Preview Extract
This document contains Chapters 1 to 2 Chapter 1 Market-Oriented Perspectives Underlie Successful Corporate, Business, and Marketing Strategies I. “Samsung—Changing Strategies to Build a Global Brand” discusses Samsung’s strategic transition from a cost-driven competitive strategy to a new and ambitious competitive strategy that made Samsung the most valuable consumer electronics brand today. II. Strategic challenges addressed in Chapter 1 Chapter 1 tackles some of the questions of importance raised by the interrelationships among the various levels of strategy (corporate strategy, business-level strategy, marketing strategy, etc.) marketing managers as well as managers in other functional areas and top executives must resolve: What do strategies consist of, and do they have similar or different components at the corporate, business, and functional levels? While marketing managers clearly bear the primary responsibility for developing strategic marketing plans for individual product offerings, what role do they play in formulating strategies at the corporate and divisional or business unit level? Why do some organizations pay more attention to customers and competitor when formulating their strategies (i.e. why are some firms more market-oriented) than others, and does it make any difference in their performance? What specific decisions and analytical processes underlie the formulation and implementation of effective marketing strategies? III. Three levels of strategy: Similar components but different issues A. What is Strategy? A strategy is a fundamental pattern of present and planned objectives, resource deployments, and interactions of an organization with markets, competitors, and other environmental factors. The definition suggests that a strategy should specify: What (objectives to be accomplished) Where (on which industries and product-markets to focus) How (which resources and activities to allocate to each product-market to meet environmental opportunities and threats and to gain a competitive advantage) B. The Components of Strategy A well-developed strategy contains five components, or sets of issues: Scope: The scope of an organization refers to the breadth of its strategic domain—the number and types of industries, product lines, and market segments it competes in or plans to enter. Goals and objectives: Strategies should detail desired levels of accomplishment on one or more dimensions of performance—such as volume growth, profit contribution, or return on investment—over specified time periods for each of those businesses and product-markets and for the organization as a whole. Resource deployments: Formulating a strategy involves deciding how the resources are to be obtained and allocated across businesses, product-markets, and functional departments and activities within each business or product-market. Identification of a sustainable competitive advantage: One important part of any strategy is a specification of how the organization will compete in each business and product-market within its domain. Synergy: Synergy exists when the firm’s businesses, product-markets, resource deployments, and competencies complement and reinforce one another. C. The Hierarchy of Strategies Most organizations have a hierarchy of interrelated strategies, each formulated at a different level of the firm. The three major levels of strategy in most large, multiproduct organizations are: Corporate strategy Business-level strategy Functional strategies, focused on a particular product-market entry Strategies at all three levels contain the five components (scope, goals and objectives, resource deployments, identification of a sustainable competitive advantage, and synergy), but because each strategy serves a different purpose within the organization, each emphasizes a different set of issues. D. Corporate Strategy At the corporate level, managers must coordinate the activities of multiple business units and, in case of conglomerates, even separate legal business entities. E. Business-level strategy How a business unit competes within its industry is the critical focus of business-level strategy. F. Marketing strategy The primary focus of marketing strategy is to effectively allocate and coordinate marketing resources and activities to accomplish the firm’s objectives within a specific product market. IV. What is Marketing’s Role in Formulating and Implementing Strategies? The wide-ranging influence of marketing managers on higher-level strategic decisions is clearly shown in a survey of managers in 280 U.S. and 234 German business units of firms in the electrical equipment, mechanical machinery, and consumer package goods industries. The study found that, on average, marketing and sales executives exerted significantly more influence than managers from other functions on strategic decisions concerning traditional marketing activities, such as advertising messages, pricing, distribution, customer service and support, and measurement and improvement of customer satisfaction. A. Variations in Marketing’s Strategic Influence Although marketing managers often have substantial influence on strategy formation at the corporate and business unit levels, the strength of that influence varies across organizations. Marketing is more influential in firms that have strong “customer-connecting” capabilities, especially when marketing has responsibility for the sales force. B. Market-Oriented Management Marketing managers do not play an equally extensive strategic role in every firm because not all firms are equally market-oriented. Market-oriented organizations tend to operate according to the business philosophy known as the marketing concept. The marketing concept holds that the planning and coordination of all company activities around the primary goal of satisfying customer needs is the most effective means to attain and sustain a competitive advantage and achieve company objectives over time. Market-oriented firms are characterized by a consistent focus by all personnel in all departments and at all levels on customers’ needs and competitive circumstances in the market environment. They also are willing and able to quickly adapt products and functional programs to fit changes in the market environment. Market-oriented firms also adopt a variety of organizational procedures and structures to improve the responsiveness of their decision-making, including using more detailed environmental scanning and continuous, real-time information systems; seeking frequent feedback from and coordinating plans with key customers and major suppliers; etc. These and other actions make an organization more market-driven and responsive to environmental changes. C. Do Customers Always Know What They Want? Some managers argue that customers cannot always articulate their needs and wants, in part because they do not know what kinds of products or services are technically possible. Critics of a strong customer focus argue that paying too much attention to customer needs and wants can stifle innovation and lead firms to produce nothing but marginal improvements or line extensions of products and services that already exist. One way to resolve the conflict between the views of technologists and marketers is to consider the two components of R&D: Most consumers have little knowledge of scientific advancements and emerging technologies. Therefore, they usually don’t—and probably shouldn’t—play a role in influencing how firms allocate their research dollars because they have little knowledge of scientific advancements. A customer focus is critical to development. Someone within the organization must have either the insight and market experience or the substantial customer input necessary to decide what product to develop from a new technology, what benefits it will offer to customers, and whether customers will value those benefits sufficiently to make the product a commercial success. D. Does Being Market-Oriented Pay? By paying careful attention to customer needs and competitive threats—and by focusing activities across all functional departments on meeting those needs and threats effectively—organizations should be able to enhance, accelerate, and reduce the volatility and vulnerability of their cash flows. Profitability is the third leg, together with a customer focus and cross-functional coordination, of the three-legged stool known as the marketing concept. The marketing concept is consistent with the notion of focusing on only those segments of the customer population that the firm can satisfy both effectively and profitably. Substantial evidence supports the idea that being market-oriented pays dividends, at least in developed economy. E. Factors That Mediate a Firm’s Market Orientation Among the reasons firms are not always in close touch with their market environments are these: Competitive conditions may enable a company to be successful in the short run without being particularly sensitive to customer desires. Different levels of economic development across industries or countries may favor different business philosophies. Firms can suffer from strategic inertia—the automatic continuation of strategies successful in the past, even though current market conditions are changing. Competitive Factors Affecting a Firm’s Market Orientation Early entrants into newly emerging industries, particularly industries based on new technologies, are especially likely to be internally focused and not very market-oriented. There are likely to be relatively few strong competitors during the formative years of a new industry, customer demand for the new product is likely to grow rapidly and outstrip available supply, and production problems and resource constraints tend to represent more immediate threats to the survival of such new businesses. Businesses facing such market and competitive conditions are often product-oriented or production-oriented. They focus most of their attention and resources such functions as product and process engineering, production, and finance in order to acquire and manage the resources necessary to keep pace with growing demand. As industries grow, they become more competitive. Industry capacity often grows faster than demand, and the environment shifts from a seller’s market to a buyer’s market. Firms often respond to changes with aggressive promotional activities—such as hiring more salespeople, increasing advertising budgets, or offering frequent price promotions—to maintain market share and hold down unit costs. This kind of sales-oriented response to increasing competition focuses on selling what the firm wants to make rather than on customer needs. Spending more on selling efforts does not create a sustainable competitive advantage. As industries mature, sales volume levels off, and technological differences among brands disappear, as manufacturers copy the best features of each other’s products. Managers can most readily appreciate benefits of a market orientation and marketers are often given a bigger role in developing competitive strategies at this stage. The Influence of Different Stages of Development across Industries And Global Markets Industries that are in earlier stages of their life cycles or that benefit from factors reducing the intensity of competition are likely to have relatively fewer market-oriented firms. Given that entire economies are in different stages of development around the world, the popularity—and even the appropriateness—of different business philosophies may also vary across countries. International differences in business philosophies can cause some problems for the globalization of a firm’s strategic marketing programs, but it can create some opportunities as well, especially for alliances or joint ventures. Strategic Inertia In some cases, a firm that achieved success by being in tune with its environment loses touch with its market because managers become reluctant to tamper with strategies and marketing programs that worked in the past. Such strategic inertia is dangerous because customers’ needs and competitive offerings change over time. F. Recent Developments Affecting the Strategic Role of Marketing Globalization While global markets represent promising opportunities for additional sales growth and profits, differences in market and competitive conditions across country boundaries can require firms to adapt their competitive strategies and marketing programs to be successful. Increased Importance of Service A service can be defined as “any activity or benefit that one party can offer another that is essentially intangible and that does not result in the ownership of anything. Its production may or may not be tied to a physical product.” The additional benefits can justify higher prices and margins in the short term and help improve customer satisfaction, retention, and loyalty over the long term. Information Technology New technologies are making it possible for firms to collect and analyze more detailed information about potential customers and their needs, preferences, and buying habits, and about their competitors’ offerings and prices. Information technology opens new channels for communications and transactions between suppliers and customers. New information and communications technologies are enabling firms to forge more cooperative and efficient relationships with their suppliers and distribution channel partners. Relationships across Functions and Firms New information technologies and the ongoing search for greater marketing efficiency and customer value in the face of increasing competition are changing the nature of exchange between companies. Cooperative relationships are emerging inside companies as firms seek mechanisms for more effectively and efficiently coordinating across functional departments the various activities necessary to identify, attract, service, and satisfy customers. G. The Future Role of Marketing In light of the changes, it is apparent that firms in most, if not all, industries will have to be market-oriented, tightly focused on customer needs and desires, and highly adaptive to succeed and prosper in the future. The effective performance of marketing activities—particularly those associated with tracking, analyzing, and satisfying customers’ needs—will become even more critical for the successful formulation and implementation of strategies at all organizational levels. V. Formulating and Implementing Marketing Strategy—An Overview of the Process A. A Decision-Making Focus Planning and executing a marketing strategy involves many interrelated decisions about what to do, when to do it, and how. B. Analysis Comes First—The Four “Cs” The analysis necessary to provide the foundation for a good strategic marketing plan should focus on four elements of the overall environment that may influence its appropriateness and ultimate success: The company’s internal resources, capabilities, and strategies The environment context—such as broad social, economic, and technology trends—in which the firm will compete The relative strengths and weaknesses of competitors and trends in the competitive environment The needs, wants, and characteristics of current and potential customers C. Integrating Marketing Strategy with the Firm’s Other Strategies and Resources A major part of the marketing manager’s job is to monitor and analyze customers’ needs and wants and the emerging opportunities and threats in the external environment. There should be a good fit—or internal consistency—among the elements of all three levels of strategy. D. Market Opportunity Analysis Understanding Market Opportunities Understanding the nature and attractiveness of any opportunity requires conducting an examination of the external environment, including the markets served and the industry of which the firm is a part. It is necessary to examine the management team that will be charged with implementing the developed strategy to determine if they have what it takes to get the job done. Measuring Market Opportunities Preparing an evidence-based forecast of the sales that can be achieved over the short and intermediate term is a particularly difficult task for new products, especially those of the new-to-the-world variety. Market Segmentation, Targeting, and Positioning Decisions Not all customers with similar needs seek the same products or services to satisfy those needs. Thus, one of the manager’s must crucial tasks is to divide customers into market segments—distinct subsets of people with similar needs, circumstances, and characteristics that lead them to respond in a similar way to a particular product or service offering or to a particular strategic marketing program. After defining market segments and exploring customer needs and the firm’s competitive strengths and weaknesses within segments, the manager must decide which segments represent attractive and viable opportunities for the company; that is, on which segments to focus a strategic marketing program. The manager must decide how to position the product or service offering and its brand within a target segment; that is, to design the product and its marketing program to emphasize attributes and benefits that appeal to customers in the target segment and at once distinguish the company’s offering from those of competitors. E. Formulating Marketing Strategies for Specific Situations The strategic marketing program for a product should reflect market demand and the competitive situation within the target market. Different strategies are typically more appropriate and successful for different market conditions and different life cycle stages. F. Implementation and Control of the Marketing Strategy A final critical determinant of a strategy’s success is the firm’s ability to implement it effectively. This depends on whether the strategy is consistent with the resources, the organizational structure, the coordination and control systems, and the skills and experience of company personnel. The final tasks in the marketing management process are determining whether the strategic marketing program is meeting objectives and adjusting the program when performance is disappointing. G. The Marketing Plan—A Blueprint for Action A marketing plan is a written document detailing the current situation with respect to customers, competitors, and the external environment and providing guidelines for objectives, marketing actions, and resource allocations over the planning period for either an existing or a proposed product or service. Written plans provide a concrete history of a product’s strategies and performance over time, which aids institutional memory and helps educate new managers assigned to the product. The discipline involved in producing a formal plan helps ensure that the proposed objectives, strategy, and marketing actions are based on rigorous analysis of the 4Cs and sound reasoning. Marketing plans vary in timing, content, and organization across companies. There are three major parts to the marketing plan: First, the marketing manager details his or her assessment of the current situation. The second part of the plan details the strategy for the coming period. Finally, the plan details the financial and resource implications of the strategy and the controls to be employed to monitor the plan’s implementation and progress over the period. End of Chapter Discussion Questions and Answers How are the basic business philosophies or orientations of a major consumer products firm such as General Mills or Nestlé and a small entrepreneurial start-up in a fast-growing, high-tech industry likely to differ? What are the implications of such philosophical differences for the role of marketers in the strategic planning processes of the two firms? Answer: The basic business philosophies or orientations of a major consumer products firm like General Mills or Nestlé and a small entrepreneurial start-up in a fast-growing, high-tech industry are likely to differ significantly. A major consumer products firm such as General Mills or Nestlé typically operates within established markets and relies on stable, proven business models. Their focus is often on maintaining market share, managing established brands, and achieving incremental growth. These firms generally have extensive resources, established distribution channels, and large-scale manufacturing capabilities. As a result, their business philosophy tends to prioritize efficiency, risk mitigation, and long-term sustainability. On the other hand, a small entrepreneurial start-up in a fast-growing, high-tech industry operates in dynamic and rapidly evolving markets. These start-ups are often characterized by innovation, agility, and a high tolerance for risk. Their business philosophy is centered around disruptive innovation, rapid experimentation, and the ability to quickly adapt to changing market conditions. Start-ups typically have limited resources and must prioritize speed to market and rapid growth in order to establish a foothold in their industry. The implications of these philosophical differences for the role of marketers in the strategic planning processes of the two firms are significant. For major consumer products firms, marketers play a key role in managing and optimizing existing product lines, identifying new market opportunities, and maintaining brand loyalty. Their focus is on leveraging market research, consumer insights, and established distribution channels to maximize the performance of existing products and identify areas for growth. In contrast, for small entrepreneurial start-ups, marketers play a more strategic role in helping to shape the company's overall business strategy. Marketers in start-ups must be highly innovative and adaptable, constantly experimenting with new marketing channels, messaging, and positioning in order to effectively reach and engage their target customers. Additionally, marketers in start-ups often work closely with product development teams to ensure that the company's products meet the needs of its target market and are positioned for success in the marketplace. Overall, while marketers in both types of firms play a critical role in the strategic planning process, the specific focus and priorities of their role will vary based on the unique business philosophies and orientations of the firm. As the small entrepreneurial firm described in question 1 grows larger, its market matures, and its industry becomes more competitive. How should its business philosophy or orientation change? Why? Answer: As the small entrepreneurial firm described in question 1 grows larger, its market matures, and its industry becomes more competitive, its business philosophy or orientation should evolve to adapt to these changes. Initially, as a small entrepreneurial firm in a fast-growing, high-tech industry, the company's business philosophy likely emphasized innovation, agility, and rapid growth. However, as the firm grows larger and its market matures, it will need to transition from a focus on rapid growth to a more sustainable, long-term approach. The firm should shift its business philosophy towards one that prioritizes efficiency, scalability, and long-term sustainability. This may involve investing in infrastructure, streamlining operations, and developing more mature and stable business processes. Additionally, the firm may need to focus more on defending its market position and protecting its existing customer base in the face of increasing competition. By adopting a more mature business philosophy, the firm can better position itself for long-term success in a competitive market. This may involve a shift in priorities from rapid growth to sustainable profitability, as well as a greater emphasis on building and maintaining strong customer relationships, investing in research and development, and continuously innovating to stay ahead of the competition. Ultimately, the goal is to ensure the firm's long-term viability and success in an increasingly competitive market. What role should marketing managers play in helping to formulate business-level (SBU) strategies in a large diversified firm such as General Motors? What kinds of information are marketers best able to provide as a basis for planning? Which issues or elements of business-level strategy can such information help to resolve? Answer: Marketing managers in a large diversified firm like General Motors (GM) play a crucial role in helping to formulate business-level (Strategic Business Unit - SBU) strategies. First and foremost, marketing managers are responsible for gathering and analyzing market data, consumer trends, competitor activities, and other relevant information. This information forms the basis for strategic decision-making at the business unit level. Marketers are best positioned to provide insights into customer needs, preferences, and behavior, as well as market segmentation, targeting, and positioning strategies. They can also offer valuable input on product development, pricing strategies, distribution channels, and promotional activities. Specifically, marketers can help to resolve several key issues or elements of business-level strategy: 1. Market Analysis and Segmentation: Marketers can provide detailed market analysis, including market size, growth trends, and segmentation data. This information helps to identify attractive market segments and target customers effectively. 2. Competitor Analysis: Marketers can gather intelligence on competitors' products, pricing, distribution, and marketing strategies. This information is crucial for identifying competitive threats and opportunities and developing effective competitive strategies. 3. Customer Insights: Marketers can provide valuable insights into customer needs, preferences, and behavior. This information helps to identify unmet customer needs, develop customer-centric products and services, and create effective marketing campaigns. 4. Product Development and Innovation: Marketers can provide input into product development and innovation strategies based on market research and customer feedback. This helps to ensure that the firm's products meet customer needs and preferences and remain competitive in the marketplace. 5. Pricing and Distribution Strategies: Marketers can help to develop pricing and distribution strategies that are aligned with customer preferences and market conditions. This includes determining optimal pricing levels, pricing strategies, and distribution channels. In summary, marketing managers play a central role in helping to formulate business-level strategies in large diversified firms like General Motors by providing valuable market insights and analysis. By leveraging their expertise in market research, customer insights, and competitive analysis, marketers can help to resolve key issues and elements of business-level strategy and drive long-term success and profitability for the firm. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications I. “Ryanair: Low Prices, High Profits—But Increasing Competition” discusses Ryanair’s use of a straightforward low-cost/low-price corporate strategy and its growth into one of Europe’s largest and most profitable airlines. II. Strategic Challenges Addressed in Chapter 2 In view of the interactions and interdependences between corporate-level strategy decisions and strategic marketing programs for individual product-market entries, this chapter examines the components of a well-defined corporate strategy in more detail: The overall scope and mission of the organization Company goals and objectives A source of competitive advantage A development strategy for future growth The allocation of corporate resources across the firm’s various businesses The search for synergy via the sharing of corporate resources, competencies, or programs across businesses or product lines A. Implications for Marketers and their Marketing Plans All six components of corporate strategy together define the general strategic direction, objectives, and resource constraints within which marketing plans must operate. III. Corporate Scope – Defining the Firm’s Mission A well-thought-out mission statement guides an organization’s managers as to which market opportunities to pursue and which fall outside the firm’s strategic domain. To provide a useful sense of direction, a corporate mission statement should clearly define the organization’s strategic scope. It should answer such fundamental questions as: What is our business? Who are our customers? What kinds of value can we provide to these customers? What should our business be in the future A. Market Influences on the Corporate Mission An organization’s mission should fit both its internal characteristics and the opportunities and threats in its external environment. It should also focus the firm’s efforts on markets where the resources and competencies will generate value for customers, an advantage over competitors, and synergy across products. B. Criteria for Defining the Corporate Mission Many firms specify the domain in physical terms, focusing on products or services or technology used The problem is that such statements can lead to slow reactions to technological or customer-demand changes. Theodore Levitt argues that it is better to define a firm’s mission as what customer needs are to be satisfied and the functions the firm must perform to satisfy them. One problem with Levitt’s advice, though, is that a mission statement focusing only on basic customer needs can be too broad to provide clear guidance and can fail to take into account the firm’s specific competencies. The most useful mission statements focus on the customer need to be satisfied and the functions that must be performed to satisfy that need, and they are specific as to the customer groups and the products or technologies on which to concentrate. C. Social Values and Ethical Principles An increasing number of organizations are developing mission statements that also attempt to define the social and ethical boundaries of their strategic domain. Some firms are pursuing social programs they believe to be intertwined with their economic objectives, while others simply manage their businesses according to the principles of sustainability—meeting humanity’s needs without harming future generations. Crafting mission statements that specify explicit social values, goals, and programs—with inputs from employees, customers, social interest groups, and other stakeholders—is becoming a more important part of corporate strategic planning. Ethics is concerned with the development of moral standards by which actions and situations can be judged. It focuses on actions that may result in actual or potential harm of some kind (e.g., economic, mental, physical) to an individual, group, or organization. Particular actions may be legal but not ethical. Ethics is more proactive than the law. Ethical standards attempt to anticipate and avoid social problems, whereas most laws and regulations emerge only after the negative consequences of an action become apparent. D. Why are ethics important? The Marketing Implications of Ethical Standards Unethical practices can damage the trust between a firm and its suppliers or customers, thereby disrupting the development of long-term exchange relationships and resulting in the likely loss of sales and profit over-time. Marketers sometimes feel pressure to engage in actions that are inconsistent with what they believe to be right, such as paying bribes to win a sale from a potential customer or to ensure needed resources or services from suppliers and government agencies. Such dilemmas are particularly likely to arise as a company moves into global markets involving different cultures and levels of economic development where economic exigencies and ethical standards may be quite different. E. Getting Caught Can Be Costly Such inconsistencies in expectations and demands across countries and markets can lead to uncertainty among a firm’s employees, and consequently to unethical—and possibly illegal—behavior. When employees are caught engaging in unlawful behavior—particularly bribery—by government regulators, fines and penalties can increase the costs dramatically. Even when the fines imposed are not large, the negative publicity surrounding the exposure- of unethical practices can raise doubts about future sales revenues and cash flows, thereby making investors more reluctant to commit funds and reducing the firm’s market capitalization. A company can reduce such problems by spelling out formal social policies and ethical standards in its corporate mission statement and communicating and enforcing those standards. It is not always easy to decide what a firm’s ethical policies and standards should be. There are multiple philosophical traditions or frameworks that managers might use to evaluate the ethics of a given action. IV. Corporate Objectives To be useful as decision criteria and evaluative benchmarks, corporate objectives must be specific and measurable. Therefore, each objective contains four components: A performance dimension or attribute sought. A measure or index for evaluating progress. A target or hurdle level to be achieved. A time frame within which the target is to be accomplished. Exhibit 2.4 lists some common performance dimensions and measures used in specifying corporate as well as business-unit and marketing objectives. When specifying short-term business-level and marketing objectives, however, two additional dimensions become important: Their relevance to higher-level strategies and goals Their attainability Thus, corporates find it useful to follow the SMART acronym when specifying objectives at all levels: Specific, Measurable Attainable Relevant Time-bound A. Enhancing Shareholder Value: The Ultimate Objective In recent years, a growing number of executives of publicly held corporations have concluded that an organization’s ultimate objective should be to increase its shareholders’ economic returns as measured by dividends plus appreciation in the company’s stock price. To do so management must balance the interests of various corporate constituencies, including employees, customers, suppliers, debt holders, and stockholders. A going concern must strive to enhance its ability to generate cash from the operation of its businesses and obtain any additional funds needed from debt or equity financing. Management’s primary objective should be to pursue capital investments, acquisitions, and business strategies that produce sufficient future cash flows to return positive value to shareholders. Many firms set explicit objective targeted at increasing shareholder value: These are usually stated in terms of a target return on shareholder equity, increase in the stock price, or earnings per share. Recently, though, some executives have begun expressing such corporate objectives in terms of economic value added or market value added (MVA). A firm’s MVA is calculated by combining its debt and the market value of its stock and then subtracting the capital that has been invested in the company. The result, if positive, shows how much wealth the company has created. Broad shareholder-value objectives do not always provide guidance for a firm’s lower-level managers or benchmarks for evaluating performance. B. The Marketing Implications of Corporate Objectives Trying to achieve many objectives at once leads to conflicts and trade-offs. Managers can reconcile conflicting goals by prioritizing them. Another approach is to state one of the conflicting goals as a constraint or hurdle. Thus, a firm may attempt to maximize growth subject to meeting some minimum ROI hurdle. In firms with multiple business units or product lines, however, the most common way to pursue a set of conflicting objectives is to first break them down into subobjectives and then assign different subobjectives to different business units or products. As firms emphasize developing and maintaining long-term customer relationships, customer-focused objectives—such as satisfaction, retention, and loyalty—are being given greater importance. Such market-oriented objectives are more likely to be consistently pursued across business units and product offerings. C. Gaining a Competitive Advantage A sustainable competitive advantage at the corporate level is based on company resources, resources that other firms do not have, that take a long time to develop, and that are hard to acquire. The trick is to develop a competitive strategy for each division within the firm, and a strategic marketing program for each of its product-market entries, that convert the company’s unique resources into something of value to customers. Strategies are built—at least in part—on a firm’s marketing-related resources and competencies. V. Corporate Growth Strategies Often, there is a gap between what the firm expects to become if it continues on its present course and what it would like to become. To determine where future growth is coming from, management must decide on a strategy to guide corporate development. Essentially, a firm can go in two major directions in seeking future growth: Expansion of its current businesses and activities Diversification into new businesses, either through internal business development or acquisition A. Expansion by Increasing Penetration of Current Product-Markets One way for a company to expand is by increasing its share of existing markets. This typically requires actions such as making product or service improvements, cutting costs and prices, or outspending competitors on advertising or promotions. Even when a firm holds a commanding share of an existing product-market, additional growth may be possible by encouraging current customers to become more loyal and concentrate their purchases, use more of the product or service, use it more often, or use it in new ways. B. Expansion by Developing New Products for Current Customers A second avenue to future growth is through a product-development strategy emphasizing the introduction of product-line extensions or new product or service offerings aimed at existing customers. C. Expansion by Selling Existing Products to New Segments or Countries Perhaps the growth strategy with the greatest potential for many companies is the development of new markets for their existing goods or services. This may involve the creation of marketing programs aimed at nonuser or occasional-user segments of existing markets. Expansion into new geographic markets, particularly new countries, is also a primary growth strategy for many firms. D. Expansion by Diversifying Diversifying operations is typically riskier than the various expansion strategies because it involves learning new operations and dealing with unfamiliar customer groups. Vertical integration is one way for companies to diversify. Forward vertical integration occurs when a firm moves downstream in terms of product flow, as when a manufacturer integrates by acquiring or launching a wholesale distributor or retail outlet Backward integration occurs when a firm moves upstream by acquiring a supplier. Integration can give a firm access to scarce or volatile sources of supply or tighter control over marketing, distribution, or servicing of its products. Related (or concentric) diversification occurs when a firm internally develops or acquires another business that does not have products or customers in common with its current businesses but that might contribute to internal synergy through the sharing of production facilities, brand names, R&D know-how, or marketing and distribution skills. The motivations of unrelated (or conglomerate) diversification are primarily financial rather than operational. By definition, an unrelated diversification involves two businesses that have no commonalities in products, customers, production facilities, or functional areas of expertise. Such diversification mostly occurs when a disproportionate number of a firm’s current business face decline because of decreasing demand, increased competition, or product obsolescence. Unrelated diversification tends to be the riskiest growth strategy in terms of financial outcomes. E. Expansion by Diversifying through Organizational Relationships or Networks Recently, firms have attempted to gain some benefits of market expansion or diversification while simultaneously focusing more intensely on a few core competencies. They try to accomplish this feat by forming relationships or organizational networks with other firms instead of acquiring ownership. VI. Allocating Corporate Resources To exploit the advantages of diversification, corporate managers must make intelligent decisions about how to allocate financial and human resources across the firm’s various businesses and product-markets. Three sets of analytical tools have proven useful in such decisions: Portfolio models Value-based planning Models that measure customer equity to estimate the value of alternative marketing actions A. Portfolio Models These models enable managers to classify and review their current and prospective businesses by viewing them as portfolios of investment opportunities and then evaluating each business’s competitive strength and the attractiveness of the markets it serves. The Boston Consulting Group’s (BCG) growth-share matrix It analyzes impact of investing resources in different businesses on the corporation’s future earnings and cash flows. Each business is positioned within a matrix, as shown in Exhibit 2.6. The vertical axis indicates the industry’s growth rate, and the horizontal axis shows the business’s relative market share. The market growth rate on the vertical axis is a proxy measure for the maturity and attractiveness of an industry. A business’s relative market share is a proxy for its competitive strength within its industry. In the exhibit, the size of the circle representing each business is proportional to that unit’s sales volume. Resource Allocation and Strategy Implications Each of the four cells in the growth-share matrix represents a different type of business with different strategy and resource requirements. The implications of each are discussed below: Question marks: Businesses in high-growth industries with low relative market shares are called question marks or problem children. Such businesses require large amounts of cash, not only for expansion to keep up with the rapidly growing market, but also for marketing activities to build market share and catch industry leader. If management can successfully increase the share of a question mark business, it becomes a star. But if managers fail, it eventually turns into a dog as the industry matures and the market growth rate slows. Stars: A star is the market leader in a high-growth industry. As their industries mature, they become cash cows. They often are net users rather than suppliers of cash in the short run. Cash cows: Businesses with a high relative share of low-growth markets are called cash cows because they are the primary generators of profits and cash in a corporation. Such businesses do not require much additional capital investment. Dogs: Low-share businesses in low-growth markets are called dogs because although they may throw off some cash, they typically generate low profits, or losses. Divestiture is one option for such businesses, although it can be difficult to find an interested buyer. Another common strategy is to harvest dog businesses. Limitations of the Growth-Share Matrix Market growth rate is an inadequate descriptor of overall industry attractiveness. Market growth is not always directly related to profitability or cash flow. Relative market share is inadequate as a description of overall competitive strength. Market share is more properly viewed as an outcome of past efforts to formulate and implement effective strategies. The outcomes of a growth-share analysis are highly sensitive to variations in how growth and share are measured. Defining the relevant industry and served market (i.e., the target-market segments being pursued) also can present problems. While the matrix specifies appropriate investment strategies for each business, it provides little guidance on how best to implement those strategies. The model implicitly assumes that all business units are independent of one another except for the flow of cash. If this assumption is inaccurate, the model can suggest some inappropriate resource allocation decisions. Alternative Portfolio Models In view of the preceding limitations, a number of firms have attempted to improve the basic portfolio model. Such improvements have focused on developing more detailed, multifactor measures of industry attractiveness and a business’s competitive strength and on making the analysis more future-oriented. Multifactor models are more detailed than the simple growth-share model and provide more strategic guidance concerning the appropriate allocation of resources across businesses. However, the multifactor measures in these models can be subjective and ambiguous, especially when managers must evaluate different industries on the same set of factors. B. Value-Based Planning Value-based planning is a resource allocation tool that assesses the shareholder value a given strategy is likely to create. Value-based planning provides a basis for comparing the economic returns to be gained from investing in different businesses pursuing different strategies or from alternative strategies that might be adopted by a given business unit. A number of value-based planning methods are currently in use, but all share three basic features: They assess the economic value a strategy is likely to produce by examining the cash flows it will generate, rather than relying on distorted accounting measures, such as return on investment. They estimate the shareholder value that a strategy will produce by discounting it forecasted cash flows by the business’s risk-adjusted cost of capital. They evaluate strategies based on likelihood that the investments required by a strategy will deliver returns greater than the cost of capital. The amount of return a strategy or operating program generates in excess of the cost of capital is commonly referred to as its economic value added, or EVA. Discounted Cash Flow Model In this model, shareholder value created by a strategy is determined by the cash flow it generates, the business’s cost of capital (which is used to discount future cash flows back to their present value), and the market value of the debt assigned to the business. The future cash flows generated by the strategy are affected by six “value drivers” The rate of sales growth the strategy will produce The operating profit margin The income tax rate Investment in working capital Fixed capital investment required by the strategy The duration of value growth Some Limitations of Value-Based planning Value-based planning is not a substitute for strategic planning; it is only one tool for evaluating strategy alternatives identified and developed through managers’ judgments. It does so by relying on forecasts of many kinds to put a financial value on the hopes, fears, and expectations managers associate with each alternative. While good forecasts are notoriously difficult to make, they are critical to the validity of value-based planning. Once someone attaches numbers to judgments about what is likely to happen, people tend to endow those numbers with the concreteness of hard facts. Therefore, the numbers derived from value-based planning can sometimes take on a life of their own, and managers can lose sight of the assumptions underlying them. Inaccurate forecasts can create problems in implementing value-based planning. There are natural human tendencies to overvalue or undervalue financial projections associated with each strategy alternatives and undervalue others. Another kind of problem involved in implementing value-based planning occurs when management fails to consider all the appropriate strategy alternatives. C. Using Customer Equity to Estimate the Value of Alternative Marketing Actions This approach calculates the economic return for a prospective marketing initiative based on its likely impact on the firm’s customer equity, which is the sum of lifetime values of its current and future customers. Each customer’s lifetime value is estimated from data about the frequency of their purchases in a category, the average quantity purchased, and historical brand-switching patterns, combined with the firm’s contribution margin. The impact of a firm’s or business unit’s past marketing actions on customer equity can be statistically estimated from historical data. This enables managers to identify the financial impact of alternative marketing “value drivers” of customer equity, such as brand advertising, quality or service improvements, etc. VII. Sources of Synergy A. Knowledge-Based Synergies The performance of one business can be enhanced by the transfer of competencies, knowledge, or customer-related intangibles—such as brand-name recognition and reputation—from other units within the firm. In part, such knowledge-based synergies are a function of the corporation’s scope and mission. The firm’s organizational structure and allocation of resource also may enhance knowledge-based synergy. B. Corporate Identity and the Corporate Brand as a Source of Synergy Corporate identity—together with a strong corporate brand that embodies that identity—can help a firm stand out from its competitors and give it a sustainable advantage in the market. Corporate identity flows from the communications, impressions, and personality projected by an organization. One rationale for corporate identity programs is that they can generate synergies that enhance the effectiveness and efficiency of the firm’s marketing efforts for its individual product offerings. C. Corporate Branding Strategy—When Does a Strong Corporate Brand Make Sense? The corporate brand will not add much value to the firm’s offerings unless the company has a strong and favorable image and reputation among potential customers in most of its target markets. A strong corporate brand also makes most sense when company-level competencies or resources are primarily responsible for generating the benefits and values customers receive from its individual offerings. An exploratory study based on interviews with managers in 11 Fortune 500 companies suggest that a firm is more likely to emphasize a strong corporate brand when its various product offerings are closely interrelated, either in terms of having similar positionings in the market or cross-product elasticities that might be leveraged to encourage customers to buy multiple products from the firm. D. Synergy from Shared Resources A second potential source of corporate synergy is inherent in sharing operational resources, facilities, and functions across business units. When such sharing helps increase economies of scale or experience-curve effects, it can improve the efficiency of each business involved. However, the sharing of operational facilities and functions may not produce positive synergies for all business units. Such sharing can limit a business’s flexibility and reduce its ability to adapt quickly to changing market conditions and opportunities. End of Chapter Discussion Questions and Answers The Kelly Bottling Company, located in a large metropolitan area of some 5 million people, produced and marketed a line of carbonated beverages consisting mainly of flavored soft drinks (not including colas), soda water, and tonics. They were sold in different types of packages and sizes to a wide variety of retail accounts. How might such a company expand its revenues by pursuing each of the different expansion strategies discussed in Exhibit 2.5? Answer: The Kelly Bottling Company, located in a large metropolitan area with a population of around 5 million people, can expand its revenues by pursuing various expansion strategies discussed in Exhibit 2.5: 1. Market Penetration: • Increase Sales to Existing Customers: The company can increase sales by promoting its existing line of carbonated beverages to its current customer base. This could involve offering discounts, running promotional campaigns, or introducing loyalty programs to encourage repeat purchases. • Expand Product Offerings: Kelly Bottling Company can introduce new flavors or variants of its existing products to attract new customers and encourage existing customers to try different products. This could involve conducting market research to identify popular flavors and preferences among its target market. 2. Market Development: • Expand Geographically: The company can expand its market by targeting new geographic areas within the metropolitan area or by entering new markets outside the metropolitan area. This could involve partnering with new retail accounts, distributors, or wholesalers to reach customers in new locations. • Target New Customer Segments: Kelly Bottling Company can target new customer segments within its existing market. For example, it could introduce products specifically targeted towards health-conscious consumers or niche markets such as gyms, health food stores, or upscale restaurants. 3. Product Development: • Introduce New Products: The company can develop and introduce new products to its existing product line. For example, it could introduce new flavors, healthier options, or premium beverages to cater to changing consumer preferences and trends. • Expand Packaging Options: Kelly Bottling Company can introduce new packaging options or sizes to cater to different consumer needs and preferences. This could include introducing smaller sizes for on-the-go consumption or larger sizes for families or parties. 4. Diversification: • Related Diversification: The company can diversify into related product categories such as energy drinks, flavored water, or sports drinks. This would allow Kelly Bottling Company to leverage its existing distribution network and customer base to introduce new products. • Unrelated Diversification: Alternatively, the company could diversify into unrelated product categories such as snacks, confectionery, or bottled water. While this would involve entering entirely new markets, it would allow Kelly Bottling Company to spread its risk and take advantage of new growth opportunities. By pursuing these expansion strategies, Kelly Bottling Company can effectively grow its revenues and strengthen its position in the market. Whether through increasing sales to existing customers, expanding into new markets, developing new products, or diversifying its product offerings, the company can capitalize on opportunities for growth and profitability within its industry. Which diversification strategy is illustrated by each of the following acquisitions? What synergies or benefits might each purchase produce? A packaged food company’s acquisition of a fast-food company that features hamburgers and French fries. A large retailer’s purchase of an interest in a company producing small appliances. A tobacco company’s acquisition of a beer company. An oil company’s acquisition of an insurance company. Answer: Sure, here are the answers: a. Acquisition: • Diversification Strategy: Related Diversification • Synergies/Benefits: This acquisition represents related diversification as both companies operate within the food industry. The packaged food company can benefit from the fast-food company's established brand, distribution channels, and customer base. Synergies might include shared production facilities, cross-promotion opportunities, and leveraging each other's distribution networks. b. Acquisition: • Diversification Strategy: Conglomerate Diversification • Synergies/Benefits: This acquisition represents conglomerate diversification as the retailer is purchasing a company operating in a different industry. The retailer might benefit from portfolio diversification, potential economies of scale, and the opportunity to leverage its existing distribution network to sell small appliances. c. Acquisition: • Diversification Strategy: Unrelated Diversification • Synergies/Benefits: This acquisition represents unrelated diversification as the tobacco company is purchasing a company operating in the alcoholic beverage industry. Synergies might include risk reduction through diversification, the ability to leverage distribution networks, and potential cost-saving opportunities in areas such as marketing and advertising. d. Acquisition: • Diversification Strategy: Unrelated Diversification • Synergies/Benefits: This acquisition represents unrelated diversification as the oil company is purchasing a company operating in the insurance industry. Synergies might include risk reduction through diversification, potential tax advantages, and the opportunity to leverage management expertise across different industries. Additionally, the oil company might benefit from offering insurance services to its existing customer base. Critics argue that the BCG portfolio model sometimes provides misleading advice concerning how resources should be allocated across SBUs or product markets. What are some of the possible limitations of the model? What might a manager do to reap the benefits of portfolio analysis while avoiding at least some shortcomings you have identified? Answer: Limitations of the BCG portfolio model: 1. Assumption of market growth rate and market share: The model assumes that market growth rate and market share accurately represent competitive advantage. However, in some cases, high market share may not lead to profitability, and market growth rate may not accurately represent future opportunities. 2. Focus on current market position: The model focuses on current market position without considering potential changes in the market or industry. 3. Limited to two dimensions: The BCG matrix considers only two dimensions, market growth rate and market share, ignoring other factors such as technological changes, competitive dynamics, and customer preferences. Strategies to mitigate the limitations: 1. Use of additional criteria: Managers can incorporate additional criteria such as industry attractiveness, competitive position, and resource requirements to provide a more comprehensive analysis. 2. Regular reassessment: Constant monitoring and reassessment of SBUs and product markets can help identify changes and adjust resource allocation accordingly. 3. Combination with other models: Combining the BCG matrix with other strategic models such as Porter's Five Forces or SWOT analysis can provide a more holistic view of the business environment. 4. Focus on long-term strategic goals: Managers should focus on long-term strategic goals rather than solely relying on short-term profitability. This may involve investing in SBUs with high growth potential even if they currently have low market share. By addressing these limitations and adopting a more flexible and comprehensive approach to portfolio analysis, managers can reap the benefits of the BCG portfolio model while avoiding some of its shortcomings. Instructor Manual for Marketing Strategy: A Decision-Focused Approach Orville C. Walker, John Mullins 9780078028946
