CH-11 Marketing Strategies for a Digitally Networked World – Marketing Strategy: A Decision-Focused Approach : Chapter Notes

This document contains Chapters 11 to 13 Chapter 11 Marketing Strategies for a Digitally Networked World I. “Opportunities in the App Economy” gives insights into how apps, bite-sized software programs that run on a mobile phone or within social networks, have revolutionized every aspect of a consumer’s life. II. Strategic Challenges Addressed in Chapter 11 This chapter addresses several timely and important questions that marketing managers in today’s companies and entrepreneurs must ask: Does every company need a digital or social media strategy? Do recent technological advances represent threats or opportunities? How should marketers address the development of strategies to take advantage of—or defend against—the rapid pace of change inherent in today’s networked world? What marketing roles can the internet, social networking, and other recent and future technological developments play, and which of these should significant resources be allocated? The chapter begins by reviewing several trends that highlight the growing importance of social networking and other related digital developments. It then identifies the fundamental principles that underlie today’s digital phenomena and the key advantages and disadvantages inherent therein, all of which every marketer must clearly understand. Next, it identifies some of the roles that digital networking technologies can plausibly play in marketing strategies, and articulates a decision framework for managers to use to decide which of the growing array of such tools their firms should employ—from web-based marketing research to advertising on mobile phones or tablets to the delivery of digitized information, goods, and services over the web. Finally, it takes a brief look into what it is likely to take to effectively serve the dot-com and mobile markets of tomorrow. III. Does Every Company Need a Digital or Social Media Strategy? The rise of consumers’ adoption of personal devices, home networking and broadband, combined with the increasing importance of the internet in media, retail, banking, and health care, means that every consumer-facing industry must better understand the intricacies of technology adoption and use. The long-term prospects of doing business in the digitally networked world with both feet are enormous. The growing market acceptance of the internet and various digitally networked technologies—both software and hardware—and the inherent advantages that they bring suggest that nearly every company needs to examine how it will be affected by and can take advantage of these developments. The outcome of such an examination might well be the development of the company’s own digital or social media strategy. IV. Threats or Opportunities? The Inherent Advantages and Disadvantages of the Digitally Networked World for Marketers Eight potentially attractive elements characterize the advantages of the new internet, telecommunication, and social networking technologies: The ability to optimize The syndication of information The increasing returns to scale of network products The ability to efficiently personalize and customize market offerings The ability to disintermediate distribution Global reach Round-the-clock access The possibility of instantaneous delivery Collectively, these elements lie at the heart of viral marketing, wherein those who see something they like on the web or on their mobile phones share it with others. A. The Ability to Optimize In many aspects of marketing practice, it can be difficult for marketers to understand what is working, what’s not, and why. The beauty of today’s digital technologies is that everything is measurable. As the digital landscape changes so fast, new companies with new metrics and techniques are fueling rapid innovation in the digital marketing and big data arenas, and attracting considerable amount of venture capital as well. Thus, while marketers are excited about—and even obsessed with—all the data that is now available to them, knowing exactly what to do with the data, and how to make the most of it, is not always clear. B. The Syndication of Information Syndication involves the sale of the same good—typically an informational good—to many customers, who may then combine it with information from other sources and distribute it. Though internet marketers rarely use the word syndication to describe what they do, it lies at the heart of many e-commerce business models. Inktomi, an originator of syndicated content, provides its search engine technology to many branded search engine sites. Yellow Brix, a syndicator, provides news articles in electronic form and delivers them to other sites, each of which appeals to a different target audience. E*Trade, a distributor of syndicated information, brings together from many sources content relevant to its investor clientele and packages it in ways useful to these clients. Why is syndication important? First, because it delivers informational goods rather than tangibles, a person or a company can syndicate the same informational goods or services to an infinite number of customers with little incremental cost. The process can be automated and digitized, enabling syndicated networks to be created, expanded, and flexibly adapted more quickly than would be possible in the physical world. By using technology called Really Simple Syndication (RSS), syndicated content can be fed to users, having preferences for such content. C. Increasing Returns to Scale of Network Products The characteristics of informational networks where a product becomes more valuable as the number of users increases is often called a positive network effect or network externality. Given the growing power of digital marketing, marketing professionals now think of media as divided into three categories: Owned media (such as a brand’s website, blog, or Twitter account) Paid media (print and broadcast ads and the like, along with such things as paid search or online display ads) Earned media (places where customers themselves—and their Facebook pages or tweets, for example—become the medium) D. The Ability to Efficiently Personalize and Customize Market Offerings Some companies track the products a customer buys and, using a technology known as collaborative filtering, are able to compare one customer’s purchases with those of others and thereby recommend products they think a customer would like, personalized to the customer’s taste. If the companies do this well, the customer’s purchases go up, and he or she becomes a happier customer because the company helped him or her find products that he or she wanted. When formal decision rules can be identified in the way customers behave (for example, reminding customers of, or making special offers for, upcoming birthdays or offering supplementary items based on past purchases), rules-based personalization can be done. Mass-customization techniques, which are user-driven instead of marketer-driven, allow customers to specify the nature of what is offered to them. In today’s highly competitive markets, personalization and customization can help build customer loyalty and makes it less likely that customers will switch to other suppliers. E. Disintermediation and Restructuring of Distribution Channels The internet makes it possible for marketers to reach customers directly, without the expense or complication of distribution channels, a phenomenon known as disintermediation. Someone must perform the functions normally performed by channel members—taking orders, delivering products, collecting payment, etc.—so those who consider disintermediating their channels and selling direct must determine how they will perform these functions and must evaluate whether doing so is more effective and efficient than using intermediaries. F. Global Reach, 24/7 Access, and Instantaneous Delivery With the internet, typically there is no extra cost entailed in making information, digital goods, or services available anywhere one can gain access to the web—literally, global reach, making the offering available 24 hours per day, seven days per week, 52 weeks per year and, in some cases, providing instantaneous delivery. In our increasingly time-pressed world, access and service like this can be of great value to customers. G. Are These Digital World Fundamentals Opportunities or Threats? Most marketers can choose to take advantage of one or more of the fundamental attributes and benefits offered by today’s digital and social networking technologies. To that extent, these technologies constitute opportunities available to marketers who employ them. Viewed differently, however, they raise complex ethical issues, and they also present potentially significant threats: The fact that the variable cost for syndicated goods approaches zero sounds good, until one realizes that for most products, price, over the long run, is not far from variable cost. There are few barriers to entry, and many internet strategies are easily imitated. Other threats include privacy and security issues, which can drive away customers rather than attract them is they are not handled with care. H. First-Mover Advantage: Fact or Fiction? In the internet gold rush in the late 1990s, and again in the later rush to build social networking sites, the key to success was said to be first-mover advantage. The first firm to establish a significant presence in each market niche would be the one that succeeded. Being the first mover can bring some potential advantages, but not all first movers are able to capitalize on the advantages. Thus, many are surpassed by later entrants. V. Developing a Strategy for a Digitally Networked World: A Decision Framework A. Marketing Applications for a Digitally Networked World The consumer experience process is a six-stage process that begins with communicating one’s wants and needs to prospective sellers; moving through the awareness, purchase, and delivery processes; obtaining any necessary service or support after the purchase to support its use or consumption; and ultimately sometimes returning or disposing of the product. Customers first provide information about their needs to sellers, whose customer insight permits them to develop goods or services intended to meet the customer’s needs. While there may be several back-and-forth iterations in the insight stage, as new product developers invent and refine their product ideas, ultimately some good or service is developed, and information about the product—promotion, customer acquisition, and brand building—then flows to customers to inform and encourage them to buy. If the customer likes what is offered, a transaction—an agreement to buy—ensues, requiring that information about pricing, terms, delivery, and so on flows to the customer, and cash—either now or upon delivery—flows the other way. With a transaction consummated, delivery of the good or service is made, with the product flowing to the customer and money or other compensation flowing to the seller. But the seller’s job is not yet done for the customer may need some kind of customer support or service during use, in which case additional information may flow in either direction or additional goods or services may flow to the customer, possibly in exchange for additional revenue. Finally, the customer may need to return, dispose of, or discontinue use of the good or service, at which point the product may be returned to the seller, cash may flow back to the customer (as a result of the product’s return or some kind of trade-in, perhaps), and another transaction—with this or another seller—may ensue, thereby repeating much of the process. Applications for Customer Insight Digital and social networking technologies generate the insight essential to the development of compelling new products in the following ways: Sifting through the trove of data posted daily on social networking sites—and providing it in an organized manner to customers willing to pay for it—is becoming a big business. In some industries, keeping track of what customers are saying about your business can be crucial. Marketing researchers are increasingly turning to the internet to conduct marketing research due to its cost-cutting, time-saving advantages over traditional survey methods. Traditional researchers debate the web’s merits on a number of dimensions: In terms of representativeness of the current makeup of the web audience, somewhat whiter, richer, younger, and more educated than the population as a whole In terms of self-selection biases, where people volunteer to participate in web-based polls In terms of randomness, or lack thereof, of web samples Applications for Product Promotion, Customer Acquisition, and Brand Building The tools that today’s au courant web marketers use comprise a variety of time-tested tactics like banner ads, search engine marketing (SEM), search engine optimization (SEO), e-mail marketing, blogs, and promotional websites. SEM and SEO enable marketers to take best advantage of consumers’ search efforts on search engines. The confluence of GPS technology and mobile phones makes it possible for marketers to deliver promotional messages to customers who are nearby. Though the commercial potential of video search has not yet been widely tapped, some observers believe that it is a plausible candidate on the short list for the web’s “next big thing.” Applications for Conducting Transactions Dynamic pricing is a controversial system that gauges a customer’s desire to buy, measures his means, and sets prices accordingly. Another arena where internet and mobile transactions are growing in number is banking, with or without banks. With services like Google Wallet on an Android phone, the user simply taps her phone at a point of sale terminal, listens for the beep, and the transaction is done in seconds. With near field technology (NFT), there is no more swiping a credit card or scrawling your name at the terminal. Applications for Delivering Digital Products An increasing array of goods and services can be digitized and thereby delivered to customers via any digital medium, including the internet, satellites, and mobile telephones. Health care appears to be an arena where digital delivery offers significant benefits. A fast-expanding array of telemedicine applications, some using two-way video, is bringing medical expertise to the most remote places. Delivering products digitally is not confined to consumer marketing. An entire industry , software-as-a-service (SaaS) has sprung up to deliver the benefits of software without the hassle involved in owning and maintaining the software itself. Application for Customer Service and Support: Savvy marketers know that, for all the hoopla about acquiring new customers, the real driver of the bottom line is the ability to profitably retain existing ones and that effective, responsive customer service is a key ingredient in doing so. They also know that customer retention is a competitive necessity. The growing number of web-based or app-based customer service applications offers the tantalizing combination of better service and significant cost savings. The trick is to focus on the customer service benefits first, rather than mere cost cutting. One myth some companies have bought into is that the internet is a self-service medium. They assume that they can let customers do all the work, but most customers really do not want to do more. One solution is coproduction, in which companies carefully consider which burdens they can remove from the customer, using digital technologies, and which customers can perform, assessing costs and benefits to both parties. Applications for Product Return and Disposal Customers’ experiences with goods and some services do not end until the products are consumed, returned, or disposed of. Some companies have found ways to use digital technologies to facilitate these processes. B. Developing Digital World Marketing Strategies: The Critical Questions Can We Digitize Any or All of the Necessary Flows at Each Stage in the Consumer Experience Process? In considering whether to employ new digital technologies at any stage of the consumer experience process, a company should ask whether any of the flows—information, goods or services, or cash—can be digitized. For cash, the answer is an automatic yes. For goods and services the question is more difficult. Text, audio, and visual images (moving or still) can be digitized, as can books, music, photos, and, given enough bandwidth, movies and other videos. But, not taste, fragrance, etc. Can We Do So First and/or In a Proprietary Way? A key question in deciding whether or not to employ a new digital application is whether one can do so in a proprietary way, thereby deterring imitation, or do so with a sufficient head start so that competitive advantage can be established before others follow. How Valuable and How Time-Critical are What Kinds of Information to the Recipient? The more valuable and time-critical the information, the more sensible it is to invest in digital applications to provide easy, timely, 24/7 access to those who can benefit from the information. Can Digital and Social Networking Tools Reach and Build Relationships with Customers in the Target Market? Simply, reaching customers with digital tools may not be enough, especially for marketers of commodity-like products. Going beyond reach to build mutually beneficial relationships may be what is needed. Are Digital Tools Measurably Effective and Efficient Compared to Other Solutions? Marketers’ concerns over the effectiveness and efficiency of their websites have led to the development of web analytics, software solutions that monitor and summarize website usage patterns. The technology can uncover a variety of problems that can plague websites: Cumbersome navigation Content that cannot be easily found Underperforming search engine strategies Unprofitable online marketing partnerships. The result of these analyses can improve customer satisfaction and response to the website, strengthen the marketer’s hand in negotiating terms of partnership deals, and even identify new market segments that might be better served with tailored sites. Setting SMART objectives that the latest tools or activities are intended to meet—specific, measurable, attainable, relevant, and timebound—and running cost-benefit analyses to assess their likely performance are necessary for making go/no-go decisions and for prioritizing which initiatives should be pursued first. VI. Managing Digitally Networked Strategies: The Talent Gap Setting out the opportunities that new digitally networked technologies provide—for almost any company, of any size, in any industry, anywhere—and the fundamental principles and forces driving these technologies is easy, relatively speaking, as is providing conceptual frameworks for thinking about the issues and trade-offs involved. A much more difficult challenge is finding the people to manage and lead the necessary efforts and initiatives in this complex and rapidly changing arena, especially when it comes to marketing, rather than purely technological issues. It is difficult to reach a wide audience with many of today’s highly targeting tools as well as to figure out how to buy the new media efficiently. Changing habits is never easy, for marketers or for anyone else. VII. Developing Strategies to Serve Digital And Social Networking Markets A. Serving the Digitally Networked Markets of Tomorrow Internet or social networking entrepreneurs should consider the various ways in which revenue can be generated on the web or in other settings such as mobile phones. Understanding one’s revenue model and being willing to change it as market and technological conditions warrant are essential. Such entrepreneurs must ask not what can I sell but what do today’s and tomorrow’s customers need, and how and where they might want to consume what I have to offer? Would-be entrepreneurs must realize that barriers to entry are incredibly low in this new world. It is not really the ideas that count. What matters is the team that will execute an idea to deliver the performance and value that customers, whether businesses or consumers, or even potential acquirers of the nascent business want and will pay for. Thus, execution is key. End of Chapter Discussion Questions and Answers As director of marketing of a medium-sized Canadian sporting goods manufacturer that produces helmets for use in sports, such as cycling, skiing, hockey, and football, you have been considering using the internet as a marketing tool. Although your helmets are sold in retail stores and to schools and athletic programs across Canada, you believe the company could reach a bigger audience and sell more helmets if the company also sold the product online at the company’s website. What arguments would you use to convince the CEO that online marketing is a good strategy? Answer: Arguments for Implementing Online Marketing Strategy: 1. Increased Market Reach: • Wider Audience: Selling helmets online will allow us to reach a broader audience beyond retail stores and schools. • Global Access: The internet provides access to customers across Canada and potentially worldwide, expanding our market reach. 2. Enhanced Customer Convenience: • 24/7 Accessibility: Online sales offer customers the convenience of purchasing helmets anytime, anywhere, without being restricted by store hours. • Ease of Purchase: Customers can browse through our product range, compare features, and make purchases with just a few clicks, enhancing their overall shopping experience. 3. Expanded Sales Channels: • Diversified Sales Channels: Adding online sales to our existing retail and institutional sales channels will diversify our sales strategy, reducing dependency on any single channel. • Direct-to-Consumer Sales: Online sales will enable us to establish direct relationships with consumers, eliminating intermediaries and increasing profit margins. 4. Cost Efficiency: • Reduced Distribution Costs: Selling online eliminates the need for physical storefronts, reducing overhead costs associated with retail space, utilities, and staffing. • Streamlined Operations: Online sales allow for automated order processing, inventory management, and customer service, leading to operational efficiency and cost savings. 5. Data-Driven Marketing: • Customer Insights: Online sales provide valuable customer data and insights, allowing us to understand customer preferences, behavior, and trends. • Targeted Marketing: We can use data analytics to personalize marketing efforts, target specific customer segments, and tailor promotions based on customer preferences. 6. Competitive Advantage: • Stay Ahead of Competitors: Many of our competitors are already selling online. By establishing an online presence, we can remain competitive and capture market share in the digital space. • Brand Visibility: An online presence enhances our brand visibility and credibility, making us more accessible and relevant to modern consumers. 7. Adaptation to Digital Trends: • Align with Digital Shift: With the increasing trend of online shopping, it's essential for us to adapt and meet the evolving preferences of our customers. • Future-Proofing: Investing in online marketing now will future-proof our business and ensure we remain relevant and competitive in the digitally networked world. Conclusion: Implementing an online marketing strategy will not only expand our market reach and enhance customer convenience but also improve cost efficiency, provide valuable customer insights, and ensure our competitiveness in the digital age. It's a strategic move that aligns with current market trends and positions us for future success. In meeting with the CEO of the helmet manufacturer, you have been asked to outline the possible threats of selling the product online. Explain. Answer: Possible Threats of Selling Helmets Online: 1. Channel Conflict: • Retailer Relationships: Selling helmets online may strain relationships with existing retail partners who fear competition from our online sales channel. • Loss of Retailer Support: Retailers may retaliate by reducing shelf space, promoting competitor products, or discontinuing our products altogether. 2. Brand Dilution and Quality Concerns: • Brand Reputation: Without physical interaction, customers may perceive online purchases as riskier, leading to concerns about product quality and authenticity. • Negative Reviews and Feedback: Negative online reviews or experiences can quickly tarnish our brand reputation and erode consumer trust. 3. Logistical Challenges: • Shipping and Handling: Helmets are bulky and may incur high shipping costs, reducing price competitiveness and eroding profit margins. • Product Damage: Helmets require careful handling during shipping to ensure they arrive undamaged, which can be challenging to guarantee. 4. Customer Experience: • Fit and Comfort Concerns: Customers may be hesitant to purchase helmets online due to concerns about fit, comfort, and safety. • Limited Customer Interaction: Online sales lack the personalized assistance and guidance that customers may need when choosing the right helmet for their needs. 5. Data Security and Privacy: • Cybersecurity Risks: Online transactions involve the exchange of sensitive customer information, increasing the risk of data breaches and cyberattacks. • Trust Issues: Customers may hesitate to provide personal and financial information online, impacting their willingness to make purchases. 6. Competitive Landscape: • Increased Competition: Selling online opens us up to competition from both traditional and online-only retailers, potentially reducing our market share and pricing power. • Price Wars: Online markets are often price-driven, leading to potential price wars that could erode profit margins. 7. Regulatory Compliance: • Legal and Regulatory Requirements: Selling helmets online may subject us to additional legal and regulatory requirements, including product safety standards, consumer protection laws, and data privacy regulations. 8. Technology Dependence: • Reliance on Digital Infrastructure: Our ability to sell online is dependent on the reliability of digital platforms, internet connectivity, and e-commerce technologies. Any disruptions in these areas could impact sales. Conclusion: While selling helmets online offers numerous benefits, including expanded market reach and increased sales potential, it also presents several challenges and threats that need to be carefully considered and addressed. By proactively addressing these threats, we can mitigate risks and ensure a successful online sales strategy. You have been hired to do some marketing research for a candy company that sells its products mainly to kids that represent all races and economic levels. The company is leaning toward using the internet to conduct the research. Its reasoning is that web-based marketing research is easier, faster, and cheaper than more traditional methods. Why might you persuade the company to think otherwise? Answer: Reasons to Reconsider Web-Based Marketing Research: 1. Limited Representation: • Digital Divide: Web-based research may exclude segments of the population that do not have internet access, potentially skewing the results. • Underrepresented Demographics: Kids from lower-income families or rural areas may have limited access to the internet, leading to a biased sample. 2. Parental Oversight and Consent: • Child Privacy Concerns: Conducting online research with kids may raise privacy concerns, requiring parental consent and oversight. • Ethical Considerations: Collecting data from children online may raise ethical questions about informed consent and data privacy. 3. Quality of Responses: • Limited Attention Span: Kids may not engage with online surveys or research activities as attentively as adults, leading to less reliable responses. • Difficulty in Understanding Questions: Complex survey questions or tasks may be challenging for children to understand without face-to-face guidance. 4. Lack of Control: • Response Accuracy: Online research lacks the control and supervision available in traditional methods, making it difficult to ensure the accuracy and reliability of responses. • Influence of External Factors: Kids may be influenced by external factors such as parental supervision or distractions when participating in online research. 5. Ethical Considerations: • Manipulative Advertising: Online research may blur the line between research and advertising, potentially exposing kids to manipulative marketing tactics. • Vulnerability to Influence: Children are more susceptible to online persuasion and may not fully understand the purpose of the research or the implications of their responses. 6. Complexity of Research Objectives: • In-depth Insights: Some research objectives may require face-to-face interactions to gain deeper insights into kids' behaviors, preferences, and motivations. • Observational Research: Observing kids in real-life settings may provide richer data than online surveys or questionnaires. Conclusion: While web-based marketing research offers advantages in terms of ease, speed, and cost, it may not be the most suitable method for researching kids, especially considering privacy concerns, data accuracy, and the need for parental oversight. A combination of online and traditional research methods may be more effective in capturing a comprehensive understanding of kids' preferences and behaviors. What characteristics are common among industries that are highly susceptible to being revolutionized by digital technologies? Answer: Common Characteristics of Industries Susceptible to Digital Revolution: 1. Information Intensive: • Industries that rely heavily on information processing, storage, and dissemination are highly susceptible to digital revolution. • Examples include media, publishing, telecommunications, and financial services. 2. High Interaction with Customers: • Industries that have direct and frequent interaction with customers are prone to digital disruption. • Sectors such as retail, hospitality, travel, and entertainment are highly impacted by digital technologies. 3. Disintermediation Potential: • Industries where intermediaries play a significant role in distribution or service delivery are vulnerable to disintermediation. • Digital technologies enable direct interaction between producers and consumers, bypassing traditional intermediaries. • Examples include e-commerce platforms disrupting traditional retail and online travel agencies impacting the travel industry. 4. Rapid Technological Advancements: • Industries that experience rapid technological advancements are more likely to be revolutionized by digital technologies. • Sectors such as information technology, software development, and electronics are continuously evolving, leading to frequent disruptions. 5. Data-Centric Operations: • Industries that rely on data analysis, data-driven decision-making, and personalized services are highly influenced by digital technologies. • Sectors like healthcare, education, and marketing leverage data analytics and AI to enhance services and operations. 6. Flexible Business Models: • Industries with flexible business models that can quickly adapt to changing market dynamics are more likely to embrace digital transformation. • Companies that prioritize innovation, agility, and digital integration can leverage technology for competitive advantage. 7. Global Connectivity: • Industries that operate on a global scale and rely on global connectivity are significantly impacted by digital technologies. • Digital platforms enable global reach, collaboration, and communication, affecting sectors like manufacturing, logistics, and supply chain management. 8. Consumer Behavior Changes: • Industries affected by changes in consumer behavior and preferences are prone to digital disruption. • Shifts towards online shopping, digital entertainment, and mobile banking have transformed industries like retail, media, and finance. Conclusion: Industries characterized by information intensity, high customer interaction, potential for disintermediation, rapid technological advancements, data-centric operations, flexible business models, global connectivity, and changes in consumer behavior are highly susceptible to being revolutionized by digital technologies. Recognizing these characteristics is crucial for businesses to proactively adapt and thrive in the digitally networked world. Chapter 12 Organizing and Planning for Effective Implementation I. “Electrolux—Organizing to Rule the World of Household Appliances” discusses the strategies adopted by Electrolux, the Swedish household appliances giant, to become a visible brand in the global market. II. Strategic Challenges Addressed in Chapter 12 This chapter examines several questions related to the second aspect of strategic fit—the issue of organizational fit—the fit between a business’s competitive and marketing strategies and the organizational structures, policies, processes, and plans necessary to effectively implement those strategies. For companies with multiple business units or product lines, what is the appropriate administrative relationship between corporate headquarters and the individual SBUs? Within a given business unit, whether it is part of a larger corporation or a one-product entrepreneurial start-up, what organizational structures and coordination mechanisms are most appropriate for implementing different competitive strategies? How should organizational structures and policies be adjusted, if at all, as an organization moves into international markets? Given the importance of formal plans as tools to aid implementation and control, the last part of this chapter returns to the planning framework introduced briefly in Chapter 1. The chapter also examines the content of effective marketing plans in detail and reviews the strategic decisions involved in formulating that content. III. Designing Appropriate Administrative Relationships for the Implementation of Different Competitive Strategies The three aspects of the corporate-business unit relationship that can affect the SBU’s success in implementing a particular competitive strategy are: The degree of autonomy provided each business unit manager The degree to which the business unit shares functional programs and facilities with other units The manner in which the corporation evaluates and rewards the performance of its SBU managers A. Business-Unit Autonomy Prospector business units are likely to perform better on the critical dimensions of new product success and increases in volume and market share when organizational decision making is relatively decentralized and the SBU’s managers have substantial autonomy to make their own decisions. However, one caveat attached to the preceding generalization is that, high levels of autonomy and independence can lead to coordination problems across business units. Low-cost defender SBUs perform better on ROI and cash flow by giving their managers relatively little autonomy. The relationship between autonomy and the ROI performance of differentiated defenders is more difficult to predict. B. Shared Programs and Facilities Some firms attempt to avoid the trade-off between efficiency and adaptability by designing relatively small, narrowly focused business units, but then having two or more units share functional programs or facilities. Sharing resources can be a problem for prospector business units. However, functional independence usually facilitates good performance for prospector businesses. The increased efficiencies gained through sharing functional programs and facilities often boost the ROI performance of low-cost defender SBUs. The impact of shared programs on the performance of differentiated defenders is more difficult to predict because they often must modify their products and marketing programs in response to changing market conditions to maintain their competitive advantage over time. C. Evaluation and Reward System Increasingly, companies around the world are adopting some form of pay-for-performance compensation scheme. The question is: Which dimensions of performance should be rewarded? For defender businesses in relatively mature markets, particularly those competing as low-cost defenders, operating efficiency and profitability tend to be most important objectives. In prospector businesses, evaluation and reward systems that place relatively more emphasis on sales volume, market share objectives, or on the percentage of volume generated by new products may be more appropriate. IV. Designing Appropriate Organizational Structures and Processes for Implementing Different Strategies Successful implementation of a given strategy is more likely when the business has the functional competencies demanded by its strategy and supports them with substantial resources relative to competitors; is organized suitably for its technical, market, and competitive environment; and has developed appropriate mechanisms for coordinating efforts and resolving conflicts across functional departments. A. Functional Competencies and Resource Allocation Competence in marketing, sales, product R&D, and engineering is critical to the success of prospector businesses because those functions play pivotal roles in new product and market development and thus must be supported with budgets set at larger percentage of sales than their competitors. The bottom-up strategic planning systems are particularly well-suited to prospector businesses operating in unstable environments. In low-cost defender businesses, the functional areas most directly related to operating efficiency play the most crucial roles in enabling the SBU to attain good ROI performance. B. Additional Considerations for Service Organizations Service organizations—and manufacturers that provide high levels of customer service as part of their product offering—often need some additional functional competencies because of the unique problems involved in delivering quality service. Competence in human resource development is crucial for service businesses pursuing prospector strategy—and perhaps also for defenders and analyzers who differentiate their offerings on the basis of good service—than for those focused primarily on efficiency and low cost. C. Organizational Structures Three structural variables are important in shaping both a SBU’s and its marketing department’s performance within the context of a given competitive strategy: Formalization—degree to which formal rules and standard policies and procedures govern decisions and working relationships Centralization—location of decision authority and control within an organization’s hierarchy Specialization—division of tasks and activities across positions within the organizational unit Prospector business units and their marketing departments are likely to perform better when they are decentralized, have little formalization, and are highly specialized. Differentiated defenders perform best when their organizational structures incorporate moderate levels of formalization, centralization, and specialization. Several common organizational designs incorporate differences in both the structural variables—formalization, centralization, and specialization—and the mechanisms for resolving inter functional conflicts. Functional Organizations At the SBU level, managers of each functional department report to the general manager. Because top managers perform their coordination activities across all product-markets in the SBU, there is little specialization by product or customer type. These characteristics make the functional form simple, efficient, and particularly suitable for companies operating in stable and slow-growth industries where the environments are predictable. Thus, the form is appropriate for low-cost defender SBUs attempting to maximize their efficiency and profitability in mature or declining industries. The simplicity of the functional organization also makes it the most common organizational form among entrepreneurial start-ups. Product Market Organizations When a company or SBU has many product-market entries, the simple functional form of organization is inadequate. This form adds an additional layer of managers to the marketing department, for example, usually called product managers, brand managers, or marketing managers, each of whom has the responsibility to plan and manage the marketing programs and to coordinate the activities of other functional departments for a specific product or product line. A product management structure decentralizes decision making while increasing the amount of product specialization within the SBU. It is more appropriate for businesses pursuing differentiated defender and analyzer strategies, particularly when they operate in industries with complex and relatively unstable market and competitive environments. Product management organizations have a number of advantages: The ability to identify and react quickly to threats and opportunities individual product-market entries face Improved coordination of functional activities within and across product-markets Increased attention to smaller product-market entries that might be neglected in a functional organization A product management organization also has shortcomings: The major one is the difficulty of obtaining the cooperation necessary to develop and implement effective programs for a particular product given that a product manager has little direct authority. The environment facing product managers is changing drastically. Market Management Organizations In some industries, a SBU may market a single product to a large number of markets where customers have different requirements and preferences. The intermediaries and marketing activities involved in selling to different markets are so different that it makes sense to have a separate marketing manager in charge of each market. Matrix Organizations A business facing an extremely complex and uncertain environment may find a matrix organization appropriate. The matrix form brings together two or more different types of specialists within a participative coordination structure. The matrix form of organization particularly suits prospector businesses and the management of new product development projects within analyzer or differentiated defender businesses. D. Recent trends in Organizational Design Organizations will increasingly emphasize the managing of business processes in contrast to functional areas. Managing processes will make the organization essentially horizontal—flat and lean versus a vertical or hierarchical model. The use of self-managing teams is increasing. Regardless of the form of worker self-management, all are based on the concept of empowerment—the theory that those doing the work should have the means to do what it takes to please the customer. In the future, many companies will use teams as the basis for collaborative networks that link thousands of people together with the help of a variety of new technologies. Not all collaborative networks are successful, especially those involving joint ventures. E. Organizational Adjustments as Firms Grow and Markets Change There are five key drivers that help managers decide when the time has come to restructure an organization, and what new structure should replace the old one: Customer needs Informational requirements of the sales and marketing personnel charged with meeting those needs Ability of a given structure to motivate and coordinate the kinds of activities that market conditions require Available competencies and resources Costs Growing firms or those serving rapidly changing markets are likely to need to rethink—and perhaps change—the structure of their sales and marketing organizations frequently. F. Organizational Designs for Selling in Global Markets Little or No Formal Organization Early on in a firm’s international involvement, the structure ranges from the domestic organization handling international transactions to a separate export department. The latter may be tied to the marketing department or may be a freestanding functional department. An International Division To avoid discriminating against international customers in comparison with domestic customers, an international division is often established to house all international activities, most of which relate to marketing. Global Structures There are a variety of global types, of which the simplest replicates the firm’s basic functional departments. By far the most common global structure is one based on products, which translates into giving SBUs worldwide control over their product lines. The area structure is a popular global organization and is essentially appropriate when there is considerable variance across markets regarding product acceptance and marketing activities. Some companies use a hybrid organization typically is some combination of the functional, product, or area types of structure. Decision-Making and Organizational Structure Organizational structures can be centralized or decentralized in terms of decision making. V. Marketing Plans: The Foundation for Implementing Marketing Actions A. The Situation Analysis Although many marketing plans start with a brief executive summary of their contents, the situation analysis is typically the first substantive section in which the marketing manager details his or her assessment of the current situation. Based on these analyses, the manager may then call attention to one or more key issues, major opportunities, or threats that should be dealt with during the planning period. Market Situation Here data are presented on the target market. Total market size and growth trends should be discussed, along with any variations across geographic regions or other market segments. Marketing research information also might be presented concerning customer perceptions and buying-behavior trends. Competitive Situation This section identifies and describes the product’s major competitors in terms of their size, market share, product quality, marketing strategies, and other relevant factors. It also should discuss the likelihood that other competitors will enter the market in the near future and the possible impact of such entry on the product’s competitive position. Macroenvironmental Situation This section describes broad environmental occurrences or trends that may have a bearing on the product’s future. Past Product Performance If the plan is for an existing product, this part of the situation analysis discusses the product’s performance on such dimensions as sales volume, margins, marketing expenditures, and profit contribution for several recent years. Sales Forecast and Other Key Assumptions The assessment of the current situation also typically includes estimates of sales potential, sales forecasts, and other evidence or assumptions underlying the plan. Such market measurements are particularly critical as the foundation for marketing plans for new goods or services where there is no past history to draw on. B. Key Issues After analyzing the current situation, the product manager must identify the most important issues facing the product in the coming year. These issues typically represent either threats to the future market or financial performance of the product or opportunities to improve those performances. C. Objectives Financial objectives provide goals for the overall performance of the brand and should reflect the objectives for the SBU as a whole and its competitive strategy. The financial goals must then be converted into marketing objectives that specify the changes in customer behavior and levels of performance of various marketing program elements necessary to reach the product’s financial objectives. D. Marketing Strategy The chosen strategy should fit the market and competitive conditions faced by the product and its strategic objectives. It also should incorporate all of the necessary decisions concerning the 4Ps. E. Action Plans The action plan is the most crucial part of the annual marketing plan for ensuring proper execution. The specific actions necessary to implement the strategy for the product are listed, together with a clear statement of who is responsible for each action, when it will be done, and how much is to be spent on each activity. Specific timelines and milestones are also set forth. F. Projected Profit-and-Loss Statement The action plan includes a supporting budget that is essentially a projected profit-and-loss statement. Once approved, the product’s serves as a basis for the plans and resource allocation decisions of other functional departments within the SBU. G. Contingency Plan The manager also might detail contingency plans to be implemented if specific threats or opportunities should occur during the planning period. End of Chapter Discussion Questions and Answers Suppose you have been offered the job of developing and managing a new medical products unit for a major electronics manufacturer. The purpose of the new SBU will be to adapt technology from other parts of the company for medical applications (diagnostic equipment such as CAT scanners, surgical lasers, etc.) and to identify and build markets for the new products the unit develops. The new unit’s performance over the next several years will be judged primarily on its success at developing a variety of new products and its rate of growth in sales volume and market share. Before accepting the job, what assurances would you seek from the company’s CEO concerning the administrative relationships to be established between the new SBU and corporate headquarters? Why? Answer: Assurances Needed from the CEO Concerning Administrative Relationships: 1. Autonomy in Decision Making: • Ensure that the new medical products unit has autonomy in decision-making regarding product development, marketing strategies, and resource allocation. • Seek assurance that the unit will have the flexibility to adapt technology for medical applications and identify new market opportunities without excessive bureaucratic hurdles. 2. Direct Reporting Structure: • Clarify the reporting structure, ensuring that the new SBU directly reports to the CEO or a high-level executive to facilitate quick decision-making and efficient communication. • Avoiding unnecessary layers of hierarchy will expedite the implementation process and allow for rapid responses to market changes. 3. Resource Allocation: • Obtain assurance regarding resource allocation, including adequate funding and access to necessary technology, research, and development resources. • Ensure that the new SBU has sufficient financial and human resources to support its growth objectives and product development initiatives. 4. Cross-Functional Collaboration: • Emphasize the importance of cross-functional collaboration between the new medical products unit and other departments within the organization. • Seek assurances that the SBU will have access to expertise from other parts of the company, such as research and development, engineering, and marketing, to support its product development and market expansion efforts. 5. Performance Evaluation Criteria: • Define clear performance evaluation criteria, focusing on product innovation, sales growth, and market share expansion. • Ensure that the performance metrics align with the unit's objectives and growth targets and that they are periodically reviewed and adjusted as needed. 6. Strategic Alignment: • Confirm that the objectives and strategies of the new SBU align with the overall corporate goals and long-term vision of the organization. • Seek assurances that the unit's initiatives are in line with the company's core competencies and strategic direction. 7. Support for Risk-Taking: • Obtain assurances that the company encourages a culture of innovation and supports risk-taking and experimentation within the new SBU. • Ensure that the organization is willing to tolerate some level of failure as part of the innovation process and that it provides a supportive environment for entrepreneurial initiatives. Conclusion: Before accepting the role of developing and managing the new medical products unit, it is essential to seek assurances from the CEO regarding administrative relationships to ensure that the unit has the necessary autonomy, resources, and support to achieve its growth objectives effectively and efficiently. These assurances will help create an environment conducive to innovation, product development, and market expansion within the organization. Now that you have accepted the job described in question 1, you have been given a $50 million operating budget for the first year. Your first task is to staff the new unit and to allocate your budget across its various functional departments. Although you obviously want to hire good people for every position, which departments require the most competent and experienced personnel, and which departments should receive relatively large shares of the available budget? Why? Answer: Allocation of Budget Across Functional Departments: 1. Research and Development (R&D): • Importance: • R&D is critical for adapting technology for medical applications and developing innovative products. • Allocation Justification: • Allocate a significant portion of the budget to R&D to ensure the development of high-quality, cutting-edge medical products. • Experienced personnel are essential to lead research initiatives, conduct feasibility studies, and drive innovation. 2. Marketing and Sales: • Importance: • Effective marketing and sales strategies are essential for identifying and building markets for new products. • Allocation Justification: • Allocate a substantial portion of the budget to marketing and sales to promote new products, establish brand presence, and capture market share. • Experienced marketing professionals are needed to conduct market research, develop marketing campaigns, and build relationships with key stakeholders. 3. Product Development: • Importance: • Product development plays a crucial role in translating technological advancements into marketable medical products. • Allocation Justification: • Allocate a significant portion of the budget to product development to ensure the timely and successful launch of new products. • Experienced engineers, designers, and product managers are necessary to oversee the product development process, from concept to commercialization. 4. Quality Assurance and Regulatory Compliance: • Importance: • Ensuring product quality and regulatory compliance is vital in the healthcare industry to meet industry standards and regulations. • Allocation Justification: • Allocate a portion of the budget to quality assurance and regulatory compliance to maintain product quality and ensure adherence to regulatory requirements. • Experienced professionals are needed to navigate complex regulatory landscapes and ensure that products meet all necessary standards and certifications. 5. Operations and Supply Chain Management: • Importance: • Efficient operations and supply chain management are essential for timely product delivery and cost-effective manufacturing. • Allocation Justification: • Allocate a portion of the budget to operations and supply chain management to streamline processes, manage inventory, and optimize supply chain efficiency. • Experienced professionals are required to manage production processes, supplier relationships, and distribution channels effectively. Conclusion: While competent and experienced personnel are essential for every department, allocating a significant portion of the budget to research and development, marketing and sales, product development, quality assurance and regulatory compliance, and operations and supply chain management is crucial for the successful establishment and growth of the new medical products unit. These departments play key roles in developing innovative products, promoting them in the market, ensuring regulatory compliance, and delivering them to customers efficiently. As general manager, what type of organizational design would you select for the new SBU described in question 1? Justify your choice in terms of its ability to help the SBU implement its strategy and accomplish its primary objectives. What potential disadvantages—if any—might be associated with your chosen organizational structure? Answer: Organizational Design for the New SBU: For the new Strategic Business Unit (SBU) responsible for developing and managing medical products within the major electronics manufacturer, I would recommend a cross-functional team-based structure . Justification: 1. Flexibility and Innovation: • A cross-functional team-based structure encourages collaboration and information sharing among different functional areas such as R&D, marketing, sales, product development, quality assurance, and operations. • This structure fosters innovation by bringing together individuals with diverse expertise and perspectives to work towards common goals. 2. Speed to Market: • With a focus on adaptability and responsiveness, cross-functional teams can expedite decision-making processes and accelerate product development cycles. • The structure allows for faster responses to market changes and customer needs, facilitating quicker entry into new markets and ensuring timely product launches. 3. Customer Focus: • Cross-functional teams ensure that customer needs and market trends are integrated into every stage of product development and marketing. • This structure enables a customer-centric approach, ensuring that products meet the demands and preferences of target consumers. 4. Efficiency and Resource Optimization: • By eliminating silos and encouraging collaboration, a cross-functional team-based structure reduces redundancy, enhances efficiency, and optimizes resource allocation. • It allows for the seamless integration of functions, streamlining processes and reducing time and resource wastage. Potential Disadvantages: 1. Conflict and Coordination Challenges: • Integrating multiple functions into cross-functional teams may lead to conflicts over goals, priorities, and resource allocation. • Coordination and communication challenges may arise due to the diverse expertise and perspectives within the teams. 2. Decision-Making Delays: • Consensus-based decision-making processes may lead to delays, particularly when there are conflicting viewpoints among team members. • Achieving alignment and agreement among cross-functional teams may require additional time and effort. 3. Managerial Oversight: • Ensuring effective coordination and oversight of cross-functional teams may require strong leadership and managerial skills. • Managers need to ensure that teams remain focused on strategic objectives and that conflicts are resolved efficiently. In conclusion, while a cross-functional team-based structure offers numerous advantages in terms of flexibility, innovation, speed to market, and customer focus, potential disadvantages such as conflict, coordination challenges, decision-making delays, and managerial oversight should be carefully addressed and managed to ensure the successful implementation of the SBU's strategy and objectives. Chapter 13 Measuring and Delivering Marketing Performance I. “Metrics Pay for Walmart” discusses Walmart’s successful use of sophisticated low cost, techniques for the management of information and the implications of their marketing and competitive strategies. II. Strategic Challenges Addressed in Chapter 13 This chapter addresses several critical questions that provide the link between a company’s efforts to plan and implement marketing strategies and the actual results those strategies produce: How can we design strategic monitoring systems to make sure our strategies remain in sync with the changing market and competitive environment in which we operate? How can we design systems of marketing metrics to ensure that the marketing results we plan for are the results we deliver? The chapter develops a five–step process for monitoring and evaluating performance on a continuous basis. It then applies the process to the issue of strategic control: how can we monitor and evaluate our overall marketing strategy to ensure that it remains viable in the face of changing market and competitive realities? Next, it applies the process to tracking the performance of a particular product-market entry and to the marketing actions taken to implement its marketing plan, or marketing performance measurement. Finally, it shows how marketing audits can be used periodically to link the overall performance measurement process—that for both strategic control and for measuring current marketing performance—with marketing planning. III. Designing Marketing Metrics Step By Step The performance measurement system monitors the extent to which a firm is achieving its objectives. The performance measurement process has five steps: Setting performance standards Specifying feedback Obtaining data Evaluating data Taking corrective action A. Setting Performance Standards Performance standards derive largely from the objectives and strategies set forth at the SBU and individual product-market entry level. They generate a series of performance expectations for profitability (return on equity, return on assets managed, gross margins, or operating margins), market share, and sales. Recent years have witnessed a shift from primarily using financially based performance measures to treating them as simply part of a broader array of marketing metrics. To be of any value, performance standards must be measurable; they must be tied to specific time periods, particularly when they concern a management compensation system. The SMART acronym (specific, measurable, attainable, relevant, and timebound) is a useful framework for setting performance standards. Of particular importance is whether a business or business unit as a whole and its individual product-market entries have set forth milestone achievement measures based on the strategies that were originally developed. For example, in a venture capital backed start-up, a short-term dashboard will be set up to track such metrics as the cost of acquiring a customer, sales and gross margin by product or product line, and repeat purchase rates. Return on Marketing Investment Increasingly these days, investors, boards, CFOs, and others are insisting that marketing managers do a better job of measuring the returns their marketing programs deliver on the investment therein. Doing so is important for a variety of reasons, including demonstrating the overall and program-by-program effectiveness of marketing expenditures, choosing among various marketing tactics or media, and obtaining the financial resources necessary to support top-line sales growth. The growing use of online promotional strategies, most of which are eminently measurable, is making this task more doable than it used to be. Profitability Analysis In brief, profitability analysis requires that analysts determine the costs associated with specific marketing activities to find out the profitability of different market segments, products, customer accounts, and distribution channels. Profitability (or cash flow) is probably the single most important measure of performance, but it has the following limitations: Many objectives can best be measured in non-financial terms Profit is a short-term measure and can be manipulated by taking actions that may prove dysfunctional in the longer term Profits can be affected by factors over which management has no control Analysts can use direct or full costing in determining the profitability of a product or market segment. In full costing, analysts assign both direct, or variable, and indirect costs to the unit of analysis. Indirect costs involve certain fixed joint costs that cannot be linked directly to a single unit of analysis. Direct costing involves the use of contribution accounting. Companies are increasingly turning from traditional accounting methods, which identify costs according to various expense categories, to activity-based costing (ABC), which bases costs on the different tasks involved in performing a given activity. Customer Satisfaction: Measures relating to customer preferences and satisfaction are essential as an early warning of impending problems and opportunities. Developing meaningful measures of customer satisfaction can be done in various ways: One way involves understanding and measuring the criteria used by customers to evaluate the quality of the firm’s relationship with them. Another approach favored by some companies is asking customers one simple question: How likely is it that you would recommend us to a friend or colleague? B. Specifying and Obtaining Feedback Data Someone must gather and process considerable data to obtain the performance measure, especially at the product-market level. The sales invoice or other transaction records are the basic internal source of data because they provide a detailed record of each transaction. Another source, and typically the most expensive and time-consuming, involves undertaking one or more marketing research projects to obtain needed information. C. Evaluating Feedback Data Management evaluates feedback data to find out whether there is any deviation from the plan and, if so, why. Typically, managers use a variety of information to determine what the company’s performance should have been under the actual market conditions that existed when the plan was executed. At the line-item level, whether for revenue or expenses, results are compared with standards set in step one of the control process. D. Taking Corrective Action The last step in the control process concerns prescribing the needed action to correct the situation. In many cases, it is difficult to identify the cause of the problem: Almost always, an interactive effect exists among the input variables as well as the environment. There is also the problem of delayed responses and carryover effects. IV. Design Decisions for Strategic Monitoring Systems A. Identifying Key Variables To implement strategic monitoring, a company must identify the key variables to monitor, which are usually the major assumptions made in formulating the strategy. The key variables to monitor are of two types: Those concerned with external forces Those concerned with the effects of certain actions taken by the firm to implement the strategy B. Tracking and Monitoring The next step is to specify what information or measures are needed on each of the key variables to determine whether the implementation of the strategic plan is on schedules—and if not, why not. The firm can use the plan as an early-warning system as well as a diagnostic tool. The advent of the Internet, social networks, graphical information systems, and other digital tools for gathering and dissemination has made it easier for sometimes far-flung managers to monitor strategic developments. C. Strategy Reassessment Strategy reassessment can take place at periodic intervals—for example, quarterly or annually, when the firm evaluates its performance to date along with major changes in the external environment. A strategic monitoring system can also alert management of a significant change in its external or internal environment. V. Design Decisions for Marketing Metrics Designing an informational dashboard for the top management team provides a clear signal about the kinds of data to which the rest of the organization should attend. The four key questions, or design parameters, of marketing performance measuring systems that need to be addressed are: Who needs what information? When and how often is the information needed? In what media and in what format(s) or levels of aggregation should the information be provided? What contingencies should be planned for? A. Who Needs What Information? Top management, functional managers in other parts of the organization, and marketing managers responsible for the various marketing-mix activities, need sales information. Sales Analysis A sales analysis involves breaking down aggregate sales data into categories such as products, end-user customers, channel intermediaries, sales territories, and order size. The objective of a sales analysis is to find areas of strength and weakness An important decision in designing the firm’s sales analysis system concerns which units of analysis to use. Most companies analyze data in the following groupings: Geographical areas Product, package size, and grade Customer Channel intermediary Method of sale Size of order Sales Analysis by Territory The first step in a sales territory analysis is to decide which geographical control unit to use. Analysts can compare actual sales by county against a standard. Analysts can then single out territories that fall below standard for special attention. Sales Analysis by Product Before deciding which products to abandon, management must study variables such as market-share trends, contribution margins, scale effects, and the extent to which a product is complementary with other items in the line. A product sales analysis is particularly helpful when combined with account size and sales territory data. Sales Analysis by Order Size Analysis by order size locates products, sales territories, and customer types and sizes where small orders prevail. Such an analysis may leads to setting a minimum order size, charging extra for small orders, training sales reps to develop larger orders, and dropping some accounts. Sales Analysis by Customer Sales analysis by customer typically shows that a relatively small percentage of customers account for a large percentage of sales. The key to sales analysis by customer is to find useful decomposition of the sales data that are meaningful in a behavioral way. Line-Item Margin and Expense Analysis Budgeted revenues and profits serve as objectives against which to measure performance in sales, profits, and actual costs. Budget analysis requires that managers continuously monitor marketing expense ratios to make certain the company does not overspend in its effort to reach its objectives. Managers also evaluate the magnitude and pattern of deviations from target ratios. B. SEO and SEM Analysis Search engine optimization (SEO) refers to a set of techniques that helps ensure that a company’s web pages are ranked highly when consumers search for information using a search engine. The search engine’s organic search, as it is called, is driven by propriety algorithms which vary from one search engine to another and are programmed to look for certain things. SEO’s job is to optimize the company’s web pages by, for example, ensuring that commonly searched-for keywords appear where the search engines are programmed to look for them. Search engine marketing (SEM) is a related but fundamentally different activity from SEO. It involves buying keywords for which consumers are likely to search so that one’s paid links come up at or near the top of the paid search listings. For marketers whose websites are intended to deliver completed transactions—booking a week’s stay on the Villa Poggiale site, for example—there is a host of other metrics that the villa’s webmaster should track to measure how effective each of its web pages is. The goal is that the consumer’s journey from the Villa Poggiale landing page to its various other pages ultimately ends up on the booking page with an inquiry at least, or a completed booking, at best. The use of web analytics, which take advantage of the inherent measurability of the web, opens a wide array of possibilities in an exciting new world in which marketing results can be clearly linked to marketing actions. C. When and How Often is the Information Needed? Timeliness is a key criterion for development of a marketing performance measurement system. Managers attend to performance information—whether for sales, margins, expenses—on a periodic basis, since they do not have time or the need to assess the performance of every item at every minute of every day. D. In What Media and in What Format(s) or Levels of Aggregation Should the Information Be Provided? Having good and timely information and reporting it in a manner that it is easy and quick to use are different things. The format or medium in which performance information is presented can make a big difference to the manager using the data. Thoughtful attention to the format in which marketing performance information is reported, to the levels at which it is aggregated, for different kinds of decision purposes, and for different users can provide a company with a significant competitive advantage. E. Does Your System of Marketing Metrics Measure Up? A key issue in developing a set of marketing metrics as part of an overall performance measurement system is getting the metrics aligned with the strategy. F. What Contingencies Should Be Planned For? Identifying Critical Assumptions: Assumptions about events beyond the control of the individual firm but that strongly affect the entry’s strategic objectives are particularly important. Assumptions about industry price levels must be examined in depth because any price deterioration can quickly erode margins and profits. Assumptions about the effects of certain actions taken by the firm to attain its strategic objectives also need to be considered in depth. Once the targeted levels of various primary objectives are reached, there are assumptions about what will happen to sales and share. Determining Probabilities This step consists of assigning to the critical assumptions probabilities of being right. Rank Ordering the Critical Assumptions If assumptions are categorized on the basis of their importance, the extent to which they are controllable, and the confidence management has in them, then the basis for rank ordering the assumptions and drafting the contingency plan has been set forth. Tracking and Monitoring The next step is to specify what information or measures are needed to determine whether the implementation of the action plan is on schedule—and if not, why not. Activating the Contingency Plan This step requires a specification of both the level at which an alert will be called and the combination of events that must occur before the firm reacts. Specifying Response Options The firm’s preplanned specific responses can be difficult to implement, depending in the situation and how it develops. Thus, most firms develop a set of optional responses that are not detailed to any great extent to provide flexibility and ensure further study of the forces that caused the alert. G. Global Marketing Monitoring Global companies typically use the same format for both their domestic and foreign operations, though report frequency and extent of detail can vary by the subsidiary’s size and environmental uncertainties. The great advantage of using a single system is that it facilitates comparisons between operating units and communications between home office and local managers. On the surface, the use of electronic data interchange and the Internet should simplify performance evaluation across countries. While this is true in terms of budget control, it leaves much to be desired in terms of understanding the reasons for any deviations. VI. A Tool for Periodic Assessment of Marketing Performance: The Marketing Audit Marketing audits are growing in popularity, especially for firms with a variety of SBUs that differ in their market orientation. Marketing audits are both a control and planning activity that involves a comprehensive review of the firm’s or SBU’s total marketing efforts cutting across all products and business units. Marketing audits are broader in scope and cover longer time horizons than sale and profitability analyses. A. Types of Audits: Refer to exhibit 13.15 The marketing environment audit requires an analysis of the firm’s present and future environment with respect to its macro components. The objective and strategy audit calls for an assessment of how appropriate these internal factors are, given current major environmental trends and any changes in the firm’s resources. The unit’s planning and control system audit evaluates adequacy of the systems that develop the firm’s product-market entry action plans and the control and reappraisal process. The organization audit deals with the firm’s overall structure, how the marketing department is organized, and the extent of synergy between the various marketing units. The marketing productivity audit evaluates the profitability of the company’s individual products, markets, and key accounts. The marketing functions audit examines in depth, how adequately the firm handles each of the marketing-mix elements. The company’s ethical audit evaluates the extent to which the company engages in ethical and socially responsible marketing. The product manager audit, especially in consumer good companies, seeks to determine whether product managers are channeling their efforts in the best ways possible. VII. Measuring and Delivering Marketing Performance The challenges entailed in measuring expenditures in marketing programs in relation to marketing performance in such a manner as to produce information that is timely, relevant, easy to use, cost effective, useful to managers, and credible across the organization are daunting. But tackling these challenges head-on can make the difference when it comes to the sort of superior returns on investment some companies deliver year after year. It is for this reason that companies are paying increased attention to development of information dashboards that provide people at all levels the information they need to make timely, well-informed decisions about marketing, operational, and other crucial decisions. End of Chapter Discussion Questions and Answers MTS Systems Inc. is a relatively small manufacturer of measurement instruments used to monitor and control automated production processes in a number of different industries, such as autos and aerospace. The firm has 12 salespeople, each of whom calls on companies in a particular industry. While the firm’s sales have increased steadily in recent years, its profits have been relatively stagnant. One problem is that the firm has no information concerning the relative profitability of the various products it makes or the different customers to whom it sells. MTS Systems has hired you as a marketing consultant to design a performance measurement system that will enable the firm to evaluate its performance across the various items in its product line and the various segments of its market. As if you were a marketing consultant, outline the major marketing metrics you would recommend including in such a system. Answer: As a marketing consultant hired by MTS Systems Inc., I would recommend implementing a comprehensive performance measurement system to evaluate the firm's performance across its product line and market segments. Here are the major marketing metrics I would suggest including in the system: 1. Product Profitability Analysis: • Calculate the contribution margin for each product to determine its profitability. • Identify the costs associated with manufacturing, marketing, and distributing each product. • Analyze the sales volume and revenue generated by each product. 2. Customer Profitability Analysis: • Determine the profitability of each customer by calculating the lifetime value (LTV) and comparing it with the cost of acquiring and serving them. • Segment customers based on their purchasing behavior, such as frequency of purchases, order size, and customer loyalty. 3. Market Segment Analysis: • Evaluate the profitability of different market segments by analyzing sales volume, revenue, and costs associated with serving each segment. • Identify the most profitable market segments and allocate resources accordingly. 4. Customer Acquisition and Retention Metrics: • Measure the cost of acquiring new customers (customer acquisition cost • CAC) and retaining existing ones (customer retention cost). • Calculate the customer churn rate to assess the effectiveness of customer retention efforts. 5. Sales Performance Metrics: • Monitor sales performance by tracking sales growth, sales volume, and sales conversion rates. • Analyze sales by region, industry, and individual salesperson to identify areas for improvement. 6. Marketing ROI (Return on Investment): • Evaluate the effectiveness of marketing campaigns by measuring the return on investment for each marketing initiative. • Track key performance indicators (KPIs) such as conversion rates, website traffic, and lead generation. 7. Inventory Management Metrics: • Monitor inventory turnover and inventory holding costs to ensure optimal inventory levels. • Identify slow-moving or obsolete inventory and take appropriate action to minimize costs. 8. Customer Satisfaction and Loyalty Metrics: • Measure customer satisfaction through surveys and feedback mechanisms. • Track customer retention rates and customer lifetime value to assess customer loyalty. By implementing these marketing metrics, MTS Systems Inc. will be able to gain insights into the profitability of its products and customers, identify areas for improvement, and make informed decisions to enhance its overall performance and profitability. What specific types of information would have to be collected and evaluated in order to implement the system you outlined in your answer to question 1? What sources could be used to obtain each necessary type of information? Answer: To implement the performance measurement system outlined in the previous answer, the following types of information need to be collected and evaluated: 1. Product Profitability Analysis: • Information Needed: • Cost of manufacturing, marketing, and distributing each product. • Sales volume and revenue generated by each product. • Sources: • Internal accounting records for cost data. • Sales records and financial statements for revenue and sales volume data. 2. Customer Profitability Analysis: • Information Needed: • Customer purchase history and frequency. • Cost of acquiring and serving each customer. • Sources: • Customer relationship management (CRM) software for customer purchase history. • Sales and marketing expense records for customer acquisition and service costs. 3. Market Segment Analysis: • Information Needed: • Sales volume, revenue, and costs associated with each market segment. • Sources: • Sales records segmented by market segment. • Financial statements for cost data. 4. Customer Acquisition and Retention Metrics: • Information Needed: • Cost of acquiring new customers (CAC) and retaining existing ones. • Customer churn rate. • Sources: • Sales and marketing expense records for CAC. • CRM software for customer churn rate. 5. Sales Performance Metrics: • Information Needed: • Sales growth, volume, and conversion rates. • Sources: • Sales records and reports. • CRM software for conversion rates. 6. Marketing ROI (Return on Investment): • Information Needed: • Cost and revenue data for each marketing initiative. • Key performance indicators (KPIs) such as conversion rates and website traffic. • Sources: • Marketing expense records. • Website analytics tools for KPIs. 7. Inventory Management Metrics: • Information Needed: • Inventory turnover and holding costs. • Data on slow-moving or obsolete inventory. • Sources: • Inventory management system for turnover and holding cost data. • Inventory tracking system for data on slow-moving or obsolete inventory. 8. Customer Satisfaction and Loyalty Metrics: • Information Needed: • Customer satisfaction survey data. • Customer retention rates and customer lifetime value. • Sources: • Customer satisfaction surveys. • CRM software for retention rates and customer lifetime value. By collecting and evaluating these types of information from the specified sources, MTS Systems Inc. will be able to effectively implement the performance measurement system and make data-driven decisions to improve its overall marketing performance and profitability. After finishing your report, including the types of information needed (see question 2), you decide to develop a dashboard of performance metrics to be used by the top management team to evaluate the drivers of the firm’s success. These measures would be used with the system you recommended. Outline the contents of this “addition,” making sure you give examples of your individual recommendations. Answer: To develop a dashboard of performance metrics for the top management team to evaluate the drivers of the firm’s success, the following key performance indicators (KPIs) should be included. These measures will complement the performance measurement system recommended earlier: 1. Overall Profitability Metrics: • Gross Profit Margin: Calculate as (Total Revenue • Cost of Goods Sold) / Total Revenue. • Example: If total revenue is $1,000 and the cost of goods sold is $600, the gross profit margin is (1,000 • 600) / 1,000 = 40%. • Net Profit Margin: Calculate as (Net Profit / Total Revenue) 100. • Example: If net profit is $200 and total revenue is $1,000, the net profit margin is (200 / 1,000) 100 = 20%. 2. Product Performance Metrics: • Contribution Margin by Product: Calculate as (Product Revenue • Product Variable Costs) / Product Revenue. • Example: If product revenue is $500 and variable costs are $300, the contribution margin is (500 • 300) / 500 = 40%. • Product Sales Growth: Year-over-year comparison of product sales revenue. • Example: Product A sales revenue in 2023 was $100,000, and in 2024, it was $120,000, indicating a 20% sales growth. 3. Customer Performance Metrics: • Customer Lifetime Value (CLV): Calculate as (Average Purchase Value Purchase Frequency Customer Lifespan). • Example: If the average purchase value is $50, purchase frequency is 4 times a year, and customer lifespan is 5 years, CLV is $50 4 5 = $1,000. • Customer Acquisition Cost (CAC): Calculate as Total Marketing and Sales Expenses / Number of New Customers Acquired. • Example: If total marketing and sales expenses are $10,000 and 100 new customers were acquired, CAC is $10,000 / 100 = $100. 4. Market Segment Performance Metrics: • Market Segment Growth Rate: Year-over-year comparison of sales growth in different market segments. • Example: Market segment A had sales revenue of $200,000 in 2023 and $250,000 in 2024, indicating a 25% growth rate. • Market Segment Profitability: Calculate as (Segment Revenue • Segment Costs) / Segment Revenue. • Example: If segment revenue is $300,000 and segment costs are $200,000, the profitability is ($300,000 • $200,000) / $300,000 = 33.33%. 5. Sales and Marketing Performance Metrics: • Marketing ROI (Return on Investment): Calculate as (Revenue Generated from Marketing • Marketing Cost) / Marketing Cost. • Example: If revenue generated from marketing is $50,000 and marketing cost is $10,000, ROI is ($50,000 • $10,000) / $10,000 = 4. • Sales Conversion Rate: Calculate as (Number of Sales / Number of Leads) 100. • Example: If there were 500 leads and 50 sales, the conversion rate is (50 / 500) 100 = 10%. 6. Customer Satisfaction and Loyalty Metrics: • Net Promoter Score (NPS): Measure customer loyalty and satisfaction by asking, "On a scale of 0 to 10, how likely are you to recommend our company/product/service to a friend or colleague?" • Example: If 50% of customers rate 9 or 10, 30% rate 7 or 8, and 20% rate 6 or below, the NPS is 50% • 20% = 30. By including these performance metrics in the dashboard, the top management team will have a comprehensive view of the firm's performance across products, customers, market segments, and sales and marketing activities, enabling them to make data-driven decisions to improve the firm's overall success. You are a marketing manager in an SBU of a large consumer food manufacturer. The SBU’s general manager has asked you to conduct a marketing audit of the SBU as a basis for evaluating its strategic and operations strengths and weaknesses. What issues or areas of concern should be covered by your audit? After completing your marketing audit, you are asked to develop a contingency plan for the SBU’s major product line. Provide an outline of what the plan should cover. Answer: Marketing Audit: As a marketing manager in the SBU of a large consumer food manufacturer, conducting a comprehensive marketing audit is crucial for evaluating strategic and operational strengths and weaknesses. The marketing audit should cover the following areas: 1. Market Analysis: • Market size, growth rate, and trends • Market segmentation and target markets • Competitive analysis, including major competitors, their market share, and competitive strategies 2. Product Portfolio Analysis: • Assessment of the SBU's product portfolio • Product life cycle analysis • Product differentiation and positioning strategies 3. Marketing Mix Analysis: • Evaluation of the SBU's current marketing mix (Product, Price, Place, Promotion) • Pricing strategies and their effectiveness • Distribution channels and their efficiency • Promotional strategies and their impact 4. Consumer Analysis: • Understanding consumer behavior and preferences • Customer satisfaction and loyalty • Brand perception and brand equity 5. SWOT Analysis: • Identification of Strengths, Weaknesses, Opportunities, and Threats for the SBU 6. Marketing Performance Metrics: • Measurement of marketing effectiveness using relevant KPIs • Sales performance, market share, ROI, customer acquisition and retention rates, etc. Contingency Plan for Major Product Line: After completing the marketing audit, developing a contingency plan for the SBU's major product line involves the following steps: 1. Identifying Key Issues: • Based on the audit findings, identify key issues and areas of concern for the major product line. 2. Setting Objectives: • Establish clear and measurable objectives for the product line, considering market conditions and business goals. 3. Strategic Options: • Develop strategic options to address the identified issues and achieve the set objectives. • This may include product improvements, pricing adjustments, distribution channel optimization, or promotional campaigns. 4. Risk Assessment: • Evaluate potential risks associated with each strategic option. • Assess the impact of these risks on the product line and the SBU as a whole. 5. Action Plan: • Develop a detailed action plan outlining specific steps to be taken to implement the chosen strategic options. • Assign responsibilities, set timelines, and allocate resources accordingly. 6. Monitoring and Control: • Establish mechanisms for monitoring the implementation of the contingency plan. • Define key performance indicators (KPIs) to track progress and make necessary adjustments if required. By following this structured approach, the SBU can effectively address the challenges identified through the marketing audit and ensure the continued success of its major product line. Instructor Manual for Marketing Strategy: A Decision-Focused Approach Orville C. Walker, John Mullins 9780078028946