, and creating a budget • The amount of folders and mailings to create
began with an understanding of a strategic objectives awareness; or
and the establishment of a preliminary marketing • Media advertising to create brand image.
mix. Initial forecasts were then based on that draft
The following example illustrates the logic:
marketing mix and on an understanding of the effects
of each tactic on resulting sales revenues and profits. 1. Determine the objective: Segment 2 currently
With the budget, forecasts, and objectives refined and has a market share of 14 percent and it has to
adjusted, a final marketing mix emerges. That final be increased to 16 percent (see Table 1 which
marketing mix, by the way, then solidifies the final contains the targets and the budget) to reach
budget, final forecasts, and specific objectives. the overall target of the business unit.
Price
(/Unit)
Number of Sales ($)
Customers
Sales (units)
Purchase Rate ⴚ ⴚ Contribution ($)

(Units/Customer
Variable Costs
($/units)
Total Variable
Costs ($)
Sales (units)
Advertising
Expenditures
ⴚ Profits ($)
Sales
Expenditures
Public Relations ⌺ Marketing Mix

Marketing
ⴙ Overhead ($)
Other Marketing
Mix Expenditures Investment
ⴙ Overhead ($)
(R&D, etc) ($)
Administrative
Marketing ⴝ Overhead ($)
Research
Unit Contribution
Margin
FIGURE 6 The Marketing Profit Tree
405
2. Determine the number of customers to be ac- be spent to acquire a new customer (advertising,
quired: Currently, the sales volume to segment 2 is folders, promotions, discounts, etc.)
$26,390,000 (191,232 units). It has to be increased 4. Establish the budget: The marketing budget
to 218,551 units (⫹27,318 units). The average for new customer acquisition, therefore, is:
customer buys 1.5 products per year. Therefore, 18,212 ⫻ $35 ⫽ $637,420.
18,213 new customers have to be acquired.
3. Determine the necessary marketing activities: A Of course, a number of additional marketing activities
mix of marketing activities is necessary to ac- are necessary to keep brand awareness high, to react to
quire new customers (media advertising, folders, competitor’s marketing moves, to keep loyal cus-
and mailings to create brand awareness, promo- tomers, and to achieve other objectives. For all these
tions, and discounts to stimulate trial purchases, activities, costs are estimated and combined into a
etc.). It is estimated that, on average, $35 have to comprehensive marketing plan.
Summary
The strategic marketing process ties situation assessment— implementation plan, an associated budget, a set of related
including scrutiny of the organization’s mission, vision, and forecasts, and specific and measureable objectives—be gen-
goals—to strategy formation, and that strategy drives the erated through iterative and interconnected analyses that
development of a marketing mix, including the traditional optimize the expected impact of the investments. These
summary “Ps” (promotion or integrated marketing com- then become the basis for assessment. Comparing realized
munications and people, product, place or distribution, and results against objectives using the specific metrics, identi-
price). Diligent and effective strategic management requires fying gaps, and formulating remedial plans is the essence of
that the implementation plan, the tactics, be linked with assessment and adjustment but is impossible if appropriate
forecast results and detailed budgets, and then those plans, and measurable objectives were not derived from the mar-
forecasts, and budgets be fleshed out in specific and meas- keting mix plan in advance.
urable objectives. These various deliverables—a detailed
Best, R. J. Market-Based Management. Upper Saddle River, Lambin, J.-J. Market-Driven Management. Houndmills,
NJ: Prentice Hall, 2005. Basingstoke, Hampshire: Palgrave Macmillan, 2007.
Endnotes
1. Adapted from D. W. Cravens, and N. F. Piercy, 3. Roger J. Best, Market-based Management (Upper
Strategic Marketing (Boston: McGraw Hill, 2006). Saddle River, NJ: Prentice Hall, 2005).
2. J.-J. Lambin, Market-Driven Management,
(Houndmills, Basingstoke, Hampshire: Palgrave
Macmillan, 2007).
406
Assessment
and Adjustment
A well-known management adage holds that “if you can’t measure it, you can’t manage
it.”1 During the marketing planning process (reiterated in Figure 1), long-term
strategies are translated into specific shorter-term marketing activities (positioning
using the marketing mix) accompanied by budgets, forecasts, and objectives. This note
focuses on that essential step: translating marketing mix activities into budgets, fore-
casts, and objectives. That process is inherently interactive; changes in one element—
the objectives, planned mix, budgets or resulting forecasts, can impact each of the other
elements.
Strategy Formation
Implementation:
Positioning
Documentation and the Marketing Mix
FIGURE 1 The Marketing Planning Cycle
407
To be effective, objectives should be “SMART”: between expected and obtained outcomes. This is
Specific, Measureable, Achievable, Relevant, and progress control. Double-loop learning is more than
Time-specific. The specific, measurable, and time- fixing a problem and changing behavior to obtain
specific characteristics of good (smart) objectives expected results; double-loop learning questions the
flow into the assessment and adjustment stage of the fundamental values, assumptions and policies that
strategic planning framework. Without specific, are behind those actions. This is the principle of
measureable, and time-specific objectives it is hard to premise control. Every strategy is based on specific
tell whether the firm has achieved what it set out to assumptions; premise control means testing and
achieve and impossible to attribute gaps in the plan- questioning those values, assumptions and policies,
ning to specific problems or failures. Therefore, a including the overarching strategy behind a particu-
useful complement to the axiom quoted above, lar marketing mix.4 The next sections elaborate on
about measurability, may be Yogi Berra’s slightly tan- premise control and process control, the two basic
gled quote: “if you don’t know where you’re going in levels of assessment and adjustment.
life, you’re liable to end up somewhere else”2 (by
which he apparently meant that, if you don’t know
where you’re going, you’ll never know if you’ve got- PREMISE CONTROL
ten there3). Thus, the necessary first steps to effective Each strategy is based on a set of assumptions about
assessment come well before the assessment, even be- opportunities and threats, industry development,
fore the implementation of the plan to be assessed, competitor strategies, consumer behavior, and so on.
when the assumptions that guide it and the specific Consequently, a strategy can be pursued only as long
outcomes that it is intended to achieve are spelled as these premises do not change. Premise control
out carefully and clearly along with the specific met- therefore should check systematically and continu-
rics that will inform their eventual assessment. ously whether or not the assumptions during a plan-
It guides implementation and is the basis for ning and implementation period are still valid.5 A
monitoring progress. To make sure that progress is premise therefore starts with an explication of the as-
made and that a company reacts to important sumptions behind each strategy. This should be done
changes in time, a continuous planning cycle is nec- on the following levels:
essary, as shown in Figure 1. Based on the long-
term strategy, which usually extends beyond one 1. What are the assumptions about future oppor-
year, yearly marketing plans are developed, imple- tunities and threats stemming from the analysis
mented, evaluated and revised. A systematic assess- of the macro environment?
ment of the results of the marketing effort and of 2. What are the assumptions about the industry
market conditions should lead to adjustments of the development stemming from the industry
marketing plan or even of the long-term strategy, if analysis?
important deviations from the intended strategy and 3. What are our assumptions about the behavior
the plan are found, or if the premise on which a strat- of our competitors?
egy is formulated, change. Hence, assessment of mar- 4. What are our assumptions about the market
keting implementation and adjustment of marketing development?
activities should concentrate on two areas: (1) prem- 5. What are our assumptions about customer be-
ise control and (2) progress control. Premise control havior?
and progress control are similar to what organiza- 6. What are our assumptions about our own
tional theory calls single-loop and double-loop competences, strengths, weaknesses, etc.?
learning. Single-loop learning is the most common
style of learning: it simply is problem solving and Table 1 clarifies the logic of the analysis. For
program calibration. We measure the results of an each level of the analysis (macro-environment, indus-
action, compare those results to prior expectations try, competition, etc.), the assumptions (strategy
or forecasts, and modify our actions to close the gap premises) are explicated. In the next step, it is analyzed
408
TABLE 1 Example of Premise Control
Level of Analysis Strategy Premise Change Impact

1. Macro 1. Exchange rate USD/Euro 1. USD/Euro 1.45 1. Loss of competitiveness in
environment 1.60 2. Introduction of new Europe due to strong
2. New production technology delayed dollar; 12.4 million less
technology lowers cost for 2 years profits in Europe
of goods sold by 10% 2. COGS higher than planned,
contribution margin 18%
lower than planned
2. Industry level 3. Diffusion of product 3. Product substitute 3. Rapidly declining sales
substitute slow in 2009 gains market share (20%) due to substitution
(4 % market share) quickly (8%) 4. Price reductions of up to
4. Bargaining power of 4. Buyers form buying 5% required
buyers does not change associations
unexpectedly
3. Competition 5. Main competitor keeps 5. Main competitors 5. Price reduction necessary,
prices high lowers prices by 10% loss of customers
6. New generation of 6. New generation of expected
products introduced products introduced
in 2011 already in 2010
4. Market 7. Market growth 12% 7. As expected 6. No changes
5. Customers 8. High loyalty due to high 8. Due to substitution 7. New customer acquisition
switching barriers and no product and price must be doubled to
available substitutes strategy of competitor, compensate for customer
high customer churn migration
6. Company 9. We can generate enough 9. No changes 8. No changes
cash flow from Business 10. Experience curve is only 9. Competitor X has
Unit X to finance the 80%; competitor X has significant cost
acquisition of company increased market share advantages now
10. We can keep our cost via an acquisition
leadership due to
economies of scale and
the 70% learning curve,
as we have the highest
market share
whether any changes can be observed, and if so, how 3. The diffusion of a product substitute is slow
these changes impact the strategy, the marketing (4% market share); and
plan, and its implementation. The strategy of the 4. Bargaining power of customers does not
company in Table 1 is based on a number of assump- change.
tions, including:
The premise control, however, reveals that a number
1. The U.S. dollar (USD)/Euro exchange rate will of these planning assumptions are not valid any-
remain 1.60; more. They have a substantial impact on the strategy
2. A new production technology lowers costs of (last column of Table 1) and lead to a revision of
goods sold by 10 percent; either the marketing plan or of the overall strategy.
409
PROGRESS CONTROL USING market; (2) competitive metrics measure how well a
FINANCIAL RATIOS AND MARKETING company performs compared to competitors; (3) cus-
METRICS tomer metrics measure the company’s performance
on a customer level and (4) marketing profitability
Progress control should measure how well a market- metrics assess marketing’s financial success.6 The
ing plan is executed, whether the objectives are marketing metrics discussed in this section are only
achieved, and whether the marketing strategy is still a selection of all available metrics. We tried to focus on
on target. The focus should be on financial ratios and the most relevant ones.
on marketing metrics. Each marketing manager
should be concerned about the overall financial ra-
Financial Ratios
tios of a company for two reasons. First, marketing
contributes to the financial performance of a com- Financial ratios are based on accounting informa-
pany and second, financial performance (e.g., liquid- tion. Most of them are most meaningful when they
ity) can constrain or permit marketing strategies and are used on a comparative basis (compared with in-
activities. dustry standards, prior periods, competitors, and
Marketing performance metrics measure the previously established plans or budgets). Differences
factors that actually drive financial profits of a in accounting practices and principles however can
company. They include four areas of metrics (see lead to differences in ratios between companies.
Figure 2): (1) market metrics measure market Financial ratios, therefore, must be used and inter-
conditions and a company’s performance in the preted with caution.
Competitive metrics
• Relative market share

• Relative quality
• Relative price
• Brand preference
Market metrics Financial ratios Marketing profitability metrics
• Market potential • Liquidity ratios • Revenue per

• Actual market • Debt ratios product/customer/segment/market
• Market development index • Activity ratios • Contribution margin per
• Market growth rate • Profitability ratios product/customer/segment/market
• Market share • Market-related and dividend ratios • Break-even volume
Customer metrics
• Brand awareness/image
• Customer acquisition rate
• Conversion rate
• Customer satisfaction
• Customer retention
• Share of wallet
• Net Promoter score
• Cross selling rate
• Customer lifetime value
FIGURE 2 Marketing Metrics and Financial Ratios
410
There are five major groups of financial ratios. • Profitability ratios relate the income earned
• Liquidity ratios measure whether a company is with the amount of resources used to generate
able to meet its current financial obligations; this income.
they focus on the size of, and the relationship • Market-related and dividend ratios measure to
between current assets and current liabilities. what extent a company generates value for its
• Debt ratios indicate the company’s ability to shareholders.
repay long-term debt.
• Activity ratios (or investment utilization ra- Table 2 gives an overview of the most important
tios) assess the effectiveness of a company’s use financial ratios, their calculation and description of
of its resources. their informative value.
TABLE 2 Important Financial Ratios7
Ratio Formula Informative Value

1. Liquidity ratios
• Current ratio Current Assets Indicates the firm’s ability to
Current liabilities meet its current financial
liabilities with assets that
can be converted to cash in
a short term.
• Quick ratio Current assets - inventory Indicates the firm’s ability to
(acid-test ratio) Current liabilities pay off short-term
obligations using liquid
assets (without relying on
sales of inventory)
• Inventory to net Inventory Indicates the extent to which
working capital Current assets - current liabilities the firm’s working capital is
tied up in inventory
2. Debt ratios
• Debt-to-assets- Total debt Indicates how much of the
ratio Total assets firm’s total assets are
financed by debt
• Debt-to-equity- Total debt Compares how much the
ratio Total stockholder’s equity firm is financed by debt
with how much it is
financed by equity
• Long-term Longterm debt Indicates the balance between
debt to equity Total shareholder’s equity debt and equity in the firm’s
ratio overall capital structures
• Times-interest- Profits before interest and taxes Measures the firm’s ability
earned Total interest charges to meet all interest
payments
• Fixed charge Profits before taxes and interest + lease obligations Measures the firm’s ability
coverage Total interest charges + lease obligations to meet all of its fixed-
charge obligations
(Continued)
411
TABLE 2 (Continued)

3. Activity ratios
• Inventory Cost of goods sold Indicates how quickly a
turnover Inventory company is able to convert
inventories to cash; or
whether a company has
excessive inventory or
perhaps inadequate inventory
• Fixed-assets Sales Measures the effectiveness
turnover Fixed assets of the firm in utilizing its
plants and equipment
• Total assets Sales Measures the effectiveness
turnover Total assets of the firm in utilizing total
assets
• Days’ receiv- Net Sales Measures the amount of
ables = Average day’s sales time that elapses between
365
Accounts receivable sales and receipt of
Day’s receivables = payment
Average day’s sales
• Working Sales Measures the speed with
capital Average current assets - Average current liabilities which funds are provided by
turnover current assets to satisfy
current liabilities
4. Profitability
ratios
• Gross profit Sales - Costs of goods sold Indicates the total margin
margin Sales available to cover operating
expenses and yield a profit
• Return on sales Profits after taxes Indicates after-tax profits
(ROS) Sales per dollar of sales; neither a
high nor a low return on
sales necessarily indicate
good performance, it
depends on the amount of
investment.
• Return on total Profits after taxes Measures the net return
assets (ROA) Total assets on total investment of the
firm
• Return on Profits after taxes Measures the net return on
stockholder’s Total stockholder’s equity stockholder’s investment in
equity (ROE) the firm.
• Return on Net income Relates all net income to
invested capi- Total liabilities and stockholder’s equity - Current liabilities all resources committed to
tal (ROIC) the firm for long periods
of time.
412
TABLE 2 (Continued)

5. Market-
related and
dividend ratios
• Earnings per Profits after taxes - preferred stock dividends Indicates the earnings
share Number of shares of common stock + equivalents returned on the initial
investment.
• Price earnings Market price per share of stock Measure of the price paid
ratio Earnings per share for a share relative to the
annual profit earned per
share; indicates whether
investors pay a relative high
or low price for the stock.
• Dividend yield Dividends per share Indicates the annual dividend
ratio Market price per share payment as a percentage of
the price per share.
• Dividend Dividends Shows the proportion of net
payout Profits after taxes (available to common shareholders) income paid out in dividends.
Marketing Metrics
monitor performance. Whether individual perform-
Whereas financial ratios indicate a company’s or a ance metrics are appropriate or not depends on the
business unit’s performance, marketing metrics meas- strategy. If, for example, a business unit follows a
ure those factors that drive a firm’s performance. There growth strategy, performance criteria such as relative
are many marketing metrics available; like a lot of market share and customer acquisitions are important;
managerial data, it would be easy for the sheer volume whereas for a harvest strategy in the maturity phase of
of those metrics to become overwhelming. Therefore, the product life cycle, customer retention and cross-
two critical, related strategic marketing tasks are to selling might be more appropriate. Table 3 contains
identify the information needed by managers and, based four categories of marketing metrics, with their for-
on that, to select the appropriate performance metrics to mula, and a brief description.
TABLE 3 Marketing Metrics
Metric Formula Informative Value

1. Market metrics
• Market Number of potential customers X average Indicates the maximum potential of a
potential sales volume per customer market if all potential consumers buy the
product or service
• Actual market Number of buyers X average sales volume Indicates the actual market demand (e.g.,
per customer on a yearly basis)
• Market devel- Actual market Indicates the market saturation.
opment index Market potential
(Continued)
413
TABLE 3 (Continued)

• Market growth Actual market t1 - Actual market t0 Indicates the market growth in percentages
rate * 100
Actual market t0
• Market share Unit sales of company X Indicates a company’s share of the overall
(units) Overall unit sales in market X market measured in units sold
• Market share Sales volume of company X Indicates a company’s share of the overall
(volume) Overall sales volume in market X sales volume in a market
2. Competitive
metrics
• Relative market Unit sales of company X Indicates a company’s or product’s
share (units) Unit sales of strongest competitor competitive position in terms of unit sales
• Relative market Sales volume of company X Indicates a company’s or product’s
share (volume) Sales volume of strongest competitor competitive position in terms of sales
volume
• Relative price Unit price of company X Measures a product’s price competitiveness
Unit price of strongest competitor
• Relative quality Quality score of company X Measures perceived quality of a product
Quality score of strongest competitor (e.g., on a scale from 1 to 5) compared to
competitors
• Brand prefer- Brand preference of company X Indicates brand superiority by relating the
ence Brand preference of strongest competitor number of customers who prefer the brand
of company X to the number of customers
who prefer the competitor’s brand
3. Marketing
profitability
metrics
• Revenue per Revenue per product, customer, etc. Indicates the importance of each product,
product/ Overall revenue customer, segment, etc., for the overall
customer/ sales volume of the company
segment/market
• Total Sales revenue – total variable cost The total contribution margin indicates
contribution the fraction of sales that contributes to the
margin offset of fixed costs. It can also be
calculated per product, customer, segment,
or market
• Contribution Unit price - variable cost per unit The contribution margin ratio indicates the
margin ratio Unit price product’s contribution to offset fixed costs
as a percentage of unit price
• Break-even Fixed costs Indicates how many units must be sold in
market volume Price per unit - variable cost per unit order to break even (cover total costs)
414
TABLE 3 (Continued)

4. Customer
metrics
• Brand Number of customers that know my brand Indicates the company’s communication
awareness ratio Total number of customers effectiveness
• Brand Number of customers that prefer my brand Indicates the attractiveness of the offer to
preference ratio Total number of customers the customer.
• Customer Number of new acquired customers Measures a company’s effectiveness in
acquisition rate Overall number of existing customers acquiring new customers
• Conversion rate Number of customers that bought my product Indicates the company’s effectiveness in
Total number of customers converting customers (from lookers to
buyers)
• Customer Number of satisfied customers Indicates the ability to satisfy customer’s
satisfaction rate Number of overall customers needs
• Customer Customers that repurchase the product Measures the company’s ability to keep
retention Number of customers customers
• Share of wallet Purchase volume of customer X Indicates the untapped sales potential per
Overall purchase volume of customer X customer.
• Net promoter Customers who recommend my product Measures the psychological commitment
score Overall number of customers of a customer to a brand/company.
• Cross selling Number of customers who buy more Indicates the company’s ability to exploit
rate than one of the offered products customer relationships.
Overall number of customers
or
Average number of offered products bought
by customer
• Customer Net present value of all profits a customer Indicates a customer’s profitability and
lifetime value produces over time attractiveness.
Summary
Developing a sound marketing strategy and a sound mar- many marketing metrics available, and you have to be very
keting plan is only half of the marketing success. To make careful in the selection of the metrics for a number of rea-
sure that strategy and plans are on target, continuous as- sons. First, using too many metrics might lead to “paralysis
sessment is necessary. A marketing manager must always by analysis.” Second, if you decide to use specific metrics
monitor whether the premises of the strategy are still to assess performance, you have to be aware that employ-
valid, and should revise the strategy or plan accordingly ees will focus on these metrics as they know that they are
when those conditions or assumptions change. Progress of measured against them. If salespeople’s performance is
implementation and success should be measured to make measured on their sales volume, they will maximize sales
sure that everything is on track. Peter Drucker once said: volume, if they are measured on contribution margins,
“If you can’t measure it, you can’t manage it!” There are they will maximize contribution margin, and if they are
415
evaluated on their customer’s satisfaction, their focus will the short run (i.e., by reducing prices) might damage the
change again. Third, you have to make sure that metrics long-term brand image. The challenge is to select and focus
don’t contradict each other. Especially short- and long-term on a limited set of appropriate metrics. This selection of
effects have to be considered. Maximizing market share in metrics depends on the strategy and their measurability.
Best, Roger J. Market-based Management. Upper Saddle Schreyögg, G. and H. Steinmann. “Strategic Control: A
River, NJ: Pearson, Prentice Hall, 2009. New Perspective.” Academy of Management Review 12
Hitt, M. A., R. D. Ireland, and R. E. Hoskisson.Strategic (1987): 91–103.
Management. Competitiveness and Globalization,
Mason, OH:, Thompson South-Western, 2005.
Endnotes
1. David A. Garvin,“Building a Learning Organization,” 6. R. J. Best, Market-based Management (Upper Saddle
Harvard Business Review 71, no. 4 (July–August, River, NJ: Prentice Hall, 2009).
1993): 89. 7. Adapted from R. N. Anthony, D. F. Hawkins, and K. A.
2. Quoted by Lewis Timberlake (with Marietta Reed), Merchant, Accounting (Boston: McGraw-Hill, 2007);
Born to Win: You Can Turn Your Dreams into Reality M. A. Hitt, R. D. Ireland, and R. E. Hoskisson, Strategic
(Carol Stream, Il: Tyndale House, 1986) 38. Management: Competitiveness and Globalization
3. Ibid. (Mason, Ohio, Thompson South-Western, 2005); and
4. See Chris Argyris and Donald A. Schön, Organizati- D. W. Cravens and N. F. Piercy Strategic Marketing
onal Learning: A Theory of Action Perspective (Reading, (Boston: McGraw Hill, 2006).
MA.: Addison Wesley, 1978).
5. G. Schreyögg, and H. Steinmann, “Strategic Control:
A New Perspective.” Academy of Management Review
12, (1987): 91–103.
416
Index
Page references followed by "f" indicate illustrated Allocations, 102, 382, 400 84-85, 92, 98, 108, 115, 117, 136-137,
figures or photographs; followed by "t" indicates a Allowances, 85, 373, 384 139-140, 170, 177-178, 180-184, 200-204,
table. Alternative evaluation, 137-138, 147 226-227, 233-234, 248, 255, 257, 262,
Amae, 131 266-267, 272, 287, 297, 301-302, 305-306,
American Management Association, 58 313, 321-326, 328-329, 338, 349, 365, 369,
8 announcements, 369 371-372, 374, 380, 388, 391, 393, 395, 398
80/20 Rule, 35 company, 369 extended, 137, 177, 200, 203, 234, 369
annual reports, 150-151 pooled, 57, 227
Annuity, 9 service, 85, 92, 137, 140, 170, 178, 180-181, 184,
A Anomalies, 212, 244 227, 255, 287, 297, 321-322, 325-326,
Abilities, 286, 288 antecedents, 217 371-372, 380, 391, 393, 395
Abstract, 43, 322-323, 337 anticipate, 51, 53, 158, 170, 184 survivor, 182-183
Accountability, 157 Application, 2, 9, 74, 99, 131, 196, 236, 245, 263-264, Beverage industry, 171
Accounting, 95, 105, 144, 162, 213-214, 229, 283, 288, 361, 386 biases, 122
330, 365, 389, 404, 410, 416 Applications, 7, 30, 75, 189, 212, 245, 247, 290, 298, Bicycles, 302
corporate governance, 95 311, 317, 336, 357, 359 Bid, 229
Accounting practices, 410 arguments, 26, 28, 37, 172, 374, 380, 382 Bonus packs, 376, 384
Accounting systems, 105 ARM, 392 Borrowing, 9
Accounts receivable, 65, 392, 412 Art, 33, 39, 123, 149, 153, 212, 279, 326, 361 brainstorming, 52, 114, 212
accuracy, 83, 101 Asia, 46, 259 Brand, 39, 43-44, 52, 58, 63, 74-76, 80-81, 84-85, 87,
Achievement, 102, 115, 130, 355, 370 Assets, 61, 64, 198, 247-248, 322-323, 329-330, 91-92, 95, 98, 101, 111, 114, 127, 131,
Acquisitions, 198, 356, 413 401-403, 411-412 135-136, 138-139, 142, 148, 150, 152,
Adaptation, 115, 117, 182, 253-255 current, 64, 248, 329, 411-412 162-163, 171, 178, 180, 183-184, 198, 201,
advertising, 254 fixed, 401-402, 411-412 203, 205, 215, 221, 228-232, 234-237,
addresses, 42, 122, 135, 262, 314, 318, 347 intangible, 329-330 240-241, 245-247, 249, 252-259, 261, 267,
adjustments, 332, 335, 373, 401, 408 return on assets, 401-403 271, 276, 287-288, 290-291, 303, 306,
Advances, 91, 116-117, 178-179, 318, 336, 338, 376, attachments, 26 308-310, 317, 319, 321-330, 333, 338,
387 attention, 22, 52, 61, 66, 83, 100, 117, 137-138, 357-358, 365, 369-370, 372-373, 375-376,
Advantages, 12, 31, 35, 42-44, 49, 57, 59, 62-63, 144-145, 149, 164, 183, 185, 213, 215, 269, 378-384, 386, 387-388, 391-393, 402-406,
69-70, 73-76, 81-82, 88, 93, 98-99, 120, 123, 283, 304, 311, 332, 380, 384, 395 410, 414-416
138, 141, 150, 159, 161, 163-165, 169-171, Attitudes, 52, 60-61, 63, 83, 115-116, 121, 129, brand equity, 75, 246, 321-325, 327-330, 365
180, 183, 192, 195, 197, 199-200, 203-204, 138-139, 209, 263-264, 279, 315, 326-327, brand evangelists, 91, 271, 276
220-221, 223, 226-228, 231, 241, 248, 391 brand personality, 228, 232, 310, 323, 327-328,
252-257, 260, 274, 285-293, 297-299, components of, 52, 115 330
301-303, 305-306, 312, 325, 328, 336, 355, consistency in, 63 brand valuation, 328-329
357, 359, 361, 370-371, 379, 387, 409 Attribute, 12, 43, 51, 126, 138, 179, 239, 241, 308, co-branding, 325
Advertising, 2, 4-5, 52-53, 82-83, 86, 91, 93, 100-102, 334, 343, 349, 408 decisions about, 81, 87, 201, 329
114, 120, 131, 135-136, 139, 147-148, 152, attributes, 12, 42-43, 63, 71, 87, 108, 126-127, labeling, 52, 114, 376
162, 184, 193-194, 202-203, 214, 254, 276, 137-138, 143, 165, 178-181, 184, 229, 237, licensing, 152, 221, 255-257
301, 311-312, 318, 324-325, 328-330, 336, 241, 267, 275, 287-288, 299, 305-309, managing, 84, 95, 148, 241, 310, 329-330, 386,
347, 365-366, 368, 372-373, 375-376, 378, 318-319, 323, 325-329, 332-334, 348-350, 391-392
380, 382-386, 389, 396, 399, 401-402, 355, 380 overview, 375
405-406 audience, 26-27, 33, 125, 324 packaging, 84-85, 178, 254, 322, 373
corporate, 102, 131, 202-203, 325, 336 audio equipment, 393 positioning, 52, 74, 76, 80-81, 84-85, 95, 98, 152,
creation of, 378 Augmented products, 87 162, 203, 221, 236, 254, 259, 267, 306,
defined, 4-5, 83, 91, 376 Austria, 171, 192, 263, 308, 335 308-310, 319, 324-325, 329-330, 365,
e-mail, 376 Authority, 27, 98, 103, 146, 322 373, 381, 392, 402-403
evaluating, 2, 86, 136, 328, 382, 386 Automobile industry, 70, 171, 367 public relations, 184, 276, 372, 376, 378, 382, 402,
local, 254, 376 availability, 116, 137, 143, 181-182, 185, 229, 263, 405
mobile, 152, 330 352, 390, 392, 394-395 sales promotions, 376, 378, 380
online, 131, 329, 347, 368, 378 Available, 3, 27, 31, 58, 65-66, 86, 100-101, 115-116, store brands, 171
product, 5, 52-53, 82-83, 86, 91, 100, 102, 114, 123, 125, 131, 134, 147, 152, 158, 177, 214, value proposition, 234, 261, 375, 381
120, 131, 135-136, 139, 148, 152, 162, 239, 252, 255, 258, 262, 283, 297, 299, 310, Brand ambassadors, 271
184, 202, 214, 254, 276, 301, 311-312, 316, 320, 328-329, 339, 349-350, 355, 371, Brand communities, 324-325, 333
318, 324-325, 329, 336, 347, 365, 368, 374, 375, 379-380, 387-390, 392, 395, 400, Brand equity, 75, 246, 321-325, 327-330, 365
372-373, 378, 380, 382-386, 389, 406 409-410, 412-413, 415 Brand evangelists, 91, 271, 276
reminder, 86, 184 avoidance, 99 Brand extensions, 87, 322
retail, 86, 148, 318, 368, 376, 389 Awareness, 22, 63, 91, 101, 103, 135-136, 183, 215, Brand loyalty, 267, 323
setting objectives, 399, 405 246-247, 258, 323, 327-328, 345, 357-358, Brand management, 162, 205, 228-229, 290-291, 310,
types of, 53, 82-83, 147, 380, 401 365, 376-379, 381-383, 402-406, 410, 415 329-330
Advertising agencies, 193, 324, 329 Brand managers, 201, 324
Advertising campaign, 328 Brand meaning, 310, 322-323, 326-329
Affect, 5-6, 13, 52, 114-115, 143, 169, 172-173, B
Backward integration, 43, 65, 169, 171, 247-248 Brand personality, 228, 232, 310, 323, 327-328, 330
296-297, 344, 350, 355, 376 Branding, 47, 54, 67, 76, 81, 84-85, 94-95, 105-106,
After-sales service, 162, 180 Balance sheet, 200, 330
balanced scorecard, 198 226, 306, 310, 312, 321-330
Age, 52, 71-72, 115, 148, 263-264, 396 generic, 76, 226, 324
Agencies, 193, 324, 329, 382, 387 Banks, 9, 246, 263-264
Bargaining, 18, 55, 168-173, 194, 286, 389, 409 strategies, 47, 76, 81, 84, 94, 226, 325
agenda, 95, 330 Brands, 28, 73, 75, 80-81, 84, 91, 94, 98, 104,
Agent, 146, 277, 385, 390 Bargaining power, 18, 55, 168-173, 194, 286, 409
Barrier to entry, 204, 387 116-117, 137-139, 158, 168, 171, 180,
Agents, 143, 146, 255-256, 379, 382, 387 183-184, 230, 234, 236, 248, 254-255, 263,
Agglomeration, 181 Behavior, 13, 60, 67, 86, 123, 127, 133-148, 157-158,
173, 176, 178, 253, 255, 261, 263-264, 267, 289, 302, 306-307, 310, 318, 321-330,
agreement, 28, 330, 389 348, 371, 373, 392-394
Agreements, 252 266-267, 275, 277, 279, 298, 323, 328, 342,
348, 369, 373, 379, 383, 385-386, 391, 408 defined, 81, 91, 94, 230, 302, 310
Aided recall, 327 family, 158, 263, 302, 327
AIDS, 302 belief system, 327
Benchmarking, 339 generic, 98, 230, 234, 236, 248, 324
Aircraft, 193 importance of, 84, 91, 138, 267
business, 193 Benefit segmentation, 148, 266, 268
Benefits, 12-13, 15, 17, 28, 49, 55, 57, 61, 68, 71, individual, 94, 137, 158, 267, 302, 322, 327, 329
ALE, 193
417
manufacturer, 230, 326, 393-394 140, 143, 148, 157, 162, 171, 180-181, Competitors, 12-13, 15-17, 19, 47-48, 50-51, 53-56,
metrics, 81 183-184, 198, 201, 228, 313, 315-316, 63, 67, 70, 74, 76, 88, 90, 94, 99, 105-106,
national, 116, 234, 254, 330 323-324, 326, 330, 349-350, 368, 373, 107, 110-111, 149, 151-153, 157, 161-162,
store, 138, 171, 267, 310, 318, 373 383-384, 388-396 168-173, 177, 180-181, 183, 185, 190-191,
Breakdown, 401 Channel captain, 181 194, 197-198, 200, 204, 216, 220, 226-227,
Breaking bulk, 92, 389 Channel conflict, 85, 391, 393, 395 231-232, 234-237, 239, 241, 244, 246, 253,
Brokers, 382-383, 387 Channel intermediaries, 92 257, 259, 266, 274, 279, 282, 286-290, 293,
Budget, 50-51, 100-102, 108-110, 163-164, 169, 172, Channel members, 1, 85, 92, 368, 383-384, 388, 297, 299, 303-304, 305, 307, 309, 311-312,
272-273, 358, 379, 382, 397-402, 405-406 390-393 333, 350, 352, 358, 360, 365, 368, 371, 374,
defined, 50, 108-110 Channels, 65, 70, 75, 81, 84-85, 91-92, 110, 115, 140, 388, 393-394, 400, 404, 408-410, 414
Budgeting, 9, 101-102, 109, 382, 397-401 169, 171, 180-181, 183, 198, 200, 221, identifying, 53-54, 63, 70, 74, 88, 90, 111, 173, 237,
capital, 9 245-248, 252, 278, 358, 368, 375, 386, 274, 287, 290, 293, 297, 312, 388
Bundling, 85, 227, 373 387-396 complaints, 35, 63, 138, 326, 333, 378
Business analysis, 332, 335, 338 Business-to-business (B2B), 70 customer, 35, 63, 138, 326, 333, 378
Business buyer behavior, 143 Consumer goods, 140, 183, 391 Component parts, 38, 162
buying process, 143 Industrial, 110, 386 Concept development and testing, 332, 334, 338
influences on, 143 Service, 70, 85, 91-92, 140, 171, 180-181, 221, Conditions, 49, 60, 84, 105, 117, 130, 143, 173, 208,
Business environment, 52 386, 389-395 210, 222, 248, 253-255, 262, 332, 389, 397,
Business markets, 71, 134, 143, 147, 172, 263-264 Channels of distribution, 65, 84, 115, 140, 180-181, 408, 410, 415
market segmentation, 263-264 368, 387-389, 392-394, 396 Confidence, 320, 322
Business model, 42, 44, 64, 85, 93, 140, 159, Character, 60 Configuration, 129, 176, 178, 322, 335
221-223, 253, 337, 384, 388, 392 Checkout, 275, 318 Conflict, 37, 43, 85, 92, 256, 391-393, 395-396
Business operations, 61 Chief marketing officer, 324 Conformance quality, 57
Business plan, 332 Children, 88, 157-158, 245, 265, 267, 361 Consideration, 27, 31, 53, 63, 91, 93, 120-121, 130,
business plans, 1 China, 246 137, 141-142, 176, 180, 201, 204, 209-210,
Business portfolio, 361 Chinese, 46, 116, 149 264, 272, 312, 370, 382, 384, 392, 394-395
Business review, 48, 67, 95, 106, 117, 130-131, 148, Claims, 62, 98, 306 Consistency, 63, 222, 227, 254, 325, 327
159-160, 165, 173, 192, 198, 217, 223, 232, Classification, 18, 52, 110, 114, 394 Consolidation, 181-182, 193, 391
249, 260, 278, 283, 320, 386, 396, 416 Climate, 19, 68, 116, 214, 253, 378 Constraints, 101-102, 279, 368, 399-400
Business strategy, 200, 212, 249, 260 Closing the sale, 136 changing, 399
Business Week, 95, 111, 131, 329 clothing, 46, 125, 140, 176, 305-306, 348, 393 Construction, 74, 128, 208
Business-to-business customers, 52, 246 Clusters, 62 Consultative selling, 86, 92
Business-to-business markets, 71, 134, 143, 147, 264 Coaching, 86 Consumer behavior, 134, 137-138, 140, 143, 147,
demand, 71, 143 Co-branding, 325 253, 255, 264, 298, 342, 408
Buttons, 302 collaboration, 149, 221 models of, 134, 138
Buyers, 16, 55, 70, 134, 143-144, 146-148, 168-172, Collections, 53, 82, 120, 312, 314, 351 Consumer choice, 178
178, 184, 233, 237, 246-247, 349, 369, 378, collusion, 368 Consumer credit, 390
380, 384, 386, 391-392, 409, 413, 415 Columbia, 130 Consumer goods, 128, 140-141, 183, 193, 391
Business buyer behavior, 143 Commercialization, 88, 91, 189 Consumer markets, 134, 143, 145, 147, 264, 379-381
Buying center, 148 Commitment, 100, 157, 255-257, 289, 327, 334, 383, Consumer preferences, 179-180, 209
Culture, 143 398, 415 Consumer products, 116, 385, 391
Product, 55, 70, 134, 143-144, 146, 148, 169-172, Commodities, 4 consumer review sites, 138
178, 184, 237, 246-247, 349, 369, 378, Communication, 26, 86, 91, 116, 152, 277-278, 348, Consumer sales promotions, 376
380, 384, 386, 391-392, 409, 413, 415 376, 378-380, 382, 415 Consumers, 4, 51, 53, 66, 71-73, 76, 82-84, 90-91,
Rational, 369, 384 Communication strategy, 91 116, 120, 123, 125-128, 134-141, 143-144,
Role, 134, 146-147, 369, 386 Companies, 26, 28, 43, 80, 91, 95, 98, 100, 102, 108, 177-180, 182-183, 214, 216, 236, 261, 263,
Buying center, 148 110, 115-116, 123, 128-130, 135, 144, 150, 266-267, 297, 305-310, 312, 317-319,
Buying centers, 385-386 156-157, 159, 171-172, 189-190, 192, 321-327, 329, 337, 345-349, 368, 373,
Buying process, 71, 136, 143, 385-386 193-195, 198, 199-201, 203-204, 214, 226, 375-376, 378-381, 383-384, 387-388, 391,
Buzz, 86, 378, 386 228, 230, 234-237, 244, 246-248, 252, 393-394, 413
Buzz marketing, 86 254-255, 257, 261, 266-267, 270, 274, 276, lifestyles, 53, 71, 91, 123, 267, 318
279, 283, 286, 288-289, 293, 318, 320, 325, Consumption, 4, 53, 71, 91, 103-104, 115, 123, 125,
C 329, 331, 333-336, 339, 350, 351, 355, 359, 127-128, 137-139, 141, 143, 179, 237, 246,
Canada, 46, 68, 111, 259 365, 367, 399, 401, 410 264, 299, 316, 342-343, 383-384
Cannibalization, 336 company image, 18 consumer, 53, 91, 125, 127-128, 137-139, 141,
Capabilities, 19, 41-42, 51, 62, 70, 75, 165, 223, 226, Company mission, 60, 401 143, 179, 264, 299, 316, 342, 383
234, 257, 264, 286-287, 289-292, 302, 304, compatibility, 91, 349 Contacts, 277, 376, 378
309, 313, 337, 355, 357-358, 394-395 Compensation, 89 Content, 86, 95, 98, 205, 226, 232, 317, 330, 373,
Capacity, 19, 65, 110, 177-178, 181, 184, 189, 194, Compete, 13, 35, 43, 46, 49-51, 55, 87, 108-110, 115, 378, 385-386
212, 298, 319, 352, 358, 367, 371 149, 173, 220, 226, 236, 252, 287, 293, 336, Continuity, 342
Capital, 2, 5, 9, 19, 42, 44, 64, 89, 168-169, 171, 194, 368, 391 Continuous improvement, 230, 290
248, 256, 289, 329-330, 333, 338, 355, 390, Competition, 12-13, 19-20, 35, 37-39, 42-44, 49-51, Continuous innovations, 141, 342-343
393, 411-412 56, 58, 61-63, 69-70, 74, 83-84, 86-87, 89, Contract, 257, 394
customer, 2, 9, 42, 44, 64, 169, 171, 248, 256, 289, 99-100, 107-110, 123-124, 129-130, 149, Contracts, 171
333, 338, 355, 390, 393 151-152, 157, 164, 168-170, 172-173, Contractual agreements, 252
definition of, 42, 168, 355 176-178, 180-185, 191, 199, 202, 204, Contribution margin, 2-3, 5-6, 93, 95, 365-366, 373,
fixed, 5, 89, 169, 194, 338, 355, 411-412 208-210, 223, 226-227, 229-231, 237, 244, 401, 404-405, 409-410, 414-415
growth, 19, 89, 169, 248, 355 254, 258, 274-275, 277, 286-287, 290, Control, 21, 30, 33-34, 63, 85, 92, 126, 143, 158,
human, 19, 289 292-293, 296, 298-300, 302-303, 315, 319, 161-162, 202, 214-215, 229, 249, 253-257,
intellectual, 330 344, 350, 352, 358, 365, 368-369, 371, 379, 261, 290, 315, 321, 323, 325-326, 329, 335,
requirements, 169, 171, 333, 393 381-382, 389, 391, 393, 400-401, 408-409 350, 377-378, 384, 386, 391-393, 396,
working, 19, 411-412 perfect, 319 408-410, 416
Capital budgeting, 9 Competitive advantage, 43-44, 47, 54, 67, 69-70, Controlling, 92
Capitalism, 148, 344, 350 76-77, 94, 105-106, 148, 161, 163, 165, 171, Convenience stores, 391
capitalization, 329 181-183, 196, 199, 223, 226-227, 229, 232, Convergence, 116, 182, 305
Career, 39 260, 266, 287, 289-291, 293, 298, 303, 312 conversations, 316
carrying costs, 392, 395 competitor analysis, 67 conversion, 349, 410, 415
Case study, 131 positioning, 47, 54, 67, 69, 76, 94, 105-106, 227, Conversion rate, 410, 415
Cash cows, 88, 151, 352-353 312 cookies, 302
Cash flow, 9, 20, 88-89, 93, 151, 158-159, 281-282, Competitive environment, 156, 180, 185, 208-210, 390 Cooperation, 163, 289, 392
352-354, 356, 360, 374, 390, 409 Competitive factors, 19, 298 Cooperative advertising, 384
Cash flows, 244, 279-280, 283 Competitive intelligence, 51, 67, 101, 149-153, 300 Coordination, 163, 214, 254-255, 290
Causal research, 315 exercise, 101 manufacturing, 214
Cell phones, 116, 176, 371 Competitive strategy, 42, 48, 111, 152, 173, 190, 232, systems, 163
Census data, 83 252, 293 Copyright, 1, 11, 25, 29, 41, 49, 59, 69, 79, 97, 107,
Central Europe, 181, 245 choosing, 42 113, 119, 133, 149, 155, 161, 167, 175, 187,
Centralization, 115, 117 sustaining, 293 193, 197, 199, 207, 213, 219, 225, 233, 243,
Certainty, 178, 318 Competitiveness, 55, 62, 164, 244, 409, 414, 416 251, 261, 269, 279, 285, 295, 301, 305, 310,
Channel, 1, 6, 23, 75, 83, 85, 91-92, 102, 105, 129, Competitor analysis, 67, 149-153, 305 311, 321, 331, 341, 351, 363, 375, 387, 397,
418
407 279-283, 410, 415 elastic, 4
overview of, 41 Customer needs, 42-43, 50, 52-55, 70-71, 76, 80, 85, excess, 177
Core competencies, 46, 49, 54, 70, 124, 248, 325 88, 90, 92, 107, 115, 124, 129-130, 141, increases in, 338
Core products, 183, 259 214-216, 220, 223, 228, 254, 311, 315, price elasticity of, 4
Corporate culture, 202 332-333, 368, 385, 388, 392, 394-396 prices and, 183
Corporate governance, 95 Customer orientation, 81, 228-229, 326 Democracy, 350
Corporate responsibility, 61 Customer relationship management, 53, 81-82, 103, Demographics, 52, 71, 115, 121, 264, 267, 276, 318
Corporate social responsibility, 60-61, 67-68 105, 120, 275-276, 278, 283, 290-291, 312 Depreciation, 1
CSR, 60 CRM, 53, 81-82, 105, 120, 275-276, 278, 312 Descriptive research, 315
environment, 60, 68 personal selling, 276 design, 23, 70, 84, 103, 110, 123, 129, 131, 162, 178,
Corporate strategies, 60 trends in, 53, 82, 120, 291, 312 180, 221-222, 226-229, 255, 258, 261,
Corporate strategy, 158-160, 173, 222-223, 232, 260, Customer relationship management system, 291 287-291, 298, 304, 311, 317, 321, 325, 331,
300 Customer satisfaction, 21, 35, 63, 103, 105, 136, 336-339, 347, 388, 393, 396
Corporate-level strategies, 156 141-142, 178, 183, 276, 278, 310, 311, elements of, 70, 84, 129, 337, 347
corporation, 61, 68, 201, 329 315-316, 333, 339, 395, 402-403, 410, 415 principles of, 325
Corporations, 59, 61, 123, 248, 329 Customer service, 180, 215, 290-291, 390, 394-395 Developed countries, 264
correspond with, 43, 318, 392 Customer strategy, 58, 131 Developing economies, 231
cost accounting, 283 customer support, 22, 217, 229, 380, 389 Differentiated marketing, 72-73, 151, 301-302
Cost leadership, 43-44, 152, 195, 226-231, 235-236, Customer value, 45, 124-125, 139-140, 148, 151-152, defined, 302
252, 369, 409 217, 222, 234-237, 239-241, 260, 287, 306, Differentiation, 18-19, 21, 43-44, 86, 89, 93, 152,
Cost leadership strategy, 235-236, 369 310, 331-332, 337, 343, 370 161-162, 172, 180-184, 195, 220, 222,
Cost of goods sold, 102, 402, 409, 412 customer value analysis, 151, 234, 236-237, 226-231, 235-236, 246, 248, 252, 305, 309,
Cost-benefit analysis, 272, 369 240-241 369-371, 373
Costs, 1-6, 9, 15, 20, 22, 42-44, 56-57, 63-65, 72, 85, logistics, 222, 234 advertising and, 184
89-90, 93-95, 98, 102, 104, 110, 117, Customers, 1-2, 13, 16, 18, 35-37, 39, 41-44, 46-48, product, 18-19, 21, 43-44, 86, 89, 152, 161-162,
139-141, 163, 169-172, 178, 189-192, 49-55, 57-58, 60-61, 63, 66-67, 69-72, 172, 180-184, 226-231, 235-236, 246,
193-195, 197-198, 199-200, 203-204, 213, 74-76, 80-87, 90-94, 99, 101, 103-106, 248, 305, 309, 369-371, 373
221-222, 227, 229-230, 233-234, 239, 241, 108-111, 116, 120-130, 134-137, 139-144, Differentiation strategies, 228
245, 252-254, 267, 271-272, 274, 279-281, 147, 151-152, 156, 158-159, 165, 169-173, Differentiation strategy, 228-229, 235-236, 369, 371
302, 313, 316, 329, 331-332, 334-335, 352, 177-185, 198, 202-204, 213-215, 221, 223, Diffusion, 90-91, 135, 147-148, 178, 343-350, 378,
355, 364-369, 371-374, 376, 382-383, 387, 226-232, 233-234, 236-237, 239-241, 386, 409
392-395, 398-402, 404-406, 409, 412, 414 244-249, 252, 254-255, 257, 259, 261-264, Diminishing marginal returns, 278, 338
alteration, 254 267, 269-272, 274-278, 279-280, 282-283, Diminishing returns, 338
distribution, 1, 6, 22, 63, 65, 85, 94, 110, 140, 163, 286-288, 290, 293, 296, 299-300, 301, Direct channel, 392
169, 171, 198, 221, 227, 245, 252-253, 303-304, 305-307, 309, 311-313, 315-319, Direct competitors, 110
280, 352, 368, 371, 373, 382-383, 387, 321-322, 324, 326, 328-329, 331-339, Direct exporting, 255
392-395, 406 343-345, 347-350, 351, 359-360, 364-374, Direct investment, 152, 255-257
labor costs, 280 375-376, 378-385, 387-390, 392-396, 398, direct labor costs, 280
licensing, 221 400, 402-406, 409, 413-415 Direct mail, 276, 376
product and, 5, 56, 85, 98, 139-140, 178, 190, 245, business-to-business, 52, 63, 70-71, 128, 134, 143, Direct marketing, 102, 115, 163, 376, 382, 387,
254, 302, 332, 335, 365, 383, 409 147, 246, 264, 376, 381 401-402
product lines, 85, 197, 331 Customs, 255 business-to-business, 376
sales and, 43, 199, 365, 367, 372, 382-383, 394, direct mail, 376
398-399, 412 D telemarketing, 376
Countries, 171, 221-222, 245, 248, 253-254, 256-257, Damage, 249, 325, 416 Direct selling, 383
260, 264, 359-360, 369 data, 4, 12-13, 22-23, 26-27, 31, 33-34, 38-39, 53-54, Discipline, 48, 52, 75, 114, 232
Country of origin, 263, 325 57-58, 62-63, 66, 81-83, 103, 105, 111, Discontinuous innovations, 141, 342-343
consumers and, 263 120-121, 123-126, 130, 134, 151-152, 163, Discount rate, 280
Coupons, 91, 318, 372, 375-376, 378, 384 192, 200-201, 203, 234, 237, 239, 241, 246, Discount stores, 393
Creating assortments, 389 248, 276-278, 306, 312, 314-318, 320, 330, Discounts, 85, 170, 193-195, 198, 227, 271, 274-275,
Creative destruction, 90, 344 355, 361, 367, 376, 399-400, 413 280, 350, 373, 384, 395, 401-402, 405-406
Creativity, 309, 332-333 Data collection, 81, 83, 125, 200, 315-317 Discrimination, 368
credibility, 326, 377-378 Data mining, 53, 58, 121, 123, 130, 276 Disease, 302
Credit, 116, 171, 245, 388-390 data source, 361 Diseconomies of scale, 57, 67, 193-196
payment methods, 245 Database, 200, 205, 234, 374, 376, 380, 390 Disposal, 102, 109, 125, 140-141, 389
Credit cards, 245, 390 characteristics of, 376, 380 Distance, 56, 88, 171, 195, 248, 308, 360
criticism, 215 development of, 234, 374 distractions, 31
CRM, 53, 81-82, 105, 120, 275-278, 312 systems, 234 Distribution, 1, 6, 19, 21-22, 47, 63, 65, 69-70, 76, 81,
CRM systems, 277-278 databases, 53, 83, 121, 123, 277, 376 84-86, 91-92, 94, 110, 115, 136, 140, 143,
Cross-functional team, 211 electronic, 376 150, 152, 162-163, 169, 171, 176-177,
Cross-functional teams, 228 dates, 321 180-184, 198, 201, 221, 227-228, 236,
Cross-selling, 198, 246, 272, 274, 281-282 Death, 91 245-248, 252-253, 261, 277, 280, 288,
CSR, 60 Debt, 61, 410-411 290-291, 301, 311, 322-323, 325-326, 345,
corporate social responsibility, 60 Debt ratios, 410-411 350, 352, 358, 368, 371, 373, 382-383,
cultural context, 52, 115, 117 deception, 61 387-396, 397, 406
Cultural differences, 263, 380 Deceptive pricing, 368 marketing and, 70, 140, 162, 288, 350, 390
business and, 380 Decider, 146 Distribution centers, 389
Cultural factors, 116 Decision criteria, 15 Distribution channel, 85, 162, 171
Cultural values, 52, 115 Decision makers, 16, 26, 126, 143 Distribution channels, 70, 85, 92, 110, 169, 171, 198,
Culture, 71, 115-116, 121, 123, 131, 136-137, 143, Decision making, 16, 23, 29-31, 52, 60, 66, 81, 83, 221, 245-247, 252, 358, 387
202, 216, 228-229, 248, 253, 255, 257, 263, 107, 115-117, 131, 135-137, 139, 142-143, Distribution strategies, 92, 136, 221
265, 313, 322, 326 147, 213-215, 228, 254, 290, 313, 315, 347, distribution channels, 92, 221
definition of, 202 369, 374, 381, 383-384, 391 Distributors, 52, 134, 151-152, 183, 316, 332-333,
national, 116, 143 Decision-making, 13, 15, 31, 122, 135-137, 143, 385 336, 358, 368, 382-383, 387, 390-392, 400
organizational culture, 202, 228-229, 248 group, 136 Diversification, 21, 46, 48, 65, 151-152, 198, 244-245,
research on, 313 Decision-making process, 13, 135-137, 385 247-249, 258-260, 290
Currency, 52, 115 Decline stage, 183 Diversification strategies, 198
Current assets, 411-412 Deflation, 209 Diversity, 18, 197, 389
Current liabilities, 411-412 Deliverables, 34, 406 Diverting, 384
Current ratio, 411 Demand, 3-4, 18, 37, 51-53, 71-72, 82-83, 86, 91-92, Divesting, 355
Curves, 121-122, 190, 192 98, 107, 110-111, 116, 120-121, 137, 141, Dividends, 60, 413
nonlinear, 121-122 143, 170-172, 176-177, 183, 214-216, 229, Documentation, 37, 47, 60, 67, 76, 84, 94, 105-106,
Customer acquisitions, 413 234, 263, 298, 302, 312, 315, 331, 335, 338, 116, 407
Customer demand, 338 350, 364, 366-367, 373, 378, 383-384, 401, documents, 12, 98, 157, 297, 339
Customer equity, 278 404, 413 Dollar, 63, 103, 108-109, 134, 142-143, 245, 376, 402,
Customer feedback, 335 aggregate, 18, 364 409, 412
Customer insights, 53-54, 82, 90, 120-121, 123-130, change in, 4, 111, 121, 141, 367, 383, 401 Dollars, 6, 18, 63, 88, 90, 129, 189, 193-194, 270,
140, 276, 311-312 currency, 52 272, 329, 360
Customer lifetime value, 9, 39, 64, 71-72, 76, 271-272, derived, 364, 401 Dominance, 21, 172, 203, 356
419
Downstream, 247, 383, 387, 391 365, 375, 411-412 Filtering, 378
Draft, 27, 83, 314, 405 internal, 61, 84, 324 Finance, 162, 214, 229, 361, 409
Drill down, 134 Equity markets, 61 Financial management, 213
Drugs, 198 Ergonomics, 337 Financial resources, 101, 151, 289
Duty, 216 E-tailers, 181 Financial risk, 91, 348-349
Dynamically continuous innovations, 141 ETC, 2, 13, 15, 21, 27, 56, 71, 75, 83, 85-87, 92-93, Financial Times, 330
Dynamics, 49-50, 72, 75, 146, 173, 185, 328, 343, 102, 109-110, 140, 151, 159, 161-162, 176, Fire, 216, 283
388, 390-391, 396 180, 190, 195, 198, 209, 212, 220, 222, Firm performance, 203, 217
235-236, 246, 254-256, 258, 263, 266-267, Firms, 15, 43, 45, 47, 51-52, 54, 57, 59-60, 62, 72, 75,
E 281-282, 287, 298, 305, 318, 321, 332-333, 87-88, 90, 102-104, 114-115, 117, 123, 125,
Early adopters, 91, 182, 257, 263, 335, 345-347 335-336, 348-349, 365-366, 376, 382, 389, 130, 138, 141, 147, 151, 161, 177, 182,
Early majority, 263, 346 391, 393, 400-401, 405-406, 408, 414 193-194, 200, 202-204, 213-215, 229-230,
Earnings, 20, 89, 168, 244, 329, 364, 413 ethical aspects, 369 236, 244, 247-248, 269-272, 274, 277, 286,
Earnings before interest and taxes, 168, 364 Ethical issues, 91, 368 309, 315-316, 320, 322, 324, 331, 337, 354,
Econometric models, 400 Ethical standards, 369 382, 385, 387-388, 391-393, 399
Economic environment, 35 Ethics, 369 organizational culture, 202, 229, 248
economic feasibility, 334 Laws, 369 value chain, 51, 125, 141, 161, 248
Economic variables, 52, 115 Ethnographic research, 127 first impressions, 34
Economics, 4, 77, 204, 339 Ethnography, 123, 125, 127, 129, 131 First-mover advantage, 190, 252
motivation and, 77 Euro, 353, 358, 409 Fixed assets, 412
Economies of scale, 49, 56-57, 65, 72, 87, 117, 150, Europe, 46, 51, 181, 200-201, 245, 259, 266, 302, Fixed costs, 1, 3-6, 20, 57, 89, 94, 169-170, 172,
163, 169-170, 183, 193-195, 197-198, 369, 390, 409 193-195, 227, 355, 364-367, 414
199-204, 221-222, 227, 230, 244, 247, 254, European Union, 261 Fixed expenses, 56, 94
256, 261, 267, 290, 301, 355, 358, 365, 367, Evaluation, 14, 19, 28, 30, 38, 63, 84, 90, 104, 109, Flexibility, 85, 163, 228-229, 257, 289-290, 313, 393
371, 409 135, 137-138, 141-142, 145, 147, 201, 215, Focus group, 317
benefits of, 49, 117, 170, 183, 200-204, 267, 365, 276, 301, 303, 345, 357-358, 372, 381, 385 Focus groups, 315, 333
371 Evaluation of alternatives, 135, 142, 381 Focus strategy, 230
franchising, 221, 256 evidence, 37, 61, 68, 122, 130, 148, 204, 214, 270, fonts, 302
improving, 65 324, 383 Food, 71, 109-111, 129, 131, 136-137, 141, 194, 216,
Economy, 45, 56, 71-72, 115, 117, 121-122, 129, 152, Exchange, 52, 85, 115, 128, 233, 255-256, 393, 409 257, 263, 297, 302, 336, 355, 378, 391
197, 208, 230, 235-236, 267, 296, 305, 319, Exchange rate, 255-256, 409 production, 110, 194, 257
370 flexible, 255 Forecasting, 53, 83, 101, 111, 121-124, 208, 290-291,
Education, 1, 11, 25, 29-31, 39, 41, 49, 52, 59, 69, 71, Exchange rates, 52, 115 315, 344, 397-400
77, 79, 97, 107, 113, 115-116, 119, 133, 149, Exclusive distribution, 392 sales, 83, 101, 111, 124, 291, 344, 397-400
155, 161, 167, 175, 180, 183-185, 187, 193, executive summary, 98-99 Forecasts, 18, 47, 67, 76, 94, 98-103, 105-106,
196, 197-198, 199, 207, 213, 219, 223, 225, Expansion, 20, 89, 177, 203, 221-222, 248, 277, 352, 122-123, 183, 209, 397-406, 407-408
232, 233, 243, 251, 253, 261, 263, 265, 360 Foreign direct investment, 257
267-268, 269, 279, 283, 285, 293, 295, 301, expect, 9, 28, 142, 177, 180-181, 190, 204, 244, 365, Foreign subsidiary, 255-256
305, 310, 311, 313, 321, 331, 339, 341, 351, 372, 378 formality, 115
363, 374, 375, 387, 396, 397, 407 Expectations, 22, 35-36, 39, 50, 98, 100, 111, 142, Forward integration, 169, 247-248
Efficiency, 65, 162-163, 214, 226-227, 229, 277, 290, 148, 179-180, 220, 244, 276, 325, 333, 408 Foundations, 66, 121, 299
322, 357 Expected product, 87, 179 Fragmentation, 378
Elasticities, 111, 201 Expected return, 382 France, 373
computing, 201 Expenditures, 2, 4, 50, 85, 93, 100-102, 124, 193, Franchisee, 129, 131, 256-257, 391
Elasticity of demand, 4 271-272, 301, 313, 336, 366, 397, 399, 405 Franchising, 152, 221, 255-257
price, 4 defined, 4, 50 relationship, 257
Electronic Commerce, 131 Expenses, 1, 3, 22-23, 56, 61, 94, 102, 241, 280, 365, termination, 257
electronic media, 378 392, 397, 401-402, 404, 412 fraud, 61
E-mail, 376 Experience, 28, 30, 33, 36, 39, 56-57, 67, 71, 84, 104, employee, 61
advertising, 376 125, 127, 129, 131, 137, 141-142, 156-157, Free markets, 350
emotions, 138-139, 385 178, 187-192, 198, 199-201, 203-204, Free trade, 115
Empathy, 228, 330 221-222, 227, 229-230, 244, 246, 252-253, Free trade zones, 115
emphasis, 42, 48, 86, 91, 93, 120, 142, 181, 183-184, 275-277, 289, 316, 324-325, 337, 339, 348, Freedom, 324
214, 216, 269-270, 272, 299, 328, 338, 355, 358, 365, 367, 371-372, 380, 386, 391, Frequency, 86, 203, 245, 247, 263, 336, 344, 404
382-383, 390, 392 409 Full line, 266
Employee productivity, 61 Experience curve, 56-57, 67, 187-192, 199-201, Functional strategies, 156
Employees, 57, 61, 151, 157-158, 171, 222, 228, 266, 203-204, 221, 227, 230, 253, 355, 358, 365, Fund, 88, 361
289, 327, 394, 415 367, 371, 409
loyalty, 289, 327 expertise, 46, 137, 140, 146-147, 178, 180, 247, G
selection of, 415 313-314, 326, 351, 373, 380, 384, 391-392 Gambling, 123
Employment, 42, 60, 71, 265 Explanations, 202 slot machines, 123
full, 71 Exploratory research, 83, 315 Gap analysis, 35, 103, 137
endnotes, 39, 48, 58, 67, 77, 95, 106, 111, 117, 130, Export department, 255-256 Gatekeeper, 146
147, 159, 165, 173, 185, 192, 196, 198, 205, Exporting, 255-256 Gatekeepers, 146, 346-348, 386
217, 223, 232, 241, 249, 260, 268, 278, 283, agents, 255-256 Gender, 263
293, 300, 304, 310, 320, 329, 339, 350, 361, Exports, 255 general purpose, 13
374, 386, 396, 406, 416 External environment, 38, 49-58, 220, 296 Germany, 171, 245, 260
creating, 159, 165, 223, 260, 293 Externalities, 38 gestures, 327
England, 39, 95, 160, 173, 223, 232, 260, 339 Gifts, 378, 384
English, 39, 60, 397 F Global marketing, 115-116
English language, 60 Facilitating functions, 228, 389-390 Global marketing strategies, 115-116
Enhancement, 275, 349 Facilitators, 180 Global products, 254
Enterprise resource planning, 171, 246, 264 Factors of production, 338 Global sourcing, 163
Entities, 134, 380, 383, 388, 390-392, 396 Fads, 58, 121, 130, 215 Global strategy, 115, 253, 255
Entrepreneurs, 127, 336 Failure, 52, 81, 83, 99-100, 116, 253, 255, 331, 347 Globalization, 116-117, 260, 263, 416
Entrepreneurship, 90, 205, 344 Fair price, 308, 344 markets, 116-117, 260, 263
Entry barriers, 169-173, 252-253, 357-358, 371 Fair value, 139, 233-235, 239-240, 344 summary, 117, 260
Environment, 13, 16, 34-35, 38, 49-58, 60, 66, 68, 81, Family, 61, 71, 136, 158, 188, 222, 237, 263, 265, 302, Globalization of markets, 116-117, 260, 263
99, 103, 105, 114, 116-117, 121, 123, 130, 319, 327, 375 example of, 263
136, 138-139, 156, 180, 185, 208-210, 212, Family life cycle, 263 Goals, 15, 35, 51, 59-60, 98, 102, 156, 159, 214, 216,
220, 286-287, 296, 298-300, 311, 326, 376, FAST, 83, 88, 129, 131, 140-141, 158, 168, 193-194, 220, 260, 391, 397-398, 401, 406
378, 390, 408-409 222, 228, 236, 246, 257, 336, 361, 391 definition of, 156, 220
natural, 35, 52, 60, 121, 123, 180, 300, 311 Fax machines, 349 Gold, 123, 373
Environmental analysis, 296 Feature, 109, 321, 334, 367-368 Goods, 1, 63-64, 70, 85, 87, 99, 102, 116, 128,
Environmental factors, 19, 52, 114, 117, 143 Federal government, 117 140-141, 143, 181, 183, 193-194, 214-215,
Environmental scanning, 74, 298 feedback, 30, 57, 91, 143-145, 163, 277, 317, 332, 236, 275, 280, 321, 330, 337, 344, 364, 380,
Equilibrium, 45, 233, 343-344 335, 347 387, 390-391, 394, 402, 404, 409, 412
market, 45, 233, 343-344 Fields, 350 bundling, 85
Equity, 61, 75, 84, 246, 254, 278, 321-325, 327-330, Film industry, 124 complementary, 394
420
free, 140, 280, 330, 394 Industrial goods, 236 Inventories, 65, 316, 391, 412
inferior, 236 Industrial Revolution, 165 Inventory, 3, 63-64, 92, 102-103, 146, 198, 203, 275,
private, 215 Industry, 14-15, 19-20, 33-35, 38, 47, 49, 51-52, 344, 384, 388-389, 391-392, 394-395,
public, 102, 116, 330, 402 54-56, 67, 70, 76-77, 88-89, 94-95, 99-100, 411-412
substitute, 409 105-106, 108, 110, 114-115, 117, 124, management of, 391
Government, 52, 114, 117, 134, 169, 171 128-129, 134, 150, 156, 162-163, 165, Inventory management, 392, 395
currency exchange rates, 52 167-173, 176-177, 181, 183-185, 190-191, Investment, 2, 6, 8-9, 19-20, 26, 30, 64-65, 88-89, 93,
Government subsidies, 52, 114 193, 204, 208-209, 211-212, 215-217, 227, 102-103, 151-152, 177, 179, 183, 190-191,
GPS, 116, 333 229-231, 234-235, 237, 240-241, 249, 253, 193, 200, 235-236, 247, 255-257, 272, 275,
Grants, 255 257-259, 264, 266, 269, 274, 286-288, 286, 291, 298, 300, 325, 328, 338, 351-356,
Grapevine, 95 291-293, 297, 302, 312, 333, 355-357, 361, 360-361, 366-367, 382-383, 387, 393, 399,
Graphs, 347 365, 367, 384, 387, 391, 399, 408-410 401, 405, 411-413
Gross margin, 6-7, 280-281 Industry structure, 168, 170, 172-173, 211, 286 gross, 6, 103, 383, 412
Gross profit, 402, 412 Inefficiencies, 57, 227 net, 9, 26, 383, 401, 411-413
Gross profit margin, 412 infer, 365 present value and, 8
Gross sales, 391 Inflation, 7, 19, 52, 115, 209 Investment decisions, 152
Group, 75, 87-88, 95, 107-108, 110, 128, 130, 136, Influencer, 146 Investments, 2, 5, 20, 53, 82-83, 88-89, 93, 120, 171,
148, 172, 189, 192, 237, 261-262, 266, 269, Information, 2, 12-13, 23, 26-27, 31, 33-34, 39, 53-54, 177, 179, 194, 203, 209, 211-212, 213, 215,
280, 300, 315, 317, 351, 361 62-63, 66, 81-84, 86, 91-92, 120, 122-123, 255, 257, 273, 275, 277-278, 289, 312, 314,
groups, 61-62, 72, 127, 137, 143, 172, 237, 264, 267, 125, 135-140, 142-143, 146-147, 150, 152, 325, 328-329, 337-338, 351-352, 355, 358,
280, 282, 315-316, 319, 333, 335, 345, 378, 156, 158, 162-163, 183-184, 197, 200, 205, 371-372, 382-383, 393, 395, 397-399, 406
411 228, 246, 276-277, 282, 290, 297, 301, 310, regulation of, 171
development of, 62, 333 312-316, 318-320, 322, 330, 347-349, 352, revenues from, 371
Growth rate, 18, 75, 88, 189, 302, 351-353, 355-356, 357, 370, 373, 376, 380-381, 386, 387, 389, Investors, 159, 413
358, 360, 410, 414 392-394, 410, 413 Ireland, 416
Growth stage, 177, 180, 182-183 Information gathering, 92 Italy, 63, 245, 308
Growth strategies, 45, 65, 76, 221, 243-249 Information management, 162
Growth strategy, 151-152, 235, 246-247, 249, 361, information needs, 86 J
413 Information processing, 138 Japan, 162, 203, 214, 314, 320, 387, 396
Guidelines, 27, 32, 52, 114 Information search, 135-138, 142, 147, 322, 381 Jargon, 351
Information system, 63, 290 Job creation, 256
H Information systems, 62-63, 163 Jobs, 61, 257
Harvesting, 64, 183 Infrastructure, 52, 116-117, 162, 222, 289, 380 profitability and, 61
Hazards, 391 Initiative, 249, 401 Joint venture, 152, 256-257
headings, 223 Initiator, 146 Joint ventures, 221, 255-257
Health care, 117 Innovation, 45, 52, 58, 64, 90-92, 116, 128-129, 131, conflict, 256
Heuristics, 122, 130, 139, 148 148, 150, 165, 172, 181-183, 198, 213-215,
Hierarchy, 37, 87, 102, 108, 135-136, 143, 147, 215, 227-229, 236, 252, 309, 331, 333, 335, 339,
342-345, 347-350, 365, 371, 386, 396 K
328, 381, 401, 403 Key success factors, 156, 159, 223, 288
Hierarchy of effects, 135-136, 143, 147, 328 importance of, 91, 347
Innovations, 45, 90-91, 94, 122, 128-129, 135, 141, Knowledge, 30, 33, 38, 54, 57, 84, 123, 128, 130, 134,
Hinduism, 255 147, 151, 198, 214, 245-247, 256-257, 265,
Horizontal integration, 391 147-148, 178-179, 185, 234, 246-247, 313,
335, 341-350, 371, 378, 380, 386, 395, 400 282-283, 313, 320, 328, 342, 344, 346, 349,
Host country, 257 381
foreign direct investment, 257 continuous, 91, 141, 342-344
defined, 45, 91, 94, 128, 342-344 sharing, 247, 257
Household appliances, 387 specialized, 346
Housing market, 210 discontinuous, 91, 141, 178, 342-343
HTML, 160, 374 dynamically continuous, 91, 141, 342
HTTP, 130, 157, 185, 192, 205, 232 Innovators, 91, 182, 263, 335, 345-348 L
Human resource management, 70, 162, 288 Input costs, 227 Labeling, 50, 52, 114, 376
Human resources, 289 Installations, 342 Labor, 1, 19, 89, 103, 190, 194-195, 227, 252, 280,
Human rights, 157 instant messaging, 302 338, 404
hypothesis, 124 Insurance, 276, 385 labor relations, 19
Intangible assets, 329-330 Labor costs, 280
Intangible products, 387 Labor productivity, 89, 103
I intangible services, 87 Labor relations, 19
Ice, 94-95, 116, 176, 245, 378 Integrated communications, 350, 381-382 Laggards, 91, 263, 346-348
Idea generation, 88, 332-333, 338 Integrated marketing communication, 376 Language, 60, 158, 397
III, 27, 82, 99, 164-165, 211, 232, 315 Integration, 43, 65, 169, 171, 198, 217, 227, 247-248, authentic, 158
IKEA, 157, 171, 222, 229, 234 266, 278, 386, 391, 396 Late majority, 263, 346
illustration, 31, 164 Intellectual property, 198, 255, 322, 330 Lead time, 90
Image, 18, 43, 85, 101, 139, 150, 178, 180, 183, franchising, 255 Leader, 34, 39, 107, 168, 170, 192, 201, 203, 205,
221-222, 228-229, 235-237, 240-241, Intellectual property rights, 330 227-228, 230, 236, 240, 257-259, 274, 306,
246-247, 253-257, 287-288, 291, 322-325, intelligence, 51, 59, 67, 101, 149-153, 300 327, 350, 352, 354, 356, 365, 370
357-358, 373, 377-378, 380, 403-405, 410, Intensive distribution, 392 Leadership, 20, 30, 43-44, 68, 89, 152, 190, 192, 195,
416 Interbrand rankings, 329 205, 226-231, 235-236, 248, 252, 302, 353,
country, 222, 254, 257, 325, 357 Interest, 7-9, 52, 61-63, 100-101, 103, 115-116, 122, 356, 369, 374, 409
national, 254, 378 135, 137, 168, 180, 185, 205, 208-210, Learning, 27, 30-31, 33-34, 39, 57, 87, 99, 115, 122,
Immediate action, 241, 401 235-236, 265, 328, 330, 335, 345-346, 364, 127, 136, 141, 171, 183, 189-190, 192,
Implementation, 28, 33, 47, 53, 67, 69, 76, 79-95, 98, 376-378, 381, 384, 391, 411 199-200, 202, 253, 261, 266, 282, 336, 365,
105-106, 120, 173, 202, 221, 260, 304, credit, 116 367, 387, 408-409, 416
311-312, 314, 320, 382, 397-398, 406, Interest rate, 7-9 Learning curve, 57, 87, 192, 199-200, 202, 261, 365,
407-409, 415 Interest rates, 52, 100-101, 115, 208-210 409
implementation plan, 28, 98, 406 real, 208-209 Learning organization, 192, 416
Imports, 236 Intermediaries, 85, 92, 255-256 ledgers, 95
Inbound logistics, 1, 161, 288 channel, 85, 92 Legal environment, 35
Inc., 54, 129, 217, 374 International business, 117, 260 Legal environments, 52, 114
Incentives, 376, 384 environment, 117 Legitimate power, 62
Income, 1, 71-72, 103, 122-123, 200, 263, 267, 275, International marketing, 115, 117 letters, 215
411-413 International markets, 115, 255, 261, 263, 380 Leverage, 55-57, 62, 87-88, 201, 203-204, 227,
differences in, 71, 200, 263 International strategy, 253-254 360-361
market, 72, 103, 200, 263, 267, 275, 411, 413 International trade, 115 Liabilities, 322, 411-412
Income statement, 1, 200 barriers to, 115 Liability, 52, 114
Independent intermediaries, 255-256 Internationalization, 152, 253-254 business, 52, 114
Independent variables, 122 Internet, 33, 86, 91-92, 128-129, 138, 140, 149, liquor, 52
India, 231-232 171-172, 204, 245, 248, 302, 319, 333, 335, Liberalization, 115-116
Indirect exporting, 255 371, 376, 380, 387-390, 393-394, 396 Licensee, 255-256
Individual marketing, 72, 152, 261 defined, 91, 128, 140, 302, 376 Licenses, 255
Inductive reasoning, 124 focus groups, 333 Licensing, 152, 221, 255-257
Industrial design, 129 Interviews, 55, 125-127, 315, 333 advantages and disadvantages, 255
421
market entry strategies, 255-256 Market entry strategy, 152, 257 return on investment (ROI), 103, 382-383
Licensor, 255-257 Market growth rate, 18, 351, 353, 355-356, 360, 410, value and, 8, 35, 53, 60, 72, 143, 302, 343, 364,
Life insurance, 385 414 396
buying, 385 Market leader, 107, 168, 170, 257-259, 352, 354, 365 Marketing analysis, 47, 66, 105
Lifestyle, 263-264, 267-268 Market performance, 64 Marketing channels, 391, 396
market segmentation, 263-264, 267-268 Market planning, 21 logistics, 391
Limited problem solving, 143 Market position, 18, 193, 249, 253, 351, 353 Marketing concept, 41-43, 47, 76, 141, 213-217, 222,
Line extensions, 247, 331 strategic, 18, 193, 249, 351 255, 311, 332
Liquidity, 410-411 Market potential, 101, 111, 331, 403, 410, 413 Marketing implementation, 408
List price, 85, 367 Market research, 13, 22, 81, 94-95, 110, 121, 127, Marketing management, 29, 54, 148, 232, 268, 269,
listening, 30, 34 131, 134, 237, 239, 264, 311-320, 331, 335, 283, 304, 310, 339, 374, 387
effective, 30 338, 358, 399-402 defined, 310
process of, 34 defined, 81, 94, 110, 121 marketing messages, 376
Loans, 7, 9 primary, 110, 121, 314, 316-317, 399 Marketing mix, 2, 15, 22, 47, 50, 52-53, 58, 67, 69-71,
Lobbying, 383 secondary, 239, 316-317, 399 74, 76, 80-82, 84-87, 93-94, 99-103,
Logistics, 1, 63-64, 85, 146, 150, 161-163, 165, 198, theory, 131, 134 105-106, 114, 117, 120, 130, 134, 137, 143,
213, 222, 227, 234, 257, 274, 288-290, 344, Market segment, 12-13, 18, 108, 220, 230, 237, 246, 147, 176, 181-182, 253-254, 261-262,
387, 389-392, 395 257, 370, 380, 405 266-267, 277-278, 304, 305, 310, 311-312,
importance of, 162-163, 288, 387, 390 Market segmentation, 12, 21, 70, 76, 162, 221, 230, 315, 319-320, 322-323, 329, 349-350, 364,
information management, 162 261-264, 266-268 366, 373, 397-399, 401, 405-406, 407-408
inventory management, 392, 395 branding, 76 Defined, 50, 58, 70, 81, 94, 182, 310
transportation, 161, 198, 222, 392 business markets, 263-264 Personal selling, 85-86, 102, 143, 147
warehousing, 161, 395 defined, 70, 230 Place, 47, 67, 69, 76, 81, 84-86, 94, 99, 105-106,
Logos, 84, 255, 322 effective segmentation, 262 120, 143, 310, 312, 319, 322, 329, 397,
London, 67, 131, 330 international markets, 261, 263 406
Long-term debt, 411 overview, 12 Price, 2, 47, 53, 67, 69-71, 76, 82, 84-87, 93-94,
Long-term implications, 373 Market share, 21, 35, 37, 49-51, 55, 57, 61, 63-64, 99-102, 105-106, 120, 137, 143, 176,
Loss, 5, 75, 85, 95, 128, 194, 236, 269, 271, 274-275, 66-67, 75, 83, 88-89, 93, 98, 103, 107, 111, 181-182, 253, 261, 266-267, 305, 310,
378, 384, 401, 409 140, 149, 153, 171-172, 183, 190-192, 193, 312, 315, 319-320, 329, 349-350, 364,
assessment, 128, 401, 409 195, 199-205, 227, 229, 234-236, 240, 366, 373, 398-399, 405-406
control, 85, 378, 384, 409 244-245, 248, 252, 315, 336, 344, 352-358, Product, 15, 22, 47, 50, 52-53, 67, 69-71, 76,
direct, 85, 384, 401 360, 365, 371, 387, 391, 399, 401-405, 80-82, 84-87, 94, 99-100, 102-103, 114,
expected, 384, 409 409-410, 413-414, 416 120, 134, 137, 143, 176, 181-182,
income, 275 Market size, 12, 249, 335, 349, 355, 357-358, 399 253-254, 261-262, 267, 278, 305, 310,
known, 5, 85, 194, 269, 384 Marketing, 1-9, 11-23, 25-27, 29-31, 35, 37-39, 41-48, 311-312, 315, 319, 322-323, 329, 349,
reduction, 409 49-55, 57-58, 59-60, 62-67, 69-74, 76, 373, 406
Low-involvement purchases, 385 79-88, 90-95, 97-106, 107, 111, 113-117, Promotion, 47, 67, 69, 76, 81, 84, 86, 94, 105-106,
Loyalty programs, 252 119-125, 127, 129-131, 133-134, 136-143, 143, 305, 312, 315, 329, 406
147-148, 149, 151-153, 155-156, 159, Marketing myopia, 217
M 161-165, 167, 170, 175-176, 181-185, 187, Marketing objectives, 63, 101, 260, 399-401, 403
Magazines, 91, 318 190, 192, 193, 195, 197-198, 199-201, Marketing plan, 11-23, 47, 51, 67, 76, 94, 98-99, 101,
Management, 19, 29-31, 33, 35-36, 39, 47-48, 53-54, 204-205, 207-209, 212, 213-217, 219-223, 103, 105-106, 309, 331, 335, 398, 400, 406,
58, 60, 63, 67-68, 70, 77, 81-82, 95, 100, 225-226, 229-230, 232, 233-234, 241, 408-410, 415
103, 105-106, 117, 120, 122, 135, 147-148, 243-244, 246-247, 249, 251-260, 261-262, Marketing planning, 13, 23, 84, 98, 105, 111, 117, 153,
152, 158-160, 162-163, 165, 185, 190, 192, 264, 266-268, 269-278, 279, 282-283, 285, 317, 327, 397, 407
196, 198, 200, 202-203, 205, 212, 213-214, 287-291, 293, 295-296, 298, 300, 301-302, setting objectives, 105
217, 223, 228-229, 232, 249, 260, 268, 269, 304, 305, 308-310, 311-315, 317-320, steps in, 105
275-278, 283, 286, 288, 290-293, 304, 310, 321-330, 331-332, 335-339, 341-345, Marketing research, 2, 4, 12, 47, 52-54, 67, 76, 81-84,
312-313, 315, 329-330, 331, 338-339, 353, 347-350, 351-352, 355, 357-358, 361, 90, 93-94, 102, 105-106, 124-125, 130-131,
355, 360-361, 366-367, 373-374, 378-379, 363-366, 369, 371, 373-374, 375-376, 182, 205, 215, 232, 277, 305, 311-312, 320,
382, 386, 387, 390-393, 395-396, 397, 401, 378-386, 387, 389-392, 396, 397-406, 327, 330, 337, 366, 382, 389, 398-399, 401,
406, 407, 416 407-410, 413-416 405
activities of, 70, 162, 165 business-to-business, 52, 63, 70-71, 134, 143, 147, data mining, 53, 130
functions of, 228, 390 246, 264, 376, 381 defined, 4, 81, 83, 94, 182, 215, 337
Management information system, 290 defined, 1, 4-6, 31, 45, 50, 58, 60, 70, 81, 83, 91, steps in, 105
Managers, 26-27, 29-30, 33, 39, 41, 43, 47, 50, 55, 94, 107, 111, 121, 140, 170, 182, 201, Marketing ROI, 382-383
61, 81, 83-84, 92, 98-100, 108, 110, 215-216, 222, 230, 233, 302, 310, 337, return on investment, 382-383
121-122, 127, 129, 131, 135-137, 157, 173, 342-344, 355, 376 Marketing strategies, 6, 21, 41, 43, 51-52, 60, 72, 76,
199, 201, 212, 214, 244, 313, 316, 319-320, global, 43, 72-73, 115-117, 148, 153, 163, 170, 92, 103, 115-117, 120-121, 152, 176,
324, 336, 351, 355, 360, 372, 374, 401, 413 201, 212, 230, 253-255, 259, 329-330, 181-183, 185, 234, 246, 249, 251-260, 269,
social responsibility of, 61 374, 380, 383 277, 282, 349, 410
Manners, 52, 115, 143 Guerrilla, 258 development of, 116, 234, 259
Manufacturers, 65, 92, 114-115, 128, 171-172, 178, ideas, 7, 13, 26, 70, 90, 129, 139, 147, 249, 270, Marketing strategy, 1-9, 29-31, 35, 37, 41-44, 46-47,
194, 214, 230, 232, 236, 307, 333, 355, 366, 278, 305, 313, 323, 331-332, 335-336, 49, 55, 57-58, 59, 63, 76, 85, 98-99, 106,
369, 371, 384, 389-391, 396 338, 344, 347, 350 114-115, 117, 130, 141, 159, 176, 199-201,
Manufacturing, 61, 70, 110, 193, 214, 228-230, 236, income statement and balance sheet, 200 209, 219-223, 230, 233, 249, 264, 296, 311,
247, 257, 288, 313, 366 metrics, 53, 62-63, 81-82, 102-103, 105, 120, 204, 320, 338, 342, 349, 364, 366, 381, 386, 387,
Manufacturing operations, 313 246, 311-312, 397-399, 406, 408, 410, 392, 397, 403-404, 410, 415
Margin, 2-3, 5-7, 9, 93, 95, 103, 161, 177, 179, 191, 413-416 Marketplace, 45, 49, 53, 58, 69, 76, 80-81, 83, 90,
229, 260, 271-272, 274, 280-281, 321, 328, needs and, 26, 35, 52-53, 69-70, 72, 82-83, 85, 88, 121, 139, 152, 204, 231, 233, 315, 318,
365-368, 371, 373, 380, 383, 392, 401, 90, 115, 117, 120, 130, 137, 182, 321-322, 324, 326, 359, 384
404-405, 409-410, 412, 414-415 214-216, 220, 255, 261-262, 264, Markets, 13, 16, 18, 21, 42-46, 50-51, 54-56, 61,
Marginal cost, 364 266-267, 277, 302, 310, 311-312, 315, 64-65, 70-71, 74, 81, 83, 87-88, 91, 108,
Margins, 5-7, 9, 22-23, 26, 37, 43, 57, 62, 64-65, 85, 392 110-111, 115-117, 121, 124, 130, 134, 136,
87, 93, 103, 177, 180, 183-184, 192, 195, of value, 42, 124, 139-140, 222, 233, 387, 389 141, 143, 145-147, 159, 172-173, 176-178,
200, 202-204, 227, 271-272, 286, 322-323, people, 8, 12, 27, 29, 45, 47, 54, 57, 62-63, 67, 69, 180-185, 190, 193, 198, 199-201, 205, 209,
329, 352, 357-358, 367, 371-372, 380, 383, 76, 80-81, 84-86, 91-92, 94-95, 105-106, 214, 216, 220-221, 223, 227, 230, 244-248,
390-393, 395, 403, 415 115-116, 123-124, 127, 129, 131, 253-260, 261-264, 267, 287, 290, 292-293,
Market assessment, 292 136-138, 140, 142-143, 147, 151, 156, 297, 301, 304, 305, 313, 315, 322, 326, 331,
Market capitalization, 329 162, 214-216, 220, 222, 254, 266-267, 335-337, 342-345, 349-350, 351-352, 355,
Market changes, 99, 204 271, 290-291, 302, 312-313, 320, 359-360, 364, 368-369, 379-384, 395, 400
Market demand, 331, 401, 404, 413 324-326, 337, 342, 344-345, 373, Markup, 6, 367-368
Market differentiation, 89, 182 375-376, 378-386, 392, 397, 400, 406 Markup pricing, 367
Market dynamics, 185, 390 place, 39, 47, 54, 67, 69, 76, 81, 84-86, 92, 94, 99, Mass customization, 73
Market entry, 152, 169-173, 198, 220, 252-253, 105-106, 115, 120, 129, 138, 140, 143, Mass market, 128, 298, 302, 335
255-257, 333, 357-358 152, 205, 215, 221, 226, 249, 287-288, Mass marketing, 43, 195, 261
examples of, 333 310, 312, 318-319, 322, 325-326, 329, Mass media, 116, 375, 380, 384
Market entry strategies, 198, 255-256 361, 379, 387, 389-392, 396, 397, 406 Mass production, 188
exporting, 255-256 price elasticity, 4, 18, 140 Matching process, 299
422
Matrices, 74-75, 129-130 Niche marketing, 72 Percentage of sales, 56, 382, 401
Maturity stage, 177, 183 Norms, 52, 115, 143, 204, 368, 374 percentages, 6, 367, 414
meaning, 31, 84, 125, 197, 200, 306, 310, 321-329, North America, 111 Perception, 184
380 NPV, 9, 38 Perceptual map, 45, 305-309, 319
understanding of, 31, 324 Performance, 13, 26, 43, 45, 55, 59, 62, 64, 68, 70,
Measurability, 103, 408, 416 O 72-73, 83, 95, 103, 108-109, 139-140,
of objectives, 103 objective setting, 103, 398, 401 143-146, 150, 163-165, 172, 178-180, 182,
Measurement, 28, 31-32, 311, 327-328, 330 Objectives, 21-22, 28, 32-35, 37-38, 41, 51, 59-60, 185, 192, 199, 203-205, 214, 217, 223, 228,
measurements, 147, 386 62-65, 81, 83, 85-86, 93, 98-103, 105-106, 233-234, 236-241, 246, 260, 287-290, 293,
Mecca, 126 121, 149-150, 153, 185, 200-205, 220, 223, 298, 303, 305, 309, 315, 319, 325, 327-329,
Media, 54, 86, 91, 116, 121, 148, 184-185, 193, 203, 260, 269, 274, 304, 311, 314-315, 328, 333-334, 343-344, 356, 369-370, 373, 381,
276, 318, 326, 346-347, 353-355, 359, 364-365, 369, 371, 373-374, 379, 381-382, 410, 412-413, 415
375-376, 378, 380, 382, 384, 401-402, 391, 397-406, 407-408, 410 firm performance, 203, 217
405-406 accounting, 105, 365, 404, 410 market performance, 64
Mediation, 378 Obligation, 61 Performance evaluation, 109
medium, 19, 100, 246, 267, 276, 320, 356, 358 Observability, 91, 349-350 Performance feedback, 144-145
meetings, 151-152, 376 Obsolescence, 92, 141, 371, 389 Performance measures, 64
Memory, 12, 84, 138, 298, 321, 323-324 Occurrence, 21 performance metrics, 410, 413
memos, 26-27 Oceans, 337 Perils, 87
Merchant, 416 Offer, 33-34, 43, 45, 76, 87, 91, 107-108, 110, Permits, 208
Mergers, 198 126-127, 139, 177-178, 182-183, 185, 189, personal attacks, 34
vertical, 198 199-200, 230, 233, 235-237, 240, 246, 282, Personal communication, 278
Mergers and acquisitions, 198 322, 342-344, 349-350, 352, 393, 415 Personal selling, 4, 85-86, 91-92, 102, 136, 143-145,
message, 43, 83-84, 91, 315, 325, 335, 348, 378-379, Offset, 244, 397, 414 147-148, 276, 376, 380, 389
386 Oil, 212, 257 customer relationship management, 276
competing, 43 Operating expenses, 402, 412 promotion mix, 376, 380
ethical, 91 Operations, 1, 6, 20, 22-23, 61-62, 89, 117, 128, 161, Personality, 77, 92, 136, 148, 216-217, 228, 232,
goodwill, 84 163-165, 200, 204, 212, 213-214, 229-230, 263-264, 310, 323, 327-328, 330
marketing, 43, 83-84, 91, 315, 325, 335, 348, 255, 277, 288-289, 291, 313, 338, 370 cultural differences in, 263
378-379, 386 Opinion leaders, 91, 128, 180, 335, 346-348, 384 Personality traits, 263-264
negative, 348, 378 Opportunities, 13, 18, 29-31, 37-39, 50-54, 59, 61, 63, Persuasion, 26-27
positive, 315, 325, 348, 378 73-74, 81, 91, 107, 110-111, 114, 116-117, persuasive messages, 380
purpose of, 83 121, 126, 144, 153, 159, 164, 178, 182, 185, developing, 380
retention of, 84 190, 212, 215, 220, 223, 246, 248-249, 252, Pharmaceutical industry, 117, 170, 193, 288
sales, 43, 83-84, 91, 325, 335, 348, 378-379, 386 261-262, 277, 296-300, 333, 352, 367, PHP, 386
Metrics, 53, 62-63, 81-82, 102-103, 105, 120, 126, 387-388, 391, 396, 401, 408 Physical distribution, 390
204, 246, 311-312, 397-399, 406, 408, 410, Opportunity cost, 267 Physical environment, 52, 116, 296
413-416 Optimism, 158 Physiological needs, 71, 215
Middlemen, 390 Oracle, 266 Place, 34, 39, 47, 54, 67, 69, 76, 81, 84-86, 92, 94, 99,
MIS, 290 Order processing, 290, 392 105-106, 115, 120, 129, 138, 140, 143, 152,
Mission statement, 60, 157-159 Organic growth, 222 158, 177, 205, 215, 221, 226, 239, 249,
Modified rebuy, 13, 145 Organization, 12, 26-27, 42, 51, 57, 60-61, 63-64, 68, 287-288, 306, 310, 312, 318-319, 322,
Money, 1, 3, 6-9, 30, 43, 51, 71, 85, 95, 101, 109, 126, 72, 84-85, 92, 95, 98, 102, 129-130, 136, 325-326, 329, 361, 379, 387-396, 397, 406
137, 139, 156, 162-163, 172, 177, 191, 203, 143-144, 146-147, 156-159, 192, 194, 200, as product, 325
216, 229, 269, 271, 306, 309, 329, 349, 354, 214, 216, 220, 227, 232, 254, 277, 302, marketing mix, 47, 67, 69, 76, 81, 84-86, 94, 99,
360, 367-368, 388, 394 323-325, 329-330, 338, 347-348, 383, 386, 105-106, 120, 143, 310, 312, 319, 322,
demand for, 177 392, 397, 406, 416 329, 397, 406
Money-back guarantees, 349 definition of, 42, 156, 220, 324 Plans, 1, 6, 12, 21-22, 29, 34, 38-39, 51, 60, 98-99,
Monopoly, 172, 236 future of, 51 101, 129, 149, 211-212, 222, 247, 263, 314,
Motivation, 27, 71, 77, 137, 139, 148, 195, 217, 395 Organizational culture, 202, 228-229, 248 371, 397, 399, 401, 406, 408, 410, 415
Motivators, 180 learning, 202 approaches to, 12, 51
Motorcycles, 231 strong, 229, 248 business, 1, 6, 12, 29, 39, 51, 60, 99, 129, 149,
multimedia, 353-355, 359 Organizational markets, 146 212, 222, 263, 401
Multinational strategy, 253-255 Organizational structure, 198, 253 Point-of-purchase displays, 325, 375
Multiple sourcing, 264 Organizations, 12, 27, 29, 59, 61, 71, 84, 102, 115, Policies, 124, 144, 203, 208, 368-369, 408
Mumbai, 255 124, 134, 138, 144-146, 156, 159-160, 195, Political systems, 114
Music, 91, 143, 313, 376 199, 215, 228, 257, 277, 329, 348, 390 Pooling, 256-257
and culture, 313 Orientation, 41, 43, 46, 52, 81, 98, 115, 201, 205, Popular culture, 121, 123
213-215, 217, 222, 228-229, 320, 326, 337 Population, 52, 115-116, 263, 316-317, 380
N future, 46, 214-215 Portfolio, 13-14, 18, 72, 75, 87-89, 95, 107, 151-152,
National brands, 234 performance, 43, 205, 214, 217, 228 158-159, 183, 203, 221, 278, 282-283,
National culture, 143 Outbound logistics, 1, 162, 289 302-303, 351-357, 360-361, 387
Nations, 114, 116-117, 130, 143 Outlays, 2 Model, 13-14, 18, 88, 159, 221, 302, 352, 357, 360
Natural environment, 35, 52, 60 outlines, 27, 51, 388 Portfolio analysis, 13, 151-152, 221, 302, 354
sustainability, 60 Output, 57, 171, 181, 188-190, 192, 194, 197, 199, Positioning, 17, 47, 52, 54, 67, 69, 74, 76, 80-82,
navigation, 335, 352-355, 359, 368 280, 338 84-85, 94-95, 98-99, 105-106, 120, 134,
Needs, customer, 385 Outsourcing, 163-164, 221 151-152, 162, 203, 221, 227, 236, 254, 259,
Negligence, 27 overhead, 1-3, 6, 93-94, 102, 179, 193, 301, 364-367, 262, 267, 304, 305-310, 311-312, 319,
elements of, 27 390, 401, 403-405 324-325, 329-330, 332, 364-365, 373-374,
Negotiation, 162, 227, 280, 396 Ownership, 46, 71, 85, 196, 256-257, 266, 389, 381, 392, 398, 402-403, 407
Planning, 162 391-392, 396 brand positioning, 95, 306, 310, 329-330, 392
Process, 162, 227, 280 defined, 81, 94, 310
Questions, 162 product positioning, 305, 332, 365
P strategy for, 236
Net income, 412-413 PACE, 349
Net present value, 9, 38, 279-280, 415 Positioning statement, 80, 84, 309, 324
Packaging, 1, 84-85, 161, 172, 178, 222, 254, 322, Postal services, 380
NPV, 9, 38 337, 373
Net profit, 402 posture, 322
Paired comparison, 317 Potential product, 87
Net working capital, 411 paragraphs, 281
Netnography, 129 Power, 18, 27, 55, 59-60, 62, 129, 138, 148, 165,
Parameter, 39 168-173, 189, 194, 198, 201, 204, 216-217,
Networking, 281-282 Partitioning, 52, 114
New entrants, 55, 168-172, 183, 204, 286, 350 227, 237, 274, 277, 286, 298, 326, 338, 371,
Partnering, 143-144, 326, 388 374, 376, 390-392, 396, 409
New products, 21, 46, 53, 65, 82-83, 88-89, 100, 120, Patent, 256
129, 131, 163, 178, 180, 185, 198, 215, 244, Predatory pricing, 368
Patents, 89, 248, 255, 289 Premium, 45, 104, 127, 152, 180, 222, 227-229,
246-248, 252, 259, 312-313, 331, 333, protecting, 248
338-339, 347-348, 386, 400 235-236, 270-271, 287, 306-307, 316, 326,
Penetration pricing, 92, 182, 370-371 330, 365, 369-371, 373, 392
New York Times, 61, 130-131, 205, 232, 262, 268, Penetration strategy, 246-247, 365, 371
330, 374, 378, 386, 390 forward, 180
Perceived value, 367 Premiums, 72, 221, 252-253, 302
New-product development, 215 Percentage changes, 209
Newspapers, 318, 347, 376, 378, 380, 384 single, 72, 221, 253, 302
423
Present value, 7-9, 38, 279-280, 329, 415 Probability, 111, 116, 130, 246-247, 249, 313, 317 103-104, 130, 158, 165, 181, 185, 191, 196,
presentations, 143, 150, 376 objective, 249 200-201, 205, 215-216, 223, 234, 248-249,
electronic, 376 Problem recognition, 135-137, 142, 381 257, 262, 268, 270-272, 275, 280-281, 286,
press releases, 150-151, 375 problem solving, 30, 143, 213-214, 408 324, 331, 353, 357-358, 361, 364-367, 379,
Prestige pricing, 369, 373 Process control, 290, 408 383, 401-405, 412-413
Price, 1-7, 18, 21, 43-45, 47, 53-54, 56-57, 63, 65, 67, Process technologies, 128 definition of, 42, 324
69-72, 75-76, 82-87, 89-90, 92-95, 99-102, Procurement, 52, 114, 146, 162-165, 169, 172, 227, Profit goal, 365
104-106, 108, 111, 115, 120, 137-140, 288-289, 380 Profits, 2-3, 5-6, 37, 42-43, 47, 54, 56-57, 61-62,
142-143, 146, 148, 152, 156, 169, 172, Product adoption, 148 64-65, 67-68, 76, 81, 88, 90, 93-94, 102-106,
176-178, 180-184, 188, 191-192, 194, 200, Product choice, 141 134, 163, 165, 169, 172, 177, 183-185,
203-204, 212, 221-222, 226-227, 229-231, product design, 70, 162, 227, 288, 290, 337-339 200-205, 214, 229, 244, 248-249, 255-257,
233-237, 239-241, 244, 246, 249, 252-253, Product development, 21, 46-47, 64-66, 88, 90, 94-95, 270, 273, 278, 279, 312, 335-336, 364-366,
258-259, 261, 266-267, 270-271, 274, 276, 100, 102, 127-128, 131, 151-152, 179, 182, 370, 373-374, 382-383, 388, 393, 395, 399,
279-281, 287-288, 297, 302-303, 305-308, 198, 200, 209, 215, 228-229, 244-249, 254, 401, 403-405, 409-413, 415
310, 312, 315, 318-320, 325, 329, 331-332, 282, 290, 311, 319, 331-339, 347, 368 Project scope, 95
335, 343-344, 348-350, 358-360, 364-374, marketing strategy, 46-47, 200, 209, 249, 311, 338 Promotion, 47, 54, 67, 69, 76, 81, 84, 86, 94, 105-106,
375-376, 378, 382-385, 387, 392, 394-395, Product development and marketing, 254 115, 129, 143, 184, 203, 214, 274, 305, 312,
398-399, 402, 404-406, 409-410, 413-414 Product differentiation, 21, 44, 180, 226-227, 231 315, 318, 324-325, 329, 336, 372, 375-376,
defined, 1, 4-6, 45, 70, 83, 94, 108, 111, 140, 182, Product life cycle, 175-185, 336-337, 347, 352-353, 378-386, 396, 406
222, 230, 233, 302-303, 310, 343-344, 413 costs of, 376
376 Product line, 20, 51, 65, 87, 89, 246, 259 marketing mix, 47, 67, 69, 76, 81, 84, 86, 94,
marketing mix, 2, 47, 53, 67, 69-71, 76, 82, 84-87, Product management, 339 105-106, 143, 305, 312, 315, 329, 406
93-94, 99-102, 105-106, 120, 137, 143, quality and, 339 Promotion mix, 324-325, 376, 380, 382
176, 181-182, 253, 261, 266-267, 305, Product managers, 98, 372 Promotion strategies, 214
310, 312, 315, 319-320, 329, 349-350, Product or service, 70, 85, 92, 161, 170, 227, 279, Promotional activities, 259
364, 366, 373, 398-399, 405-406 322, 332, 351, 413 Promotional pricing, 373
marketing strategy and, 176, 349, 364 Product placement, 378 prompting, 259
predatory pricing, 368 Product planning, 90 Property, 8, 65, 71, 198, 255, 322, 330
price changes, 2, 367 Product positioning, 305, 332, 365 risks, 255
price discrimination, 368 Product quality, 35, 57, 103, 150, 201-202, 204-205, Property rights, 330
price elasticity, 4, 18, 140 232, 249, 276, 287-289, 291, 303, 323, 357, Proposal solicitation, 144-145, 381
price skimming, 86, 184 391 proposals, 27, 223, 385
promotional pricing, 373 Product specification, 145, 381 examples of, 385
Price bundling, 373 Product specifications, 254 producing, 27
Price changes, 2, 367 Product strategies, 87 Prospecting, 143, 145
Price discrimination, 368 Production, 1, 45, 55-57, 68, 75, 89, 92, 102, 110, 124, Funnel, 143
Price elasticity, 4, 18, 140 156, 161, 163, 170-171, 177-179, 188-192, Importance, 145
Price elasticity of demand, 4 193-195, 197-198, 201-202, 204, 214, 217, Protection, 136, 220, 330
Price fixing, 368 222, 227, 232, 254, 256-257, 259, 280, 288, Prototype, 332, 334-336, 338
Price leadership, 43, 226 290, 301, 331-332, 338, 352, 357-358, Psychographics, 71
Price level, 239, 315 365-367, 371, 384, 409 Psychology, 68, 127, 131, 147-148
Price lining, 87 centralized, 163, 195, 222, 254 Public policy, 60, 330
Price points, 203-204, 233, 392 decentralized, 156, 163 Public relations, 2, 86, 93, 102, 184, 276, 347-348,
Price ratio, 239 national, 110, 201, 254, 384 366, 372, 376, 378, 382, 401-402, 405
Price wars, 172, 184, 236, 249, 358, 368 Production costs, 110, 331 campaign, 378, 382
Price-quality inferences, 378 Production function, 179 defined, 376
Prices, 1, 9, 45, 62, 76, 81, 93, 151, 162, 171-172, Production planning, 384 objectives, 86, 93, 102, 382, 401-402, 405
177, 183, 188, 190-191, 195, 204, 222, 229, Productivity, 20, 61, 89, 103, 127, 158 Publicity, 378, 380
236-237, 239-240, 244, 252, 257, 259-260, labor, 89, 103 Pull strategy, 91
270, 277, 280-281, 307, 315, 322, 344, Products, 2-4, 13, 21, 43, 45-47, 51, 53-55, 57, 61, Purchasing, 71, 111, 142-144, 146, 169-170, 194-195,
349-350, 358, 364-365, 367-371, 373-374, 64-67, 70, 72, 75-76, 80-83, 87-89, 91-92, 201, 203, 227, 264, 266, 274, 277, 316, 367,
384, 391, 394, 397, 409, 416 94-95, 98, 100, 104-106, 108-111, 116, 379, 385, 391
break-even, 365 120-121, 124, 129-131, 134-142, 150-151, definition of, 170
custom, 162, 370 157, 161, 163, 165, 168-173, 176-178, Purchasing agents, 143, 146, 379
demand and, 373 180-185, 195, 197-198, 200, 204, 214-215, Purchasing power, 194, 201
equilibrium, 45, 344 220-222, 227, 229-230, 234-237, 239-241, purpose, 13, 26-27, 34, 42-43, 51, 59-61, 70, 83, 90,
flexible, 229 244-249, 252-259, 262-264, 270-271, 147, 156-158, 213, 216, 237, 276, 305, 316,
maximum, 364 274-275, 277, 279-281, 286-288, 290, 297, 337
minimum, 349, 364, 368 302, 305-308, 310, 312-313, 318-319, 321, defining, 43, 237
predatory, 368 323, 325-326, 331-339, 341-350, 351-361, general, 13, 34, 43, 60, 316
retail, 1, 260, 368, 391, 394 364, 369, 371, 373-374, 375-376, 378, 380, specific, 13, 27, 34, 42-43, 60, 83, 216, 316
trade and, 391 384-386, 387-395, 397, 399-400, 406, 409, statement of, 26
Pricing, 9, 23, 92, 94, 152, 162, 182-183, 190, 192, 415
198, 230, 311, 350, 363-374, 395 attributes of, 43, 87, 178, 184, 229, 275, 305, Q
deceptive, 368 348-350 Qualitative research, 131, 317
dynamic, 182, 192, 198, 368 branding, 47, 54, 67, 76, 81, 94-95, 105-106, 306, Quality, 3-4, 18, 31, 34-36, 39, 43, 45, 57, 63, 72, 85,
elements of, 183, 230, 350, 364-365, 367, 373 310, 312, 321, 323, 325-326 87, 89, 92, 103, 106, 139, 142, 146, 148,
horizontal, 190 consumer products, 116, 385, 391 150-151, 156, 158, 161-163, 169, 171-172,
new product, 94, 182, 311, 368, 370 defined, 4, 45, 70, 81, 83, 91, 94, 108-111, 121, 200-202, 204-205, 212, 221-222, 227-229,
objectives, 311, 364-365, 369, 371, 373-374 140, 170, 182, 215, 222, 230, 302, 310, 232, 233-237, 239-241, 249, 252-255,
payment, 9, 373 334, 337, 342-344, 355, 376 257-259, 265, 269, 276, 279, 283, 287-291,
penetration, 92, 152, 182-183, 365, 369-371 development of, 116, 129, 135, 139, 157, 170, 303, 306-309, 321, 323, 325-327, 330, 339,
predatory, 368 221-222, 234, 259, 262, 333, 359, 374, 343-344, 357, 364-365, 369-374, 378, 384,
strategy, 9, 23, 92, 94, 152, 182-183, 190, 192, 385, 397, 406 391-393, 410, 414
230, 311, 364-366, 369-371, 373-374 industrial products, 400 quality control, 162
tactics, 23, 152, 183, 311, 364, 368, 373-374 labeling, 376 Quality management, 163, 290-291
trial, 371 levels of, 4, 108, 137, 176, 255-256, 326, 334-335, Quantity demanded, 4
value, 9, 92, 152, 162, 230, 350, 364, 367, 351, 391 Quantity discounts, 373
369-372, 374, 395 marketing mix, 2, 47, 53, 67, 70, 76, 80-82, 87, 94, Question marks, 88, 352-353
vertical, 198, 368 100, 105-106, 120, 130, 134, 137, 176, Quick ratio, 411
Pricing strategies, 92, 94, 182, 192, 198, 363-374 181-182, 253-254, 262, 277, 305, 310, quotations, 300
Primary activities, 70, 161-163, 288 312, 319, 323, 349-350, 364, 373, 397,
Primary data, 53, 314, 316 399, 406
Primary market research, 316 packaging, 161, 172, 178, 222, 254, 337, 373 R
Primary research, 399 product concept, 331, 333 Radio-frequency identification, 203, 344
Principal, 226 support services, 70, 248 RFID, 203, 344
Principles, 5, 28, 95, 157, 192, 205, 217, 229, 232, professionalism, 34 Railroads, 51, 215
241, 278, 283, 314, 320, 325, 374, 410 Professionals, 29, 233, 303, 319, 359-360 Rate of return, 42, 44, 272
Pro forma financial statements, 99 Profit, 1-7, 9, 42, 57-58, 61, 69-70, 85, 92-93, 99, Rates, 52, 64, 93, 100-101, 115, 208-210, 245, 282,
424
315, 352-353, 391, 403 247, 305-306, 308, 316, 318, 325, 368-369, Structure, 148
gross, 391 383-384, 387-392, 396 sales messages, 348
Rating, 150, 237, 239, 280, 317, 334-335 Retailing, 6, 116-117, 232, 234, 288, 330, 368, 391 Sales objectives, 64, 103, 401, 403
Rational appeals, 384 Retention, 57, 61, 76, 84, 269-278, 279, 382, 410, Sales offices, 387
Rationalization, 65 413, 415 Sales orientation, 214
Ratios, 38, 239, 410-413 Return on assets, 401-403 Sales potential, 415
Raw materials, 19, 70, 171, 198, 289, 316 Return on investment, 103, 190-191, 193, 235-236, Sales records, 83
Reach, 64, 86, 91, 116, 185, 262, 309, 376-377, 380, 382-383 Salespeople, 92, 129, 138, 276, 282, 391, 398-399,
389, 392, 405 advertising, 193, 382-383 415
Readiness, 63, 71, 103, 136, 381, 383, 403 Return on marketing investment, 102, 383 Samples, 83, 91, 127, 280, 316-317, 378
Real value, 139, 147, 396 Revenue, 1-5, 9, 61, 94, 103, 140, 266, 271, 280, Sampling, 130, 314, 372, 377
Rebates, 275, 373 329-330, 364-365, 367, 372, 378, 384, 388, SAP, 266
Receivables, 389, 412 402, 404, 410, 414 Satisfactions, 216
Recession, 52, 114-115, 117, 131, 210, 355 marginal, 364 Saving, 126, 222, 369
recommendations, 27, 29, 31-33, 63, 104, 137-138, Revenues, 1-3, 6, 9, 38, 42, 44, 53, 62, 82, 93-94, SBUs, 75, 87-88, 151, 351-353, 356
164, 270, 276, 314, 348, 357, 378 120, 123, 169, 244, 248, 279-281, 283, 312, strategic business units, 75, 87, 151, 351-352
focusing on, 270 329, 364, 366-367, 371, 383, 391, 397, 399, Scale economies, 67, 194, 252-255, 336
Records, 60, 83, 98, 105, 247 405 franchising, 255
Recruitment, 123, 128, 162, 270 revision, 409 improving, 336
Referrals, 104, 270-271, 276, 281 product, 409 Scanning, 54, 74, 298
Reform, 117 Rewards, 117, 245, 278, 391 Scarcity, 373, 389
health care, 117 RFID, 203, 344 scope, 43-44, 51, 57, 61, 65, 67, 72-73, 76, 87-88, 95,
Regression analysis, 100, 102, 122 Radio-frequency identification, 203, 344 110, 162, 170, 181-182, 197-198, 209, 212,
Regulation, 171, 209, 369 Risk, 20-22, 30, 50, 61, 83, 89, 91, 99, 137, 140, 142, 216, 220-222, 225-232, 304, 308, 330, 344,
of investments, 171 145, 151, 159, 164, 183, 212, 227-229, 354
Regulations, 52, 114, 144, 208, 253, 262, 368, 374 246-247, 253-257, 264, 298, 300, 313, 322, SEA, 156, 189
global, 253, 374 345-346, 348-349, 354, 367, 371, 380, 389 Seasonal discounts, 373
Regulatory environment, 116-117, 208, 296 asset, 50 Secondary data, 316
Reinvestment, 256-257 business, 30, 50, 61, 89, 99, 140, 151, 159, 164, Secondary market research, 239
Relationship marketing, 278 183, 212, 227, 229, 246, 253, 257, 264, Secondary research, 399
Relationships, 1-4, 6-7, 9, 19, 35, 38, 42-43, 69, 74, 298, 300, 313, 354, 380 Securities, 289
100, 115, 121-123, 127, 135, 140, 147, 200, commercial, 61, 142, 322, 380 Security, 51, 71, 136, 158, 266
202, 204, 223, 248, 256-258, 271-272, enterprise, 246, 264 Segment profiles, 16, 262, 264, 301
276-278, 279, 281, 283, 289, 308, 318, 323, financial, 21-22, 91, 99, 137, 140, 151, 229, 264, Segmentation, 12, 15, 21, 47, 52-54, 67, 69-76, 81-83,
326, 349, 355, 365-366, 374, 376, 378, 381, 313, 348-349 94, 99, 105-106, 120, 137, 148, 152, 162,
386, 392, 397, 405, 415 market, 20-22, 50, 61, 83, 89, 91, 99, 140, 151, 178, 184, 221, 230, 261-264, 266-268, 275,
preferences, 123, 308, 318 159, 183, 227, 229, 246-247, 253-257, 297, 301, 310, 312, 315, 345, 356, 394
Relative advantage, 91-92, 150, 182, 349 264, 298, 313, 345-346, 348-349, 354, age, 52, 71-72, 148, 263-264
Relative cost, 19, 161, 191 367, 371, 380, 389 behavioral, 263-264, 266-267, 301
Religion, 255 objective, 227, 345 business-to-business markets, 71, 264
Hinduism, 255 operational, 227 consumer markets, 264
Repatriation, 257 personal, 91, 137, 142, 145, 264, 313, 322, 380, defined, 70, 81, 83, 94, 230, 310
Repatriation of profits, 257 389 family life cycle, 263
reports, 26, 62, 103, 125, 127, 148, 150-151, 316, 348 political, 300 gender, 263
body of, 26 property, 255, 322 psychographics, 71
organizing, 125 strategic, 20-22, 50, 99, 142, 151, 159, 164, 212, Selection, 92, 129, 143-145, 162, 237, 239, 292-293,
types of, 127 227-229, 247, 257, 298, 300, 313, 346, 301-302, 304, 326, 332, 334, 338, 360, 381,
Representations, 7, 145, 305, 318 371, 389 410, 415-416
research, 2, 4-5, 12-13, 22, 29, 33, 39, 43, 47, 52-55, subjective, 83 Selective distribution, 373
58, 67, 70, 76-77, 81-84, 90, 93-95, 100, Risk taking, 228-229, 389 Self-actualization, 71, 136, 215-216
102-106, 110, 120-121, 123-127, 130-131, Risks, 7, 21, 28, 47, 67, 76, 92, 94, 98-100, 105-106, Self-esteem, 71, 126-127, 157
134, 137-138, 141-142, 147-148, 162-164, 111, 129, 158, 211, 252, 255-256, 313, 329, Sellers, 148, 321, 396
179, 182, 185, 193, 200, 202-205, 212, 215, 335, 389-390, 398 Sensitivity, 2-4, 39, 101, 142, 237, 239-241, 267, 365,
232, 234, 237, 239, 241, 264, 268, 269-270, patterns of, 129 370-371
277, 288-290, 301, 305, 311-320, 327, 330, Risk-taking, 264 sentences, 309
331, 335-339, 344, 358, 366, 382-383, Rivalry, 55, 168-170, 172-173, 177, 183, 185, 204, September 11, 2001, 124
385-386, 389, 398-402, 405 286, 302 Service encounter, 142
planning, 12-13, 47, 54, 67, 77, 84, 90, 95, 100, ROE, 412 Service mark, 322
102-106, 130, 148, 162, 164, 200, 205, Role, 30, 33, 39, 41, 52, 60, 95, 98, 122, 129, 134, Service provider, 394
212, 215, 264, 277, 311-312, 317, 327, 142, 146-147, 205, 229, 235-236, 296, 311, Service retailers, 181
330, 386, 398-399 314, 322, 333, 338, 347, 350, 355, 369, 386, Services, 12-13, 21, 35, 51, 63, 70, 80-81, 85, 87, 92,
primary, 43, 53, 70, 83, 110, 121, 162-163, 288, 388 104, 106, 108-109, 116, 126, 140-141, 150,
314, 316-317, 385, 399 managerial, 30, 39, 122, 147, 205, 314, 369 156, 158-159, 168, 170, 172, 184-185, 194,
purpose of, 70, 83, 90, 147, 305 Rules of thumb, 139 204, 214, 220-221, 234, 236, 239, 246, 248,
secondary, 53, 83, 239, 288, 316-317, 399 252, 262-263, 278, 281, 283, 310, 330, 337,
Research and development, 5, 70, 102, 162, 164, 179, S 380, 382, 387-391, 395
193, 212, 288, 301, 314, 336, 338 Salaries, 3 attributes of, 87, 184
cost of, 102, 193 Salary, 188 branding, 81, 85, 106, 310, 330
human, 70, 162, 288 Sales, 1-6, 9, 23, 27, 35, 37, 43, 45, 52, 55-57, 63-66, defined, 70, 81, 108-109, 140, 170, 310, 337
Research design, 84 70, 75, 83-84, 86, 89, 91, 93-94, 98-103, differentiation, 21, 172, 184, 220, 236, 246, 248,
Research objective, 82, 314 105, 110-111, 115, 124, 129, 143-148, 252
research process, 81-82, 314 151-152, 162-164, 169-170, 177-178, 180, international markets, 263, 380
Resellers, 369 184-185, 191-192, 193-195, 199-200, levels of, 108, 156, 391
Resources, 15, 27-28, 41-42, 44, 49, 51, 54, 59, 203-204, 214, 228-229, 244-246, 248-249, Servicescape, 337
61-62, 70-71, 75, 83, 93, 98, 100-102, 111, 254-256, 261, 275, 280-283, 288-289, 291, SERVQUAL, 232, 330
117, 130, 137, 140, 144, 147, 149, 151, 153, 311, 313, 317-320, 325-326, 328-329, Shareholder, 60-61, 68, 244, 283, 411
158-159, 162, 164-165, 173, 178, 185, 192, 331-332, 335-336, 344-345, 347-350, Shareholders, 60-62, 244, 411, 413
196, 197-198, 202-203, 205, 212, 213, 215, 352-353, 358, 360, 364-369, 371-373, shipping, 92, 116, 245
217, 221, 223, 227, 232, 241, 245-249, 375-376, 378-386, 387-389, 391-396, Ships, 388
252-253, 255-260, 268, 269, 272, 275, 397-405, 409, 411-415 Shrinkage, 389-390
277-278, 282-283, 286-293, 298, 300, 304, Sales and marketing, 336 Signaling, 368
310, 318, 320, 329, 331-334, 339, 350, 351, Sales force, 84, 86, 100, 110, 143, 151-152, 163, 280, SIMPLE, 3-4, 7, 33, 36-37, 42, 63, 91, 93, 99, 130,
356, 359, 361, 374, 382-383, 386, 392, 347, 360, 365, 382-383, 399-401 148, 193, 202, 220, 236, 244, 253-254, 261,
395-396, 397, 399, 401, 406, 411-412, 416 motivating, 401 279, 290, 307, 316, 324, 338, 349, 367, 371,
enterprise resource planning (ERP), 246 overview, 399 373
Responsibility, 30, 39, 60-61, 67-68, 126, 326 selling process, 143 Single market, 230, 402
Restrictions, 198 Sales leads, 382 Situation analysis, 49
Retail stores, 389 Sales management, 147-148, 152, 162, 386 Size, 12-16, 18-19, 50, 71-72, 75, 83, 98, 108, 134,
Retailers, 52, 54, 57, 63, 65, 129, 171, 181, 183, 234, Leadership, 152 169, 171-172, 193-195, 197, 226, 230, 237,
425
249, 261-264, 266, 272, 282-283, 301-303, 400-401, 404, 407-408, 410 256-257, 266, 274, 290-291, 327, 335, 368,
308, 314-317, 332, 335, 349, 352, 354-355, competitive, 13-14, 18, 43-44, 47-48, 51, 55-56, 59, 373, 393-394
357-359, 380, 390, 399, 404, 411 62-63, 76, 81, 87, 92-94, 120, 149, systems analysis, 192
of competition, 19, 108, 226, 230 151-153, 156, 173, 181-185, 200-201,
Skilled labor, 252 204, 209-211, 214, 221, 226-227, T
Skills, 19, 34, 41, 51, 80, 92, 226-228, 231, 247, 264, 229-232, 236-237, 241, 246, 248, 252, Tables, 229, 263, 314
266, 288, 290-291, 400 260, 277, 286-287, 289, 292, 298, 300, Tangible products, 387
skimming, 86, 92, 182, 184, 350, 365, 369-371 301, 357, 360, 364, 368, 373, 410 Target costing, 401
Skimming strategy, 92, 365, 370 corporate, 51, 60, 63, 156, 173, 198, 203, 213, 222, Target market, 43, 168, 220, 231, 237, 241, 302, 304,
Sloan School of Management, 185 232, 260, 300, 325, 336, 397, 404 305, 332, 334, 345, 360, 379-380, 403, 405
Slogans, 159, 322 functional, 151, 156, 211, 213, 222, 228-229, 325, Target marketing, 72
Slope, 140, 188, 239, 370 338 differentiated marketing, 72
Small and medium-sized companies, 246 Strategy, 1-9, 18, 21-23, 26, 28, 29-31, 35, 37-39, Tattoos, 129
Small business, 266, 268 41-48, 49-50, 52-53, 55-58, 59-60, 62-64, Taxes, 168, 235-236, 316, 364, 372, 402-403, 411-413
SOAP, 171 66-67, 69-77, 80-82, 84-85, 91-95, 98-99, consumption, 316
Social class, 52, 115, 143 102-103, 105-106, 111, 114-115, 117, corporate, 403
international markets, 115 120-121, 130-131, 136, 141, 149, 151-152, income, 411-413
Social factors, 143 156, 158-160, 165, 168-169, 171-173, 176, sales, 364, 372, 402-403, 411-413
Social needs, 61, 71, 136, 215 181-184, 190, 192, 199-205, 209-212, teams, 143, 146, 212, 213, 228-229, 290, 336, 380,
social networks, 216, 347 214-215, 219-223, 226, 228-232, 233-237, 385
business, 216 240-241, 245-247, 249, 252-260, 261, 264, effective, 212, 336, 380, 385
Social responsibility, 60-61, 67-68, 326 266-267, 274-275, 277, 286-287, 290, roles in, 143
marketing research, 67 292-293, 296, 298-300, 302, 305, 309, types of, 143, 380
Social status, 178, 263 311-312, 315, 320, 324, 329, 332, 335, Teamwork, 151
Socialism, 350 337-338, 342, 349, 353, 356, 361, 364-366, Technological advances, 318
Societies, 130 369-371, 373-374, 375, 378, 381-383, 386, Technological progress, 52, 116
Society, 61, 68, 95, 115-116, 130, 263, 373 387-388, 392, 394, 396, 397-398, 400-401, Technology, 19, 52-53, 70, 75, 84-85, 90, 92, 110,
summary, 130 403-404, 406, 407-410, 413, 415-416 116-117, 121, 124, 128-129, 162, 169, 176,
software, 156, 171, 246, 259, 264, 266, 277, 366, 371, combination, 93, 230-231, 235, 240, 252-253, 255, 178-179, 182-185, 189-190, 192, 194-195,
387-388 309, 315, 337, 381 197, 215, 227, 246, 252-253, 256-258, 260,
purchasing, 264, 266, 277 corporate social responsibility, 60, 67 264, 266, 275, 277, 288-291, 296-297, 303,
Sourcing, 162-163, 264 CSR, 60 319, 323, 329-330, 332-333, 336-337, 339,
Soviet Union, 321 defined, 1, 4-6, 31, 45, 50, 58, 60, 70, 81, 91, 94, 342, 345, 348-350, 355, 387-388, 390, 393,
Specialization, 72, 152, 170, 190, 194-195, 227, 266, 111, 121, 182, 201, 215, 222, 230, 233, 395-396, 409
302, 380 302, 337, 342 advances in, 116-117, 178, 336, 387
Specialized knowledge, 346 differentiation, 18, 21, 43-44, 93, 152, 172, Technology management, 339
Specialty stores, 183, 393 181-184, 220, 222, 226, 228-231, Teens, 91
Speculation, 124 235-236, 246, 252, 305, 309, 369-371, Telecommunications, 116, 193
speeches, 150 373 infrastructure, 116
spelling, 103, 379 focus, 21, 28, 37, 42, 44, 48, 50, 52, 60, 63, 66, 72, Telemarketing, 376
Sponsorships, 324-325 75-76, 80, 82, 91, 98, 111, 115, 130, 151, telephone, 116, 140, 371, 389
Stakeholders, 61-62, 220, 289 165, 182, 199, 203, 214-215, 220, Television advertising, 52, 114, 378
Standardization, 115, 117, 204, 227, 254-256, 264 229-232, 237, 252, 261, 302, 311, 315, product placement, 378
advertising, 254 338, 382-383, 410, 415-416 public relations, 378
statistics, 135, 140, 249 global, 43, 72-73, 115, 117, 201, 212, 230, Tenure, 270
Status, 71, 126, 137, 141, 178, 216, 263-264, 266, 253-255, 259, 329, 374, 383 Termination, 257
309, 373 multinational, 115, 117, 253-255 Terminology, 311
culture and, 216 pull, 8, 91-92, 383 Terms of trade, 391
Status quo, 126, 141 push, 91-92, 102, 383 Territory, 69, 81
Stock, 46, 57, 63-64, 103, 161, 214-215, 244, 278, retrenchment, 249 The Economist, 117, 148, 260, 329, 374
383, 395, 413 Stress, 181 The New Yorker, 58, 130, 205, 374
Store brands, 171 Students, 29-31, 33-34, 39, 124, 129, 303, 360, 378, Theft, 390
Stories, 378 386, 388 Third-party logistics, 391
Straight rebuy, 145 Subgroups, 70, 116 Threats, 13, 18-19, 29-31, 37-38, 74, 107, 114, 117,
Strategic alliances, 221 Subsidiaries, 253-256 212, 220, 296-300, 388, 408
Strategic business units, 75, 87, 151, 198, 235, multinational strategy, 253-255 Time value of money, 7, 9, 329
351-352, 360 Subsidies, 52, 114 Time-series analysis, 100, 399-400
SBUs, 75, 87, 151, 351-352 Substitute products or services, 168 Timing, 28, 93, 152, 252, 260, 336
Strategic business units (SBUs), 75, 351 Substitution, 19, 107-108, 111, 169, 172-173, 292, Total assets, 411-412
Strategic group, 237 371, 409 Total cost, 5, 189, 193-194, 266, 380, 404
Strategic issues, 84-85, 213, 389 Success, 28, 33, 35, 41, 61-62, 90, 95, 99, 111, 116, Total costs, 1, 3-5, 94, 414
Strategic management, 29, 31, 35, 60, 68, 77, 158, 131, 147, 150, 156, 159, 162, 165, 184, 199, Total revenue, 1-2, 4-5
165, 185, 192, 196, 198, 217, 223, 232, 286, 203-204, 215, 217, 223, 235-236, 245-249, Tourism, 264, 268
290, 292-293, 315, 338, 355, 361, 406, 416 271, 286-289, 292-293, 303-304, 315, Trade, 31-32, 39, 86, 92, 102, 115-117, 129, 137, 147,
definition of, 355 328-329, 333-335, 337-339, 347, 370, 373, 151-152, 157, 172, 181, 183, 255, 318-319,
strategic objectives, 149, 185, 203, 304, 379, 382, 375, 401, 410, 415 321-322, 330, 334, 343, 367, 369, 376, 378,
399-401, 405 summarizing, 31, 181 383-384, 391, 394-395, 400
Strategic options, 152 Sunk costs, 141 Trade associations, 400
cost leadership, 152 Supermarkets, 239 Trade dress, 322
differentiation, 152 Supply, 21, 51, 107, 110-111, 130, 145, 198, 212, 214, Trade liberalization, 115
Strategic planning, 1, 47, 50, 66, 74, 77, 85, 88, 95, 234, 257, 278, 350, 388-389, 394-395 Trade promotion, 384
99, 129, 164, 200, 205, 215, 247, 304, Supply chain, 130, 198, 234, 257, 278, 388 Trade promotions, 102, 183, 383-384
311-312, 317, 361, 374, 399, 408 Support, 19, 22-23, 27, 31, 33, 37, 70, 81, 84-86, 92, Trade selling, 86
marketing analysis, 47, 66 98-99, 102, 124, 126, 151, 157-158, 162, Trade shows, 151-152
marketing implementation, 408 183-184, 217, 220, 222, 229, 248, 254, 270, Trademark, 255-256, 306, 309, 321-322, 330
marketing planning, 317 277, 280, 293, 313, 317, 325-326, 349-350, Trademarks, 322-323, 330
new products, 88, 129, 215, 247, 312 365, 367, 376, 380, 389, 391-394 Trade-offs, 31-32, 137, 319, 334, 343, 367, 369, 378
process overview, 47 support activities, 102, 162 Trade-Related Aspects of Intellectual Property, 330
Strategies, 6, 13-14, 18, 21, 29, 38, 41, 43-45, 47-48, Surplus, 353 Trade-Related Aspects of Intellectual Property Rights,
49, 51-52, 55-56, 59-60, 62-66, 71-72, 76, consumer, 353 330
80-81, 84, 87-88, 91-94, 103, 115-117, Survey research, 382 Training, 85, 92, 102, 140, 162, 209, 257, 275, 289,
120-121, 136, 143, 147, 149, 151-153, 156, surveys, 83, 105, 122, 127, 150, 317-318, 333, 349, 378, 380, 389
173, 176, 181-185, 192, 195, 198, 200-201, 399-400 Transactions, 54, 134, 143, 271, 279, 390, 393
203-205, 209-211, 213-214, 221-222, Sustainability, 60, 68, 337 Transfers, 388
225-232, 233-237, 239-241, 243-249, Switzerland, 254, 307 Transnational strategy, 253, 255
251-260, 261, 269-270, 274-275, 277-278, SWOT analysis, 18, 37-38, 74, 76, 221, 295-300 Transparency, 236, 387
282-283, 286-287, 289, 292, 296, 298, 300, Synergy, 197-198 Transportation, 50-51, 137, 161, 195, 197-198, 216,
301, 325, 336, 338, 343, 349-350, 354, 357, system, 3, 19, 35, 46, 55, 61, 63, 91-92, 101, 116, 222, 231, 392, 404
360, 363-374, 381, 383, 388-389, 397, 128-129, 163, 200, 203, 222, 229, 236, costs, 195, 197-198, 222, 392, 404
426
networks, 216 170-171, 183, 185, 190-191, 193-195, 197,
Transportation costs, 195, 222 199, 227, 229, 244, 271, 282, 317, 326,
Treaties, 115 331-332, 335-336, 352-353, 358, 365-367,
Trends, 13, 16, 18, 35, 49, 53-54, 56, 58, 60, 66-67, 371-373, 376, 384, 389, 401-405, 410,
82, 116-117, 119-131, 147, 208, 291, 296, 413-415
298, 311-312, 330, 339, 355, 360, 399 of international trade, 115
Trialability, 349 Volumes, 194, 280
Triple bottom line, 60, 62, 68
Trucks, 216, 230 W
Trust, 130, 157, 198, 246, 289, 313, 356, 378 Wall Street Journal, 106, 260, 275, 278, 320
Turnover, 222, 245, 412 War, 115, 149, 153, 227, 257, 259, 368, 374
Warehousing, 161, 395
U Warranties, 85, 87, 348, 389
Unaided recall, 327 Water, 84, 107, 116, 127, 168, 201, 216, 245, 269-270,
underscores, 2, 58 371, 394
Undifferentiated marketing, 152, 301-302 Weaknesses, 13, 18, 20, 35, 37-38, 51, 62-63, 70, 74,
Unemployment, 52, 115 89, 99, 149-151, 153, 163-164, 173,
Unique selling proposition, 309, 331-332, 334 258-259, 287-288, 292-293, 296-300, 335,
United Kingdom, 253 356, 376, 399, 408
United States, 114, 116-117, 124, 162, 168, 193, 201, Wealth, 115, 122, 213, 329
245, 255, 259, 261-262, 313, 318, 330, Web, 86, 128, 149, 157, 203, 274, 335, 337, 339, 347,
368-369, 373, 378, 384, 390 378, 388
Universities, 336 Web 2.0, 347
Up-selling, 274 Web site, 203, 274, 337, 339
Upstream, 391 design, 337, 339
U.S, 194, 201, 257-258, 278, 316, 330, 374, 386, 409 Web sites, 86, 128, 378
U.S., 194, 201, 257-258, 278, 330, 374, 386, 409 websites, 138
U.S. dollar, 409 white space, 305
U.S. law, 330 Wholesalers, 383, 387, 392
Utility, 36, 334, 349 trade promotions, 383
Wiki, 192
V Wisdom of crowds, 130
Validity, 122 Women, 276, 302, 305-306, 309-310, 335
Value, 1, 3, 5-9, 20, 26, 29, 35, 38-39, 41-43, 45, 51, Won, 42, 76, 80, 83, 123, 178, 257
53-54, 57, 60-61, 64-65, 67-68, 69-72, 74, word of mouth, 91, 136, 142, 183, 276, 348, 350, 378
76, 83-85, 87, 89-90, 92-93, 99, 103, 106, Work, 8, 13, 27-28, 31, 33-34, 55, 58, 76, 91, 99, 125,
121-122, 124-126, 130, 134, 136, 139-145, 128, 131, 156, 158, 164-165, 181, 192, 196,
147-148, 151-152, 156-158, 161-165, 211, 217, 228, 240-241, 257, 265-266, 274,
169-171, 180, 184, 189, 199, 202, 215, 217, 282, 304, 325, 372, 388, 396
221-222, 226, 228-230, 232, 233-237, Workers, 60-61, 194-195
239-241, 244, 248, 252-253, 260, 261, 267, Working capital, 19, 411-412
270-273, 276-278, 279-283, 287-289, 291, World, 3, 26, 29-31, 33, 35, 39, 43, 55, 68, 77, 80, 84,
298-299, 302, 304, 306-307, 309-310, 316, 91, 100, 115-117, 124, 130, 141, 153, 156,
319, 322, 324-325, 327-330, 331-334, 337, 158, 160, 178, 181, 193-194, 208, 212, 215,
342-344, 350, 364, 367, 369-372, 374, 375, 230-232, 234, 236, 248, 255, 260, 261, 302,
381-384, 387-390, 393, 395-396, 403, 309, 313, 319, 330, 331, 342, 368, 373, 378,
410-415 380, 384, 386
building, 57, 64, 67, 84, 87, 136, 142, 184, 202, World Trade Organization, 330
248, 267, 271, 324-325, 327-330, 369, World War, 115
372, 382-384, 396 writing process, 27
defined, 1, 5-6, 45, 60, 70, 83, 121, 140, 170, 189, WWW, 58, 95, 117, 131, 148, 157, 159-160, 260, 268,
215, 222, 230, 233, 302, 310, 334, 337, 329-330, 335, 374, 386, 396
342-344
marketing and, 54, 64, 70, 90, 140, 162, 226, 288,
332, 350, 390
of marketing, 29, 35, 39, 41, 43, 57, 64, 70, 83, 85,
124, 147-148, 165, 217, 232, 241, 267,
271, 278, 282-283, 329-330, 374, 375,
413
Value added, 103, 189, 199, 403
Value chain, 1, 51, 67, 70, 99, 124-125, 140-141,
161-165, 170-171, 221-222, 226, 248,
288-289, 291
definition of, 170
Value chains, 125, 140, 165, 298
Value marketing, 279
Value pricing, 230
Value proposition, 69, 234, 261, 304, 375, 381
Value-added, 65, 230, 389-390
Customer service, 390
Product, 65, 230, 389-390
Selling, 65, 389-390
Value-based pricing, 374
Variability, 18
Variable costs, 1-6, 93-95, 102, 329, 364-367, 404-405
Variables, 3, 38, 52, 63, 70-71, 83-84, 88, 94, 100,
103, 115, 122, 202, 208, 262-264, 266-267,
315, 318, 323, 355-357, 360
Variance, 122, 137
Venture capitalists, 223
Vertical integration, 198, 227, 247, 391
virtual communities, 131
Vision, 50, 59-60, 67, 99, 102, 111, 150-151, 156-160,
201, 220, 222-223, 332, 335, 397-398, 401,
403, 406
Visualize, 56
VoIP, 371
Volume, 1-2, 4, 6, 38, 56-57, 63, 92-93, 101, 115, 162,
427
428

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Strategic Marketing

Mooradian Matzler Ring

Visit us on the World Wide Web at: www.pearsoned.co.uk

© Pearson Education Limited 2014

ISBN 10: 1-292-02056-3

British Library Cataloguing-in-Publication Data

Printed in the United States of America

1. Appendix: Basic Financial Math for Marketing Strategy

PART ONE: COST-VOLUME- cost of each unit sold) multiplied by quantity

There are some fundamental relationships among TVC = VC>u * Q

Purchase Rate ⴚ ⴚ Contribution ($)

Public Relations ⌺ Marketing Mix

FIGURE 1 Cost-Volume-Profit Relationships

osts Total Costs

FIGURE 2 Simple Variable-, Fixed- and Total-Cost Structure

FIGURE 3 Breakeven Analysis

Gross Margin $75,000

FIGURE 5 Graphic Representations of Gross Margins

3. Market Attractiveness/Competitive Position relative position of strategies for improving

a. Size (Units and/or $)

ii. Sought in Three Years:

d. Life Cycle Stage

Your Company’s Relative Share

Segmenting the Market

Customer Benefits Sought Segment A Segment B Segment C Segment D Segment E

NOTE: Rank the order of benefits for each segment.

Segment A Segment B Segment C Segment D Segment E

Decision Making Unit (DMU)

Total Segment A Segment B Segment C Segment D Segment E

Size (Units and/or $)

Life Cycle Stage

Major Competitor Segment A Segment B Segment C Segment D Segment E

⫹ We are BETTER ⫺ We are WORSE

Map #1 Map #2 Map #3 Map #4 Map #5

e STEP 5: Project the future position of each unit, based on forecasts of

MARKET ATTRACTIVENESS/COMPETITIVE POSITION CRITERIA EXAMPLES

ATTRACTIVENESS OF STRENGTH OF YOUR

MARKET ATTRACTIVENESS/COMPETITIVE POSITION CRITERIA EXAMPLES

ATTRACTIVENESS OF STRENGTH OF YOUR

MARKET ATTRACTIVENESS/COMPETITIVE POSITION MODEL

CRITERIA HIGH MEDIUM LOW

CRITERIA HIGH MEDIUM LOW

Skills to Support Segment

MARKET ATTRACTIVENESS/COMPETITIVE POSITION GRAPH

High Medium Low

• Reinforce Vulnerable Areas • Seek Ways to Overcome

Build Selectively Manage Earnings

• Build up Ability to Counter Segments Where Profitability is Investment and Rationalize

Protect & Refocus Preserve Cash Flow Divest

High Medium Low

2. Objectives (Overall and/or by Segment): Remember, “objectives” are near-term, measurable,

Event or Assumption Likelihood of Occurrence Possible Impact Contingency Plan

• Reliable data and/or

Segment A Segment B Segment C Segment D Segment E

Current Current Current Current Current