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Eighth

Edition Eighth Edition

Marketing Strategy
Marketing
The eighth edition of Marketing Strategy: A Decision-Focused Approach focuses on strategic
issues while providing specific tools and frameworks for making marketing decisions.

This edition addresses four key trends that are sweeping the world of marketing theory and
practice and creating opportunities for college and business-school graduates to bring new
tools and ideas to employers or to their own entrepreneurial ventures. These key trends include:

Strategy
The growing interest among students everywhere in learning what it will take to run their
own companies.

The growing importance of emerging markets such as India, China, Brazil, and Russia on
the global economic stage and the growing realization in companies everywhere that
business today is a global game.

A Decision-Focused Approach

A Decision-Focused Approach
The increasing attention being given in many companies to issues concerning the
measurement of marketing performance and the extent to which marketing activities and
spending contribute to the creation of shareholder value.

MD DALIM 1218035 12/08/12 CYAN MAG YELO BLACK
The growing ubiquity of social networks—Facebook, LinkedIn, Twitter, and the like—
which provide powerful new communication tools for marketers of all kinds, from
companies with goods to sell to political organizations out to change the world.

Perhaps most important, this book—with its focus on strategic decision-making and its web-
savvy insights and real-world global perspective—provides the marketing tools and frameworks
today’s graduates will need to hit the ground running as they take the next steps in their careers.

To learn more about this text, visit www.mhhe.com/walker8e Orville C. Walker, Jr.
John W. Mullins

Mullins
Walker

Marketing Strategy
A Decision-Focused Approach Eighth Edition

Orville C. Walker, Jr.
James D. Watkins Professor of Marketing,
Emeritus
University of Minnesota

John W. Mullins
Associate Professor of Management Practice
in Marketing and Entrepreneurship
London Business School

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MARKETING STRATEGY: A DECISION-FOCUSED APPROACH, EIGHTH EDITION

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY
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Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978-0-07-802894-6
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Library of Congress Cataloging-in-Publication Data

Walker, Orville C.
Marketing strategy : a decision-focused approach/Orville C. Walker, Jr., John W. Mullins.—8th ed.
p. cm.
Includes index.
ISBN 978-0-07-802894-6—ISBN 0-07-802894-9 1.Marketing—Management. I. Mullins, John W. (John Walker) II. Title.
HF5415.13.W249 2014
658.8'02—dc23
2012041227

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement
by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the accuracy of the information presented at these sites.

www.mhhe.com

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About the Authors
Orville C. Walker, Jr.
Orville C. Walker, Jr., is Professor Emeritus in the University of Minnesota’s Carlson
School of Management, where he served as the James D. Watkins Professor of Marketing
and Director of the PhD Program. He holds a master’s degree in social psychology from
Ohio State University and a PhD in marketing from the University of Wisconsin–Madison.
Orville is the coauthor of three books and has published more than 50 research articles
in scholarly and business journals. He has won several awards for his research, including
the O’Dell award from the Journal of Marketing Research, the Maynard award from the
Journal of Marketing, and a lifetime achievement award from the Sales Management In-
terest Group of the American Marketing Association.
Orville has been a consultant to a number of business firms and not-for-profit organiza-
tions, and he has taught in executive development programs around the world, including
programs in Poland, Switzerland, Scotland, and Hong Kong. Perhaps his biggest business
challenge, however, has been attempting to turn a profit as the owner-manager of a small
vineyard in western Wisconsin.

John W. Mullins
John Mullins is Associate Professor of Management Practice in Marketing and Entrepreneur-
ship at London Business School. He earned his MBA at the Stanford Graduate School of Busi-
ness and, considerably later in life, his PhD in marketing from the University of Minnesota.
An award-winning teacher, John brings to his teaching and research 20 years of executive
experience in high-growth firms, including two ventures he founded, one of which he took
public.
Since becoming a business school professor in 1992, John has published more than 40
articles in a variety of outlets, including Harvard Business Review, Sloan Management
Review, the Wall Street Journal, the Journal of Product Innovation Management, and the
Journal of Business Venturing. His research has won national and international awards
from the Marketing Science Institute, the American Marketing Association, and the Rich-
ard D. Irwin Foundation. John is coauthor of Marketing Strategy: A Strategic Decision-
Making Approach, 8th edition.
John’s consulting, executive education, and case-writing regularly take him to destina-
tions in Africa, India, and Latin America. John’s best-selling trade book, The New Busi-
ness Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business
Plan, is the definitive work on the assessment and shaping of market opportunities. John’s
newest trade book, coauthored with noted venture capital investor Randy Komisar and also
a bestseller, Getting to Plan B: Breaking Through to a Better Business Model, has won
widespread critical acclaim. It is reshaping the approach entrepreneurs and other innova-
tors take to starting their new ventures.

iii

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Brief Table of Contents
Preface xi SECTION THREE
Formulating Marketing Strategies 187
SECTION ONE 8. Marketing Strategies for New Market
Introduction to Strategy 1 Entries 189
1. Market-Oriented Perspectives Underlie 9. Strategies for Growth Markets 219
Successful Corporate, Business, and
Marketing Strategies 3 10. Strategies for Mature and Declining
Markets 245
2. Corporate Strategy Decisions and Their
Marketing Implications 31 11. Marketing Strategies for a Digitally
Networked World 278
3. Business Strategies and Their Marketing
Implications 58
SECTION FOUR
Implementation and Control 305
SECTION TWO
Opportunity Analysis 85 12. Organizing and Planning for Effective
Implementation 307
4. Understanding Market Opportunities 87
13. Measuring and Delivering Marketing
5. Measuring Market Opportunities: Performance 333
Forecasting and Market Knowledge 114
6. Targeting Attractive Market Name Index 361
Segments 139
7. Differentiation and Brand Positioning 162 Subject Index 364

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Table of Contents
Preface xi Market Influences on the Corporate Mission 34
Criteria for Defining the Corporate Mission 35
Social Values and Ethical Principles 35
SECTION ONE 1 Why Are Ethics Important? The Marketing Implications
Introduction to Strategy 1 of Ethical Standards 36
Getting Caught Can Be Costly 37
Chapter One 3 Corporate Objectives 38
Market-Oriented Perspectives Underlie Enhancing Shareholder Value: The Ultimate
Successful Corporate, Business, Objective 40
and Marketing Strategies 3 The Marketing Implications of Corporate
Objectives 41
Strategic Challenges Addressed in Chapter 1 4
Gaining a Competitive Advantage 41
Three Levels of Strategy: Similar Components
Corporate Growth Strategies 42
but Different Issues 6
Expansion by Increasing Penetration of Current
What Is a Strategy 6
Product-Markets 43
The Components of Strategy 6
Expansion by Developing New Products for Current
The Hierarchy of Strategies 7
Customers 43
Corporate Strategy 8
Expansion by Selling Existing Products to New Segments
Business-Level Strategy 8
or Countries 44
Marketing Strategy 10
Expansion by Diversifying 44
What Is Marketing’s Role in Formulating
Expansion by Diversifying through Organizational
and Implementing Strategies? 10
Relationships or Networks 45
Variations in Marketing’s Strategic Influence 11
Allocating Corporate Resources 45
Market-Oriented Management 11
Portfolio Models 46
Do Customers Always Know What They Want? 12
Value-Based Planning 49
Does Being Market-Oriented Pay? 14
Using Customer Equity to Estimate the Value of
Factors That Mediate a Firm’s Market Orientation 15
Alternative Marketing Actions 51
Recent Developments Affecting the Strategic Role
Sources of Synergy 52
of Marketing 17
Knowledge-Based Synergies 52
The Future Role of Marketing 20
Corporate Identity and the Corporate Brand as a Source
Formulating and Implementing Marketing Strategy—
of Synergy 52
An Overview of the Process 21
Corporate Branding Strategy—When Does a Strong
A Decision-Making Focus 21
Corporate Brand Make Sense? 53
Analysis Comes First—The Four “Cs” 21
Synergy from Shared Resources 54
Integrating Marketing Strategy with the Firm’s Other
Strategies and Resources 21
Chapter Three 58
Market Opportunity Analysis 22
Formulating Marketing Strategies for Specific Situations 24
Business Strategies and Their Marketing
Implementation and Control of the Marketing Strategy 24 Implications 58
The Marketing Plan—A Blueprint for Action 24 Strategic Challenges Addressed in Chapter 3 60
Strategic Decisions at the Business-Unit Level 61
Chapter Two 31 How Should Strategic Business Units Be Designed? 61
Corporate Strategy Decisions and Their Business-Unit Objectives 62
Marketing Implications 31 Allocating Resources within the Business Unit 63
How Do Businesses Compete? 63
Strategic Challenges Addressed in Chapter 2 32
Generic Business-Level Competitive Strategies 63
Implications for Marketers and Their Marketing Plans 33
Do the Same Competitive Strategies Work for Single-
Corporate Scope—Defining the Firm’s Mission 34
Business Firms and Start-ups? 66
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vi Table of Contents

Do the Same Competitive Strategies Work for Service Understanding Markets at the Micro Level 104
Businesses 67 Understanding Industries at the Micro Level 106
Do the Same Competitive Strategies Work for Global The Team Domains: The Key to the Pursuit of
Competitors? 67 Attractive Opportunities 107
Will the Internet Change Everything? 68 Mission, Aspirations, and Risk Propensity 107
How Do Competitive Strategies Differ from One Ability to Execute on the Industry’s Critical Success
Another? 69 Factors 108
Differences in Scope 70 Connectedness: It’s Who You Know, Not What You
Differences in Goals and Objectives 71 Know 108
Differences in Resource Deployment 71 Putting the Seven Domains to Work 109
Differences in Sources of Synergy 72 Anticipating and Responding to Environmental
Deciding When a Strategy Is Appropriate: Change 110
The Fit Between Business Strategies and the Impact and Timing of Event 110
Environment 72 Swimming Upstream or Downstream: An Important
Appropriate Conditions for a Prospector Strategy 74 Strategic Choice 111
Appropriate Conditions for an Analyzer Strategy 74
Appropriate Conditions for a Defender Strategy 74
Chapter Five 114
How Different Business Strategies Influence
Marketing Decisions 76
Measuring Market Opportunities:
Product Policies 77 Forecasting and Market Knowledge 114
Pricing Policies 79 Strategic Challenges Addressed in Chapter 5 115
Distribution Policies 79 Every Forecast Is Wrong! 116
Promotion Policies 79 A Forecaster’s Tool Kit: A Tool for Every
What If the Best Marketing Program for a Product Forecasting Setting 116
Does Not Fit the Business’s Competitive Strategy? 80 Statistical Methods 118
Observation 119
SECTION TWO 85 Surveys or Focus Groups 119
Analogy 120
Opportunity Analysis 85
Judgment 121
Experiments and Market Tests 121
Chapter Four 87
Other Mathematical Approaches: Chain Ratios and
Understanding Market Opportunities 87 Indices 122
Strategic Challenges Addressed in Chapter 4 89 Rate of Diffusion of Innovations: Another Perspective
Markets and Industries: What’s the Difference? 89 on Forecasting 123
Assessing Market and Industry Attractiveness 90 The Adoption Process and Rate of Adoption 123
Macro Trend Analysis: A Framework for Assessing Adopter Categories 124
Market Attractiveness, Macro Level 91 Implications of Diffusion of Innovation Theory for
The Demographic Environment 91 Forecasting Sales of New Products and
The Sociocultural Environment 94 New Firms 124
The Economic Environment 94 Cautions and Caveats in Forecasting 126
The Regulatory Environment 95 Psychological Biases in Forecasting 126
The Technological Environment 97 Common Sources of Error in Forecasting 126
The Natural Environment 98 Keys to Good Forecasting 127
Your Market Is Attractive: What about Your Why Data? Why Marketing Research 128
Industry 99 Customer Relationship Management: Charting a Path
Porter’s Five Competitive Forces 99 Toward Competitive Advantage 129
A Five Forces Analysis of the Cellular Phone Service Internal Records Systems 130
Industry 102 Marketing Databases Make CRM Possible 130
Challenges in Macro-Level Market and Industry Why CRM Efforts Fail 134
Analysis 103 Client Contact Systems 134
Information Sources for Macro-Level Analyses 104 Competitive Intelligence Systems 136

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Plot Results on Matrices 154 Chapter Eight 189 Step 4: Project Future Position for Each Segment 155 Marketing Strategies for New Market Step 5: Choose Segments to Target. Allocate Entries 189 Resources 156 Strategic Challenges Addressed in Chapter 8 190 Different Targeting Strategies Suit Different Sustaining Competitive Advantage over the Product Opportunities 156 Life Cycle 191 Niche-Market Strategy 157 Market and Competitive Implications of Product Life- Mass-Market Strategy 157 Cycle Stages 192 Growth-Market Strategy 158 Strategic Implications of the Product Life Cycle 196 Global Market Segmentation 159 Limitations of the Product Life-Cycle Framework 197 New Market Entries—How New Is New? 197 Chapter Seven 162 Objectives of New Product and Market Differentiation and Brand Development 199 Positioning 162 Market Entry Strategies: Is It Better to Be a Pioneer or Strategic Challenges Addressed in Chapter 7 163 a Follower? 201 Differentiation: One Key to Customer Preference and Pioneer Strategy 201 Competitive Advantage 164 Not All Pioneers Capitalize on Their Potential Differentiation among Competing Brands 164 Advantages 203 Physical Positioning 165 Follower Strategy 204 Limitations of Physical Positioning 165 Determinants of Success for Pioneers and Perceptual Positioning 166 Followers 205 Levers Marketers Can Use to Establish Brand Strategic Marketing Programs for Pioneers 207 Positioning 167 Mass-Market Penetration 207 Preparing the Foundation for Marketing Strategies: Niche Penetration 207 The Brand Positioning Process 168 Skimming and Early Withdrawal 209 wal28949_fm_i-xvi. Table of Contents vii Marketing Research: A Foundation for Marketing Step 1: Identify a Relevant Set of Competitive Decision Making 135 Products 168 What Users of Marketing Research Should Ask 136 Step 2: Identify Determinant Attributes 170 Step 3: Collect Data about Customers’ Perceptions for Chapter Six 139 Brands in the Competitive Set 171 Targeting Attractive Market Segments 139 Step 4: Analyze the Current Positions of Brands in the Competitive Set 171 Strategic Challenges Addressed in Chapter 6 140 Step 5: Determine Customers’ Most Preferred Do Market Segmentation and Target Marketing Make Combination of Attributes 176 Sense in Today’s Global Economy 141 Step 6: Consider Fit of Possible Positions with Customer Most Markets Are Heterogeneous 142 Needs and Segment Attractiveness 177 Today’s Market Realities Often Make Segmentation Step 7: Write Positioning Statement or Value Imperative 142 Proposition to Guide Development of Marketing How Are Market Segments Best Defined? 143 Strategy 178 Who They Are: Segmenting Demographically 144 The Outcome of Effective Positioning: Building Where They Are: Segmenting Geographically 146 Brand Equity 181 Geodemographic Segmentation 146 Managing Brand Equity 181 How They Behave: Behavioral Segmentation 147 Positioning Decisions in Global Markets 183 Innovative Segmentation: A Key to Marketing Some Caveats in Positioning Breakthroughs 150 Decision Making 183 Choosing Attractive Market Segments: A Five-Step Process 151 Step 1: Select Market Attractiveness and Competitive SECTION THREE 187 Position Factors 152 Step 2: Weight Each Factor 154 Formulating Marketing Strategies 187 Step 3: Rate Segments on Each Factor.indd vii 17/12/12 11:40 AM .

indd viii 17/12/12 11:40 AM . and Instantaneous Flanking and Encirclement Strategies 240 Delivery 287 Guerrilla Attack 241 Are These Digital World Fundamentals Supporting Evidence 242 Opportunities or Threats? 287 First-Mover Advantage: Fact or Fiction? 289 Chapter Ten 245 Developing a Strategy for a Digitally Networked Strategies for Mature and Declining World: A Decision Framework 290 Marketing Applications for a Digitally Networked Markets 245 World 290 Strategic Challenges Addressed in Chapter 10 246 Developing Digital World Marketing Strategies: Challenges in Mature Markets 246 The Critical Questions 296 Challenges in Declining Markets 247 Managing Digitally Networked Strategies: The Talent Shakeout: The Transition from Market Growth to Gap 300 Maturity 247 Developing Strategies to Serve Digital and Social Characteristics of the Transition Period 247 Networking Markets 301 Strategic Traps during the Transition 248 Serving the Digitally Networked Markets of Strategic Choices in Mature Markets 249 Tomorrow 301 wal28949_fm_i-xvi. 24/7 Access. or Position Defense. Chapter 11 279 Maintenance Objectives 226 Does Every Company Need a Digital or Social Fortress. or Strategic Withdrawal. viii Table of Contents Marketing Program Components for a Mass-Market Strategies for Maintaining Competitive Penetration Strategy 209 Advantage 250 Marketing Program Components for a Niche Penetration Methods of Differentiation 251 Strategy 215 Methods of Maintaining a Low-Cost Position 256 Marketing Program Components for a Skimming Customers’ Satisfaction and Loyalty Are Crucial for Strategy 215 Maximizing Their Lifetime Value 258 Marketing Strategies for Mature Markets 260 Chapter Nine 219 Strategies for Maintaining Current Market Share 260 Strategies for Growth Markets 219 Strategies for Extending Volume Growth 262 Strategic Challenges Addressed in Strategies for Declining Markets 268 Chapter 9 220 Relative Attractiveness of Declining Markets 268 Opportunities and Risks in Growth Divestment or Liquidation 271 Markets 222 Marketing Strategies for Remaining Gaining Share Is Easier 222 Competitors 271 Share Gains Are Worth More 223 Price Competition Is Likely to Be Less Intense 224 Chapter Eleven 278 Early Entry Is Necessary to Maintain Technical Marketing Strategies for a Digitally Expertise 224 Networked World 278 Growth-Market Strategies for Market Leaders 225 Marketing Objectives for Share Leaders 226 Strategic Challenges Addressed in Marketing Actions and Strategies to Achieve Share. Strategy 228 Media Strategy? 280 Flanker Strategy 231 Threats or Opportunities? The Inherent Advantages Confrontation Strategy 232 and Disadvantages of the Digitally Networked World Market Expansion Strategy 233 for Marketers 282 Contraction. Strategy 233 The Ability to Optimize 282 Share-Growth Strategies for Followers 233 The Syndication of Information 283 Marketing Objectives for Followers 233 Increasing Returns to Scale of Network Products 284 Marketing Actions and Strategies to Achieve Share The Ability to Efficiently Personalize and Customize Growth 234 Market Offerings 285 Deciding Whom to Attack 236 Disintermediation and Restructuring of Distribution Frontal Attack Strategy 238 Channels 286 Leapfrog Strategy 239 Global Reach.

indd ix 17/12/12 11:40 AM . Table of Contents ix SECTION FOUR 305 Chapter Thirteen 333 Implementation and Control 305 Measuring and Delivering Marketing Performance 333 Chapter Twelve 307 Strategic Challenges Addressed in Chapter 13 334 Organizing and Planning for Effective Designing Marketing Metrics Step by Step 335 Implementation 307 Setting Standards of Performance 336 Strategic Challenges Addressed in Chapter 12 308 Specifying and Obtaining Feedback Data 341 Designing Appropriate Administrative Relationships Evaluating Feedback Data 342 for the Implementation of Different Competitive Taking Corrective Action 343 Strategies 310 Design Decisions for Strategic Monitoring Business-Unit Autonomy 311 Systems 343 Shared Programs and Facilities 311 Identifying Key Variables 344 Evaluation and Reward Systems 312 Tracking and Monitoring 344 Designing Appropriate Organizational Structures and Strategy Reassessment 345 Processes for Implementing Different Strategies 313 Design Decisions for Marketing Metrics 345 Functional Competencies and Resource Allocation 313 Who Needs What Information? 345 Additional Considerations for Service SEO and SEM Analysis 349 Organizations 315 When and How Often Is the Information Needed? 350 Organizational Structures 316 In What Media and in What Format(s) or Levels of Recent Trends in Organizational Design 320 Aggregation Should the Information Be Provided? 351 Organizational Adjustments as Firms Grow and Markets Does Your System of Marketing Metrics Change 321 Measure Up? 352 Organizational Designs for Selling in Global What Contingencies Should Be Planned For? 353 Markets 322 Global Marketing Monitoring 355 Marketing Plans: The Foundation for Implementing A Tool for Periodic Assessment of Marketing Marketing Actions 323 Performance: The Marketing Audit 355 The Situation Analysis 327 Types of Audits 355 Key Issues 328 Measuring and Delivering Marketing Objectives 329 Performance 357 Marketing Strategy 329 Action Plans 329 Name Index 361 Projected Profit-and-Loss Statement 330 Contingency Plans 330 Subject Index 364 wal28949_fm_i-xvi.

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WHY THIS BOOK? Why did your instructor choose this book? Chances are that it was for one or more of the following reasons: • Among your instructor’s objectives is to give you the necessary tools and frameworks to enable you to be an effective contributor to marketing decision-making. Many also ask students to complete a term-long project of some kind. such as the development of a marketing plan for a new or existing product or a new venture. mar- keting management. • Your instructor appreciates and believes you will benefit from the real-world. • Your instructor wants to use the most current and web-savvy book available. Preface WHY THIS COURSE? The best of the leading business schools and other executive education programs offer capstone or other elective courses in marketing whose strategic perspective challenges students to “pull it all together” and integrate what they have learned in earlier courses— including those in marketing and other disciplines—in making strategic marketing deci- sions.or new-economy companies. and we devote an entire chapter—Chapter 11—to the development of marketing strategies for the new econ- omy. service. and distribution industries and has taken us—and thereby you. Our combined entrepreneurial. the 4 Ps.indd xi 17/12/12 11:40 AM . We inte- grate the latest new-economy developments into each chapter. Further. and consulting experience spans a broad variety of manufacturing. global perspectives offered by the authors of this book. • Your instructor prefers a tightly written text whose strategic perspectives serve as a concise foundation around which a broader set of materials. People in nearly every role in every company can have a powerful influence on how happy its customers are—or are not—with the goods and services the company provides. the reader—around the world many times over. This book’s focus on decision making sets it apart from other texts that place greater emphasis on description of marketing phenom- ena than on the strategic and tactical marketing decisions that marketing managers and entrepreneurs must make each and every day. Whether called Marketing Strategy. we supplement the book with an interactive website to help you learn and to help your instructor choose the best case and other materials and in-class activi- ties. xi wal28949_fm_i-xvi. and other marketing fundamentals typically covered in earlier courses. case-writing. whether as an entrepreneur or in an established firm. Strategic Brand Management. This text assumes student familiarity with—and thus does not repeat—the basics of buyer behav- ior. In addition. Strategic Market Planning. or something else. as well—is to make both the latest web-based tools as well as time-tested marketing principles relevant to those of you who will work in either old. such as case studies or supplementary readings that fit the specific theme of the course. including start-ups—not just in big companies with traditional mar- keting departments. As the reader will see from the outset in Chapter 1. are assembled. such courses typically ask students to apply what they learn to decision making in case studies that bring alive real marketing situations. Our goal—and probably that of your instructor. software. We have written this text to serve exactly these kinds of case-based and project-based capstone and advanced elective courses. it is not just marketing managers who make marketing deci- sions. marketing decision making is a critical activity in every firm.

Facebook. informed. we have written this book to meet the marketing needs of readers who hope to make a difference in the long-term strategic success of their organizations—whether their principal roles are in marketing or otherwise. the students or participants will be asked to make numerous decisions—decisions in case studies about what the protagonist in the case should do. who tell us they want today’s graduates to be prepared to “hit the ground running” and contribute to the firm’s decision making from day one. This decision-focused approach is important to students and executives who are our readers. The book’s concise strategic focus also helps instructors build specialized elective courses—in Strategic Brand Management or in Marketing in the So- cially Networked Economy. for without such benefits. it brings a realistic. in terms of the firm’s mis- sion and competencies. such as those entailed in developing a marketing plan. This book puts the tools in the toolbox to make this happen. employers want to know what their new hires can do. or decisions in a marketing simulation game. instructors can design a rich and varied course in which students learn experientially. specific tools and frameworks for making marketing decisions that take best advantage of the conditions in which the firm finds itself—both internally. Accounting and consulting firms must find ways to differentiate their services from other providers so their customers have reasons to give them their business. and web-savvy perspective to an important question many students are asking: “Have the advent of Internet. colleagues. and others from whom we have learned so much.indd xii 17/12/12 11:40 AM . In the end. In this brief preface. The ability to bring thoughtful and disciplined tools and frameworks—as opposed to seat-of-the-pants hunches or blind intuition—to marketing decision making is one of the key assets today’s business school graduates offer their em- ployers. without whom this book would not have been possible. WEB-SAVVY INSIGHTS Because this book has been written by authors from web-savvy institutions who work with web-savvy companies. By combining this book with sup- plemental readings and/or cases. and externally. we want to say a bit more about each of the four distinctive benefits— bulleted previously—that this book offers its readers. as they focus on the various strategic decisions that define contemporary marketing theory and practice. Thus. for example—that draw on supplemental readings to com- plete the thematic picture. and we thank our many students. A FOCUS ON DECISION MAKING This eighth edition of Marketing Strategy: A Decision-Focused Approach retains the stra- tegic perspectives that have marked the earlier editions. students learn the key strategic principles quickly. and wal28949_fm_i-xvi. decisions in a course project. because in most advanced marketing management classes and executive courses. not just what they know. while providing. xii Preface Stockbrokers must attract new customers. customers will not buy. Because the book is concise. A CONCISE STRATEGIC FOUNDATION This eighth edition serves as a concise foundation for a capstone or advanced elective course in marketing whose focus is on strategic issues. We also point out the key changes in this edition compared to previous ones. so they can devote most of their reading and prep time to the application of those principles to cases or a course project. Our decision-focused approach is also important to employers. in each chapter. Software engineers developing the next great internet or mobile ap- plication must understand how their technology can benefit the intended customer. in terms of the market and competitive context in which it operates.

we integrate examples of young entrepreneurial companies. In short. • The growing importance of emerging markets such as India. and no-tech—both successful and otherwise—to show how both yesterday’s and today’s marketing tools and decision frameworks can most effectively be applied. today’s digitally networked world has made available a host of new marketing tools—from blogs to tweets to e-mail marketing to delivery of digital goods and services over the Internet—most of which are available to companies in the so-called old and new economies alike. Both of us have successfully started and managed entrepreneurial companies—a vine- yard in Orville’s case and a fresh pasta company and an outdoor products company as part of the 20 years of executive experience with large companies and small ones that preceded John’s academic career.indd xiii 17/12/12 11:40 AM . On the other hand. The result of our collective and varied experience and expertise is a book marked by its real-world. Thus. A REAL-WORLD. The book’s many examples of real people from around the world making real strategic marketing decisions include examples of start-ups and high- growth companies as well as examples of larger. global perspective. whether now—upon. and the latest mobile apps changed all the rules?” Our answer is “well. with the latter ranging from Scotland to South Africa. • The increasing attention being given in many companies to issues concerning the mea- surement of marketing performance and the extent to which marketing activities and spending contribute to the creation of shareholder value. or even before. Both of us bring a rich variety of both domestic American and international consulting and executive education experience. yes and no. It is in the application of theory—to the world of marketing practice—where we believe this book excels. throughout the book. from London to Lagos. we’ve gone to considerable lengths to address four key trends that are sweeping the world of marketing theory and practice. from Hyderabad to Hong Kong and more. time-tested marketing fundamentals—such as under- standing one’s customers and competitors and meeting customer needs in ways that are dif- ferentiated from the offerings of those competitors—have become even more important in today’s fast-moving world. Our decision focus is all about application. Brazil. both of us have practiced the marketing lessons we preach. important as that perspective is. and entrepreneurship arenas. But we don’t just bring an academic perspective to the party. wal28949_fm_i-xvi. GLOBAL PERSPECTIVE Theory is important because it enhances our understanding of business phenomena and helps managers think about what they should do. John’s platform at Lon- don Business School.” On one hand. WHAT’S NEW IN THIS EDITION? In this eighth edition of Marketing Strategy. Both of us have contributed the fruits of our research to the growing body of knowledge in the marketing management. China. marketing strategy. more established firms. and Russia on the global economic stage and the growing realization in companies everywhere that business today is a global game. and we have the battle scars to prove it. Preface xiii Twitter. high-tech. graduation—or later in their careers. new products. one of the world’s most global institutions. trends that are creating opportunities for well-educated graduates to bring new tools and ideas to their employers or to their own entrepreneurial ventures: • The growing interest among students everywhere in learning what it will take to run their own companies. keeps us in touch with the latest developments on the global business scene. as the many dot-com failures a few years ago attest.

xiv Preface • The changing nature of marketing research. In addition to these more significant changes. and iPads by the time the ink is dry on this edition. however. To reflect the growing interest—some would say concern—about the measurement of marketing performance. established ones—are using the strategic tools and frameworks that this book brings to life. We have worked especially hard to add examples from fast-growing emerging economies like India. As the author team knows from personal experience. and the like— which provide powerful new communications tools for marketers of all kinds. such as the discussion of stricter international bribery laws in Chapter 2. and the latest empirical evidence of what works and what doesn’t incorporated. a way to disintermediate one’s distribu- tion channel and reach customers directly. which now focuses on the marketing impli- cations of today’s digitally and socially networked world. We’ve made a special effort to increase our coverage of recent concep- tual developments and empirical findings in the academic literature as well as insights from the popular business press. Chapter 11 provides an underpinning to help students and faculty discuss why and how it’s all happening. we’ve completely updated and revamped Chapter 11. • The growing ubiquity of social networks—Facebook. We’ve addressed the first of these issues. we’ve added a new section to Chapter 13 to address the tools for analyzing and making the most of search engine optimization (SEO) and search engine marketing (SEM) techniques. China. A new chapter-opening vignette on opportunities in the “app economy” should prove to be of interest to our many entrepreneurially minded readers. laptops. every chapter has been refreshed. We have also added a new sec- tion on positioning decisions in global markets in Chapter 6. by adding more examples throughout the book of how entrepreneurial com- panies—not just large. two now essential arrows in every marketer’s quiver that didn’t even exist just a few editions ago.indd xiv 17/12/12 11:40 AM . and this edi- tion is no exception. its examples updated. and by a growing recognition that understanding customer desires in today’s complex world requires more than an occasional cus- tomer survey. and to draw meaningful managerial implications for both marketers and aspiring entrepreneurs. Twitter. In this eighth edition. and we’ve added two new global case vignettes—one on the emerging middle class in the developing world and another on Swedish appliance maker Electrolux’s global strategy. and we’d like our readers who choose such a path to be well equipped for the journey. Though further innovations in this arena will no doubt have hit our readers’ cell phones. whether companies with goods to sell or political organizations out to change the world. Readers of this eighth edition should be equipped to contribute to the development of executive dashboards and other systems for measuring and tracking marketing performance. the entrepreneurial path is a long and difficult—but always exciting—one. Perhaps nothing. provides a greater opportunity for today’s marketing grad- uates than the continuing rise of Internet penetration around the world and its growing importance for marketers—whether as a vehicle for promoting one’s brand and building loyalty. or for other reasons. Recent editions of this book have been known for their global perspective. and Russia. students’ growing interest in all things entre- preneurial. a means of conducting marketing research. and new material on some of the unique problems encountered in marketing across cultures. LinkedIn. New technology that can bring up-to-the-minute performance data to managers’ desktops is having profound effects on how today’s most forward-thinking companies are run. However. These changes are being driven by two factors: the power of the Internet to make many kinds of research both less expensive and faster to carry out. the overall structure and flow of this eighth wal28949_fm_i-xvi.

and to direct both readers and instructors to additional resources to help make our marketing strategy subject matter come alive.” the student resources include chapter quizzes and review material. Without Elizabeth’s research skills. Ohio University. Preface xv edition remains unchanged. In particular. • Strategic issues: We note in the margins key concepts or questions that are addressed more thoroughly in the adjacent text. and Karl S. We are grateful to all of them. we highlight at the end of each chapter how that chapter’s material might be effectively put to use in developing a marketing plan. • Online learning center at www. we’d probably still be writing! wal28949_fm_i-xvi. University of Alabama. Instructor resources include an instructor’s manual. We would also like to thank the following reviewers for their outstanding comments: Chris Moberg.indd xv 17/12/12 11:40 AM . To help students “crack tomorrow’s case” or “pass the exam. its emphasis on strategic deci- sion making remains intact. SPECIAL FEATURES There are several special features we’ve used to call reader’s attention to key concepts and examples. we provide a list of recommended readings and cases to enable instructors to choose the most current and compelling materials in designing or updating a case-based or project-based course that’s focused on marketing strategy or related issues THANKS! Simply put. • Global and Internet icons: We place icons in the margins to call the reader’s attention to global examples as well as examples of how marketing strategy concepts are playing out in the Internet arena. this book is not solely our work—far from it. and Lori Bradshaw have been instrumental in giving birth to this edition.mhhe. We also thank a small army of talented people at McGraw-Hill/Irwin for their work that has turned our rough manuscript into an attractive and readable book. and those we work with in industry have made contributions that have sig- nificantly shaped our perspectives on marketing decision making. col- leagues. the examples in this book and the references to current academic research would be fewer in number and far less compelling. Laura Spell.com/walker8e: We have placed a variety of sup- plemental materials for students and instructors on the book’s website. • Marketing plan exercises: Because many of our readers will be asked to prepare a mar- keting plan. Without them. and a test bank. We wish to give special thanks to Rebecca Quinn and Elizabeth Philp. Rebecca’s experience at social networking up-and-comer Wildfire has been hugely helpful in the extensive updat- ing of Chapter 11. Petrochuk. both recent graduates of of London Business School. whether on the job or as a class project. Columbia University. These features include the following: • Case vignettes: We open each chapter with a brief case vignette to illustrate how some of that chapter’s key themes have been applied in a real company. Robert M. Morgan. to ensure that time-pressed readers don’t overlook critical information or crucial questions they should ask. Rutter. In addition. Perhaps most importantly. Michael A. to make the book more readable and its key themes more engaging. Many of our students. Walsh University. our editors. Mary Jane Lampe. This book’s decision-focused approach remains its key strength. Pow- erPoint slides. chosen with the book’s global focus clearly in mind.

Jr. and London Summer 2012 wal28949_fm_i-xvi. We therefore dedicate this book to Jeannette and Orville Walker. we thank our parents. and our gratitude for passing on to us your curiosity and your passion for learning. without whom. of course. Mullins Madison. xvi Preface Finally. John W. Sr.indd xvi 17/12/12 11:40 AM .. Orville C. Wisconsin. neither of us would be here. and to Alice and Jack Mullins. Walker. To all of you we extend our love. our respect.

Corporate Strategy Decisions and Their Marketing Implications 3.indd 1 14/12/12 12:26 PM . Business. Business Strategies and Their Marketing Implications wal28949_ch01_001-030. and Marketing Strategies 2. Section One Introduction to Strategy 1. Market-Oriented Perspectives Underlie Successful Corporate.

wal28949_ch01_001-030.indd 2 14/12/12 12:26 PM .

and other digital devices. and Marketing Strategies Samsung—Changing Strategies to Build a Global Brand1 Samsung Electronics is the largest component of veteran who was brought in as CEO of the electron- South Korea’s largest chaebol—one of the giant ics unit—complained. At about the same In order to implement its new competitive strategy. “If we were to continue competing only on price. Hewlett-Packard. the global market for memory Mr.” jor reevaluation. Over time it morphed into a technically a major strategic shift essential for the unit’s survival. As Yun Jong-yong—a company new digital technologies. was technically as good as a Sony. its TVs the last half century. The objective was to such as Wal-Mart at very low prices. the unit competed primarily and Marketing Strategies by (a) producing technical components or low-cost manufactured products for firms with better-known Mr. innovative company that was one of the pioneers in developing flat-screen displays. the Asian financial crisis of 1997 made Sanyo label. market and competitive environments forced a ma. but then several shocks in its and relatively upscale customers around the world. Samsung’s electronics unit sat at the back of the store or piled up in discount started out in 1970 making cheap TV sets for the chains.indd 3 14/12/12 12:26 PM . sales of Samsung’s own branded products Samsung had to become a pioneer in developing were also declining. Yun argued. While Sony and other 3 wal28949_ch01_001-030. such as Dell. multi- function cell phones. Finally. and strategy aimed at developing and marketing tech- General Electric and (b) selling me-too consumer nically superior products while building an image products—such as TVs and microwave ovens— of Samsung as a stylish. time. high-quality brand com- under the Samsung brand through discount chains manding a premium price. Yun initiated an ambitious new competitive brands. Samsung could build a TV that family-controlled conglomerates that have been in. plasma TVs. Business. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. But New Competitive until the mid-1990s. but because of the strumental in building the country’s economy over down-market image of the Samsung brand. First. establish a unique competitive position using tech- Samsung’s cost-driven competitive strategy nical innovation and design to appeal to younger worked well until 1996. “the Chinese would slaughter us.” chips and other components Samsung supplied for other electronics brands softened due to increased Technical Innovation and R&D competition and excess capacity.

In the 2010 fiscal year it spent communications across world markets.indd 4 14/12/12 12:26 PM . overtaking Sony as the unless potential customers know they exist. As a result. They wal28949_ch01_001-030. and ing Samsung as a high-quality brand worthy of a after-tax profits were 13. was to reorganize the firm’s distribution channels. And in acquire them easily. sponsorships. and the company’s market researchers run focus groups and user surveys in many markets around the world. it also supports regional and local events—such as keters. forward TV commercials showing off the com- pany’s cool sense of style as well as the technical New Product Development and Design sophistication of its products. the firm shifted substantial specialty stores and web retailers—such as Best resources into R&D focused on technologies such as Buy and Amazon. Kim 9. Tokyo. London.9 billion)—about 6 percent of consolidated the firm’s roster of advertising agen- the unit’s total revenue—on R&D. But cutting-edge technology does not guarantee The firm also makes extensive use of more market success. Eric Kim was recruited from crashed Samsung’s position as the “cool designer” outside the firm to head a global marketing effort in the smartphone market. and think they are worth the spite of the fact that Apple’s iPhone and iPad gate- money. the firm’s 450 design. premium price.1 trillion won ($7. distributed through service-oriented electronics tions. and other international events. can most valuable consumer electronics brand. According Revamping Samsung’s marketing efforts was also to studies by Interbrand (a brand consultancy). Club in the United Kingdom—as a means of stay- ers are assigned to design centers in cities such as ing close to local customers. new riety of sporting and cultural events in every major product development at Samsung usually involves a region of the world. or a cool image. the unit’s global revenues reached 165 trillion won Consistent with the strategic objective of establish. Therefore. and To ensure consistency in Samsung’s marketing mobile telephony. Therefore. Consequently. Shanghai. that lead was rooted in the analog world. It must be incorporated into prod. The Results Samsung Electronics’ revamped competitive strat- Marketing Programs to Build egy and the marketing programs designed to imple- the Samsung Brand ment it have been a smashing success. the brand’s value in- for Samsung Electronics. many of the company’s products tronics. STRATEGIC CHALLENGES ADDRESSED IN CHAPTER 1 Samsung’s experiences in the consumer electronics industry illustrate some important points about the nature of business strategy and the interrelationships among different levels of strategy in an organization. points that will recur as major themes throughout this book. It is a sponsor of the Olympics. contemporary promotional tools such as product ucts that deliver benefits that at least some seg. Mr. critical to the success of its new competitive strat. the global value of Samsung’s brand increased by egy because even the most technically sophisti. team of designers who collaborate closely with the Asian Games. He then launched the are engaged in R&D activities in more than firm’s first brand-building campaign with fashion- 40 research centers around the world. For instance. and San Francisco.com—instead. Samsung pro- price. display drivers and chip sets. and internet advertising ment of consumers will consider to be worth the to strengthen its brand. but firm’s engineers. Some of those benefits may be subjective— vides both financial and technical support for a va- attractive styling. (about $143 billion) in the 2011 fiscal year. 4 Section One Introduction to Strategy rivals had a substantial lead in consumer elec. One quarter of cies from 55 down to a single global advertising the company’s workforce—some 44. placements.7 trillion won. and mar. To ensure they stay in touch with consumer the Montreal Jazz Festival and the Chelsea Football tastes in different countries. more than 200 percent over the first decade of cated and well-designed products are likely to fail the twenty-first century. were pulled out of low-priced discount chains and The digital world required new technical innova. manufacturing people. One of his first moves creased another 20 percent in 2011.000 people— group—British-based WPP. large-area LCDs.

and opportunities and threats related to trends in the external environment. what role do they play in wal28949_ch01_001-030. envi- ronmental trends. This level of strategy primarily addresses how a business will compete in its industry in order to attain a sustainable advantage over its rivals. but also the retail outlets used to distribute them. What do strategies consist of. Each level of strategy must be consistent with—and therefore influenced and con- strained by—higher levels within the hierarchy. Finally. they often play a crucial role in influencing strategies formulated at higher levels in the firm. On the other hand. and competitors’ actions in formulating successful strategies at every level. which segments to target. not only the cool new digital products developed by Samsung. Each strategy is formulated at different levels in the organization and deals with different sets of issues. and what prices to charge all reflect the marketing strategies for each of Samsung Electronics’ various product-market entries. Some firms’ strategies are driven more by technology. promotional media. and functional levels? While marketing managers clearly bear the primary responsibility for developing strategic marketing plans for individual product offerings. For example. These interrelationships among the various levels of strategy raise several questions of impor- tance to marketing managers as well as managers in other functional areas and top executives. companies do not always embrace a market orientation—nor rely as heavily on inputs from their market- ing and sales personnel—in developing their strategies. their advertising appeals.indd 5 14/12/12 12:26 PM . what promotional tools and appeals to employ. For example. high-quality brand commanding a premium price. however. or cost concerns. The constrained by—higher levels within the objectives. Samsung’s decision to increase the resources devoted to R&D in order to become a pioneer in digital technology reflected the chaebol’s overarching corporate strategy which stressed engineering excellence and the organization’s competencies in related product areas. Market-oriented firms have been shown to be among the more profitable and successful at maintaining strong competitive positions in their industries over time. marketing managers’ freedom of with—and therefore influenced and action is ultimately constrained by those higher-level strategies. emerging challenges posed by competitors. and other aspects of their marketing pro- grams were shaped by the unit’s competitive strategy of establishing Samsung as a stylish. Business. decisions about the content of those new strategies were influenced by information and analyses supplied by the firm’s marketing and sales personnel. what channels to use to distribute those products. the kinds of businesses it should be in. and do they have similar or different components at the corporate. and its growth policies. prices. attempts to establish a unique competitive position for its products by using technical innovation and cool design to appeal to younger and relatively upscale customer segments around the world reflect Samsung Electronics’ business-level strat- egy. are but one part of a hierarchy of strategies within the firm. They also coordinate their activities around the primary goal of sat- isfying unmet customer needs. While the need for a new competitive strategy at Samsung became obvious because of stagnating sales and declining profits. Because a major part of the marketing manager’s job is to monitor and analyze the needs and desires of potential customers. interrelated functional decisions about how to divide the market into segments. Strategic Issue Regardless of their participation or influence in formulating cor- Each level of strategy must be consistent porate and business-level strategies. business. This level of strategy provides direction concerning the organization’s overall mission. Such firms are market-oriented and follow a business phi- losophy commonly called the marketing concept. pursue a hierarchy of interdependent strategies. such as semiconductors. As we shall see later in this chapter. and action plans for a specific product-market hierarchy. Some firms systematically incorporate such market and competitive analyses into their planning processes. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. particularly larger corporations with multiple divisions or business units such as Samsung. what products to offer each target segment. and Marketing Strategies 5 also demonstrate the importance of timely and accurate insights into customer desires. Most firms. strategies. production.

. 3.e. 4.2 Our definition suggests that a strategy should specify (1) what (objectives to be ac- complished). product-markets. competitors. The following defini- tion. and interactions of an organization with markets. This common thread among its various activities and product-markets defines the essential nature of what its business is and what it should be. the actions necessary to achieve those objectives. Consequently. 6 Section One Introduction to Strategy formulating strategies at the corporate and divisional or business unit level? Why do some organi- zations pay much more attention to customers and competitors when formulating their strategies (i. One important part of any strategy is a specification of how the organization will compete in each business and product- market within its domain. profit contribution.indd 6 14/12/12 12:26 PM . Formulating a strategy also involves deciding how those resources are to be obtained and allocated across businesses. The Components of Strategy A well-developed strategy contains five components. (2) where (on which industries and product-markets to focus). Decisions about an organization’s strategic scope should reflect management’s view of the firm’s purpose or mission. the last section of this chapter briefly outlines the components and organizational framework of a formal marketing plan. How can it position itself to develop and sustain a differential wal28949_ch01_001-030. resource deployments. It spells out the objectives to be accomplished. Scope. and the timing and locus of responsibility for each action. it continues to be the subject of widely differing definitions and interpretations. Identification of a sustainable competitive advantage. product lines. and (3) how (which resources and activities to allocate to each product-market to meet environmental opportunities and threats and to gain a competitive advantage). or return on investment—over specified time periods for each of those businesses and product-markets and for the organization as a whole. and functional departments and ac- tivities within each business or product-market. why are some firms more market-oriented) than others. and other environmental factors. THREE LEVELS OF STRATEGY: SIMILAR COMPONENTS BUT DIFFERENT ISSUES What Is a Strategy? Although strategy first became a popular business buzzword during the 1960s. Every organization has limited financial and human resources. Goals and objectives. that strategy and its various elements need to be periodically summarized and communicated to other people and functional departments in the organization. 2. and market segments it competes in or plans to enter. captures the essence of the term: A strategy is a fundamental pattern of present and planned objectives. or sets of issues: 1. The marketing plan is an important tool for such communication. Each of the plan’s components will be examined in more detail in one or more future chapters. The scope of an organization refers to the breadth of its strategic domain—the num- ber and types of industries. and each of those chapters will conclude with a detailed marketing planning exercise. however. and does it make any difference in their performance? What specific decisions and analytical processes underlie the formulation and implementation of effective marketing strategies? These are the questions tackled in this chapter. While our primary focus in this book is on the various analyses and program decisions that underlie the development of a sound marketing strategy for a good or service. Resource deployments. Strategies also should detail desired levels of accomplishment on one or more dimensions of performance—such as volume growth.

these five basic dimensions are part of all strategies. The three major levels of strategy in most large.1. product-markets. (2) business-level strategy. The Hierarchy of Strategies Explicitly or implicitly. most organizations have a hierarchy of in- terrelated strategies. and competencies complement and reinforce one another. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. Synergy. In small EXHIBIT 1. 5. multiproduct organizations are (1) corporate strategy. managers must examine the market opportunities in each business and product-market and the company’s distinctive competencies or strengths relative to its competitors. Business. each formulated at a different level of the firm. resource deploy- ments. and Marketing Strategies 7 advantage over current and potential competitors? To answer such questions. However.1 The Hierarchy of Strategies Environmental Corporate factors mission Corporate strategy Corporate Corporate Deployment goals and development of objectives strategy resources Strategic business SBU 2 SBU n unit 1 Business strategy Deployment of Business Competitive resources across unit's strategy product-markets objectives and functions Marketing Human R&D Operations strategy resources strategy strategy for product strategy and plans and plans market entry X and plans Functional strategy Tactical marketing plan for product market entry X wal28949_ch01_001-030. Synergy enables the total performance of the related businesses to be greater than it would otherwise be: The whole becomes greater than the sum of its parts.indd 7 14/12/12 12:26 PM . These three levels of strategy are diagrammed in Exhibit 1. Synergy exists when the firm’s businesses. and (3) functional strategies focused on a particular prod- uct-market entry. rather than a single comprehensive strategy.

but because each strategy serves a different purpose within the organization. distribution chan- nels. and/or promotional themes.3 Business-Level Strategy How a business unit competes within its industry is the critical focus of business-level strategy.indd 8 14/12/12 12:26 PM .2 summarizes the specific focus and issues dealt with at each level of strategy. but other functional departments—such as R&D and operations—also have strategies and plans for each of the firm’s product-markets. Finally. modern plants might adopt a low-cost competitive strategy. What distinctive competencies can give the business unit a competitive advantage? Which of those competencies best match the needs and wants of the customers in the business’s target segment(s)? For example. even separate legal business entities. managers must coordinate the activities of multiple business units and. therefore. we examine the interfunctional implications of product- market strategies. One with a strong marketing department and a competent salesforce may compete by offering supe- rior customer service. corporate and busi- ness-level strategic issues merge. Decisions about the organization’s scope and resource deployments across its divisions or businesses are the primary focus of corporate strategy. and seeking synergy among the firm’s various businesses. product or production technologies. a common salesforce. and technological resources. a business with low-cost sources of supply and efficient. Corporate Strategy At the corporate level. Throughout this book. wal28949_ch01_001-030. in the case of conglomerates. The essential questions at this level include: What business(es) are we in? What business(es) should we be in? and What portion of our total resources should we devote to each of these businesses to achieve the organization’s over- all goals and objectives? Thus. 8 Section One Introduction to Strategy single-product-line companies or entrepreneurial start-ups. conflicts across functional areas. however. financial. they shifted substantial corporate resources— including R&D expenditures. designing effective organizational structures and processes. Attempts to develop and maintain distinctive competencies at the corporate level focus on generating superior human.4 Another important issue a business-level strategy must address is appropriate scope: how many and which market segments to compete in and the overall breadth of prod- uct offerings and marketing programs to appeal to these segments. and vast numbers of cus- tomer service personnel—into the corporation’s service and software businesses to support the new strategic direction. when top-level managers at IBM decided to pursue future growth primarily through the development of consulting services and software rather than computer hardware a few years ago. Our primary focus is on the development of marketing strategies and programs for individual product-market entries. Strategies at all three levels contain the five components mentioned earlier. we discuss them in the next sections. Exhibit 1. Synergy can provide a major competitive advantage for firms where related businesses share R&D investments. marketing and advertising budgets. and the mechanisms that firms use to resolve those conflicts. each emphasizes a differ- ent set of issues. synergy should be sought across product-markets and across functional departments within the business. A major issue in a business strategy is that of sustainable competitive advan- tage.

functional competencies customer image) or or activities across across businesses within functional competencies product-market entries the firm across product-markets within an industry wal28949_ch01_001-030. MIS) entry Sources of competitive • Primarily through • Primarily through • Primarily through advantage superior corporate competitive strategy. better to competitors in its components of the organizational processes industry marketing mix relative or synergies relative to to competitors within a competitors across all specific product-market industries in which the firm operates Sources of synergy • Shared resources.indd 9 14/12/12 12:26 PM . or (including favorable resources. superiority resources. • Shared resources • Shared marketing technologies. more competencies relative on one or more corporate R&D. effective product financial or human business unit’s positioning.2 Key Components of Corporate. Business. competencies. Business. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. and Marketing Strategies 9 EXHIBIT 1. and Marketing Strategies Strategy Components Corporate Strategy Business Strategy Marketing Strategy Scope • Corporate domain— • Business domain— • Target market definition “Which businesses “Which product-markets • Product-line depth and should we be in?” should we be in breadth within this business or • Branding policies industry?” • Corporate development • Business development • Product-market strategy strategy development plan Conglomerate Concentric • Line extension and diversification diversification product elimination (expansion (new products for plans into unrelated existing customers businesses) or new customers Vertical integration for existing Acquisition and products) divestiture policies Goals and objectives • Overall corporate • Constrained by • Constrained by objectives aggregated corporate goals corporate and business across businesses • Objectives aggregated goals Revenue growth across product-market • Objectives for a specific Profitability entries in the business product-market entry ROI (return on unit Sales investment) Sales growth Market share Earnings per share New product or Contribution margin Contributions to market growth Customer satisfaction other stakeholders Profitability ROI Cash flow Strengthening bases of competitive advantage Allocation of resources • Allocation among • Allocation among • Allocation across businesses in the product-market entries components of the corporate portfolio in the business unit marketing plan • Allocation across • Allocation across (elements of the functions shared by functional departments marketing mix) for a multiple businesses within the business unit specific product-market (corporate R&D.

they not only are responsible for developing strate- gic plans for their own product-market entries. R&D.. using a constant-sum scale of 100. operations. and finance). wal28949_ch01_001-030. Next. John P. “Marketing’s Influence within the Firm. place. and Harley Krohmer. Source: Reprinted with permission from Journal of Marketing.3 Influence of Functional Units over Various Business Decisions Decisions Marketing Sales R&D Operations Finance Business strategy decisions Strategic direction of the business 38 29** 11** 9** 14** Expansion into new geographic markets 39 45** 3** 3** 10** Choices of strategic partners 33 38* 7** 9** 12** New product development 32 23** 29** 9** 7** Major capital expenditures 13 11** 13 29** 35** Marketing strategy decisions Advertising messages 65 29** 3** 1** 2** Customer satisfaction measurement 48 35** 5** 8** 4** Customer satisfaction improvement 40 37* 7** 10** 6** Distribution strategy 34 52** 1** 6** 6** Customer service and support 31 47** 5** 10** 7** Pricing 30 41** 4** 9** 16** The number in each cell is the mean of the amount of points given by responding managers to each function. p.05. and finance on a variety of strategic and tactical decisions within their businesses. published by the American Marketing Association. A t-test was performed to compare column 2 (mean of relative influence of marketing) with columns 3 through 6 (relative influence of sales. firms seek competitive advantage and synergy through a well-integrated program of marketing mix elements (primarily the 4 Ps of product. WHAT IS MARKETING’S ROLE IN FORMULATING AND IMPLEMENTING STRATEGIES? The essence of strategic planning at all levels is identifying threats to avoid and opportu- nities to pursue. and competitors. the critical issue concerning the scope of a marketing strategy is specifying the target market(s) for a particular product or product line. distributors. and promotion) tailored to the needs and wants of potential customers in that target market.5 The study examined perceptions of marketing managers’ influence relative to managers from sales. Consequently. operations. mechanical machinery. Exhibit 1. EXHIBIT 1. marketing managers are usually most familiar with conditions and trends in the market environment.” Journal of Marketing 63 (April 1999). where: * p < . and 234 German business units of firms in the electrical equipment. The wide-ranging influence of marketing managers on higher-level strategic decisions is clearly shown in a survey of managers in 280 U.3 summarizes the results.01. Statistically significant dif- ferences with marketing are indicated by asterisks. Therefore. Workman Jr. ** p < . but also are often primary participants and contributors to the planning process at the business and corporate levels as well. and consumer package goods industries. Christian Homburg.S.indd 10 14/12/12 12:26 PM . The primary strategic responsibility of any manager is to look outward continuously to keep the firm or business in step with changes in the environment. 10 Section One Introduction to Strategy Marketing Strategy The primary focus of marketing strategy is to effectively allocate and coordinate market- ing resources and activities to accomplish the firm’s objectives within a specific product- market. 9. Because they occupy positions at the boundary between the firm and its customers. price. R&D.

For example. business-level strategic decisions. marketing managers also were perceived to wield significantly more influence than managers from other functional areas on cross-functional. They also are willing and able to quickly adapt products and wal28949_ch01_001-030.8 More critically. and measurement and improvement of customer satisfaction. the selection of strategic business partners. the influence of sales executives was perceived to be even greater than that of marketing managers on some of these decisions. Business. customer-oriented aspects central to marketing. the strength of that influence varies across organiza- tions. “Germany has tradition- ally stressed technology and operations more than the softer. distribution. pricing. Interest- ingly. While the views of finance and operations executives carry more weight in approving major capital expenditures. For one thing. Similarly. though. such as advertising messages. customer service and support. Might the relative influence of the different functions become more similar as firms adopt more integrative organizational forms. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. 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. More surprisingly.indd 11 14/12/12 12:26 PM . As originally stated by General Electric six decades ago. managers in other functional areas of market-oriented firms incorporate more customer and competitor information into their decision-making processes as well. and new product development. marketing and sales managers exert more influence on decisions concerning the strategic direction of the business unit. especially when marketing has responsibility for the sales force. One reason—particularly in the indus- trial goods firms selling electronic equipment and machinery—may be that sales managers have more detailed information about customer needs and desires because they have direct and continuing contact with existing and potential buyers. the study detailed in Exhibit 1.7 Market-Oriented Management Another reason marketing managers do not play an equally extensive strategic role in ev- ery firm is because not all firms are equally market-oriented. Thus. such as cross-functional work teams? The study’s results suggest not. As one of the study’s authors points out. on average.”6 Other variables appear to impact marketing’s influence regardless of national culture. For instance. marketing managers tend to have greater strategic influence in firms that spend relatively heavily on R&D and that seek a competitive advantage based extensively on innovative product and service offerings. expansion into new geo- graphic markets. marketers tend to have a greater influence on all levels of strategy in organizations that embrace a market-oriented philosophy of business. marketing managers may not play as pervasive a strategic role in other cultures as they do in the United States. Market-oriented organizations tend to operate according to the business philosophy known as the marketing concept. and Marketing Strategies 11 The study found that. Marketing’s influence was not significantly reduced in compa- nies that had instituted cross-functional structures and processes. marketing and sales executives exerted significantly more influence than managers from other functions on strategic decisions concerning tra- ditional marketing activities. Variations in Marketing’s Strategic Influence Although marketing managers often have substantial influence on strategy formation at the corporate and business unit levels. Not surprisingly. marketing is more influencial in firms that have strong “customer-connecting” capabilities. market-oriented firms are characterized by a consistent focus by personnel in all departments and at all levels on customers’ needs and competitive circumstances in the market environment.3 found that marketers’ influence on both tactical and strategic issues was significantly lower in German firms.

2. Target customers precisely. encouraging entrepreneurial thinking among lower-level manag- ers. 10. Grow with partners and alliances. 7. Define the business as a service business. decentral- izing strategic decisions. As Akio Morita.4 Guidelines for Market-Oriented Management 1. 5. published by the American Marketing Association. They embrace the concept of market segmentation by adapting product offerings and marketing programs to the special needs of different target markets. So instead of doing a lot of marketing research. Define and nurture your distinctive competence. and McDonald’s McLean low-fat hamburger. Do Customers Always Know What They Want? Some managers—particularly in high-tech firms—question whether a strong focus on cus- tomer needs and wants is always a good thing. Define marketing as market intelligence. 12 Section One Introduction to Strategy EXHIBIT 1. including using more detailed environmental scanning and continuous.9 For instance. 10.4. “Executing the New Marketing Concept. 3.. Such firms pay a great deal of at- tention to customer research before products are designed and produced. Webster Jr. designers. Measure and manage customer expectations. New Coke. Market-oriented firms also adopt a variety of organizational procedures and structures to improve the responsiveness of their decision-making. Build customer relationships and loyalty. Samsung uses cross-functional teams of engineers. but we do. 9. the late visionary CEO of Sony. But the critics of a strong customer focus argue that paying too much attention to customer needs and wants can stifle innovation and lead firms to produce nothing but marginal improvements or line wal28949_ch01_001-030. Let the customer define quality. 14. were developed with a great deal of cus- tomer input. 15. These and other actions recom- mended to make an organization more market-driven and responsive to environmental changes are summarized in Exhibit 1.indd 12 14/12/12 12:26 PM . were developed with little or no market research. Commit to continuous improvement and innovation. 6. once said: Our plan is to lead the public with new products rather than ask them what kind of products they want. 8. seeking frequent feedback from and coordinating plans with key customers and major suppliers. The public does not know what is possible. 13. 12.” Marketing Management 3. Make customer value the guiding star. in part because they do not know what kinds of products or services are technically possible. and process engineers to manage new product development projects and to adapt existing products to varying cus- tomer preferences in different markets around the world. 11. such as the Chrysler minivan and Compaq’s pioneering PC network server. Manage for profitability. p. On the other hand. Listen to the customer. 4. marketers. such as Ford’s Edsel. Frederick E. 1 (1994). functional programs to fit changes in that environment.11 The laws of probability dictate that some new products will succeed and more will fail regardless of how much is spent on marketing research. market researchers. Create customer focus throughout the business. real-time information systems. some famous duds. we refine our thinking on a product and its use and try to create a market for it by educating and communicating with the public. and using interfunctional management teams to analyze issues and initiate strategic actions outside the formal planning process. Destroy marketing bureaucracy. Manage culture along with strategy and structure. not sales volume. They argue that customers cannot always articulate their needs and wants.10 Others have pointed out that some very successful new products. Source: Reprinted with permission from Marketing Management.

How do marketers respond to this charge? Although many consumers may lack the technical sophistication necessary to articu- late their needs or wants for cutting-edge technical innovations. they usually don’t— and probably shouldn’t—play a role in influencing how firms allocate their basic re- search dollars. around the world have built cars. the same is not true for industrial purchasers.com. parts inventories exploded and supply costs Source: Jay Greene.indd 13 14/12/12 12:26 PM . and Marketing Strategies 13 extensions of products and services that already exist. While innovative product design is LEGO’s primary More critically. and then there is development—the conversion of technical con- cepts into actual salable products or services. wal28949_ch01_001-030. described in Exhibit 1. Top executives decreed the firm’s profits declined dramatically in the early to that new product development projects should be man- mid-2000s. the company has found that de- core product line as well. Top management had given signers function most successfully when placed under free reign to the firm’s designers to develop more imagi. many of . some constraints. and whether customers will value those benefits sufficiently to make the product a commercial success. and other products in highly help control production and supply costs. 2010). As for consumer markets. ence or special expertise. EXHIBIT 1. the Swedish toy company. very demanding Unfortunately. as well as designers. and profitability problems involved reducing the creative But despite its widely known and respected brand. what benefits it will offer to customers.5 How LEGO Revived Its Brand Not many toy companies in the world have as much firm’s ultimate consumers. manufacturing managers who could ures drawn from that series. markets points out. However. “How LEGO Revised Its Brand. fire trucks. uct prototypes. those complex designs incorporated about what they want to buy. and sales of the company’s brand recognition as LEGO. a customer focus is critical to development. LEGO launched a kid’s TV series. with the Swedish company’s plastic bricks. the new designs did not appeal to the kids who are the Design Is How It Works (New York: Portfolio/Penguin Group. developed with their cooperation (perhaps in the form of an alliance or partnership). Someone within the organiza- tion must have either the insight and market experience or the substantial customer input necessary to decide what product to develop from a new technology. with tastes. namely that the products being de- native creations for kids to build with LEGO bricks. As designers happily embraced their new freedom and de. and refined at customer beta sites. First there is basic research. ferent countries. preferences. as illustrated by the travails of LEGO.businessweekhttps://www.scribd.com/design. Therefore. LEGO’s vice president of products and veloped many increasingly complex and artistic designs. they will go somewhere else. Mads Nipper. . As a result. . Many high-tech industrial products are initiated at the urging of one or more major customers. aged by teams involving marketing managers familiar One reason for the decline was a loss of strategic fo. Business. If your offer does not thousands of new components. market re- competitive categories that were largely unrelated to the searchers who could test kids’ reactions to various prod- firm’s popular bricks and where the firm had no experi. Most consumers have little knowledge of scientific advancements and emerging technologies. even en. The signed appeal to the customers who will use them. the solution to LEGO’s product design tire cities.” www went through the roof. See also. Three generations of kids core products went downhill. To make matters worse. and purchase behaviors in dif- cus. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. About half of all manufactured goods in most countries are sold to other organizations rather than individual consumers. July 23. 2010.5. a set of action fig. “Children are . Paradoxically. many of which were not stack up. LEGO began foundering within its competitive strength. The importance of a customer focus often becomes clear when a firm attempts to develop a variety of successful new product offerings from a single well-established technology. Jay Greene.” interchangeable with those of other products in the line. one way to resolve the conflict between the views of technologists and marketers is to consider the two components of R&D. freedom of the firm’s designers.

a strong customer focus usually pays big dividends in terms of market share and profit over the long haul. at least in a developed economy such as the United States. and reduce the volatility and vulnerability of their cash flows. together with a customer focus and cross-functional coordination. accelerate. and market capitalization. customer equity. cutting-edge new releases. before Apple introduced the iPod. 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. “I don’t know how else you can sell in a consumer marketplace without understanding product design and usage. For example. rather than lowering costs or advancing technology. sales growth. 14 Section One Introduction to Strategy In the case of an innovative new technology. although firms can sometimes succeed in the short run even though they ignore customer desires. many probably would have said. For instance. profitability is the third leg. One study of start-ups in Japan and A market orientation has a significant the United States found that new firms that focused on marketing positive effect on various dimensions of first. But if a market researcher had asked whether they would buy a product smaller than a Sony Walkman that could store and play thousands of songs they could download from their computer without messing with cassette tapes or CDs. “Certainly!” A strong customer focus is not inconsistent with the development of technically in- novative products. it often must be developed into a con- crete product concept before consumers can react to it and its commercial potential can be assessed. They can tell you what problems they are having with current products and services and what additional benefits they would like from new ones. in- cluding return on assets. Sometimes the marketing concept is interpreted as a philosophy of trying to satisfy all customers’ needs regardless of the cost. You have to know what the end user wants. Substantial evidence supports the idea that being market-oriented pays dividends. Indeed. articulated customer wants. That would be a prescription for financial disaster. nor does it condemn a firm to concentrate on satisfying only current. but such low-price channels are largely reserved for the firm’s older. and new product success. likely to be brought down by competitors as their product-markets sales growth. of the three- legged stool known as the marketing concept. As one CEO pointed out. More important.indd 14 14/12/12 12:26 PM . were less performance. A number of studies involving more than 500 firms or business units across a variety of industries indicate that a market orientation has a significant positive effect on various dimensions of performance.15 wal28949_ch01_001-030. new product success. including return on assets. developed. the marketing concept is consistent with the notion of focusing on only those seg- ments of the customer population that the firm can satisfy both effectively and profitably. Firms might offer less extensive or costly goods and services to unprofitable segments or avoid them.”12 Does Being Market-Oriented Pay? Since an organization’s success over time hinges on its ability to provide benefits of value to its customers—and to do that better than its competitors—it seems likely that market- oriented firms should perform better than others. consumers can express their needs or wants for specific benefits even though they do not know what is technically feasible.13 And that should enhance their economic performance and shareholder value. in recent years Samsung Electronics has resumed distributing some of its products through discount chains such as Walmart and Carrefour.14 Even entrepreneurial start-ups appear to benefit from Strategic Issue a strong customer orientation. few consumers would have asked for such a product because they were unfamiliar with the possibilities of digitization and miniaturization in the electronics industry. Instead. no-frills models rather than its more stylish. In other cases.

focus on product Market research. Broad. • Firms can suffer from strategic inertia—the automatic continuation of strategies suc- cessful in the past. Credit A necessary evil. even though current market conditions are changing. and production problems and resource constraints tend to represent more immediate threats to the survival of such new businesses. Other functional differences between production-oriented and market-oriented firms are summarized in Exhibit 1. or other organiza- tions in their market environment. production. ability to satisfy customers’ needs or solve problems. Among the rea- sons 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.6. EXHIBIT 1. Research Technical research. Company makes what it can sell. suppliers. minimize bad debt A customer service. Product line Narrow. This is because there are likely to be relatively few strong competitors during the formative years of a new industry. quality. customer demand for the new product is likely to grow rapidly and outstrip available supply. promotional tool. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. They focus most of their attention and resources on such functions as product and process engineering. many companies around the world are not very focused on their customers or competitors. distributors. technology to satisfy customer needs. Pricing Based on production and distribution Based on perceived benefits provided. particu- larly industries based on new technologies. costs. Packaging Protection for the product. • Different levels of economic development across industries or countries may favor dif- ferent business philosophies. a tool to attract losses. Competitive Factors Affecting a Firm’s Market Orientation The competitive conditions some firms face enable them to be successful in the short term without paying much attention to their customers.6 Differences between Production-Oriented and Market-Oriented Organizations Business Activity or Function Production Orientation Marketing Orientation Product offering Company sells what it can make. Business. The business is primarily concerned with producing more of what it wants to make.indd 15 14/12/12 12:26 PM . and Marketing Strategies 15 Factors That Mediate a Firm’s Market Orientation Despite the evidence that a market orientation boosts performance. Promotion Emphasis on product features. focus on identifying improvement and cost cutting in the new opportunities and applying new production process. are especially likely to be internally focused and not very market-oriented. customers. and finance in order to acquire and manage the resources necessary to keep pace with growing demand. Early entrants into newly emerging industries. Businesses facing such market and competitive conditions are often product- oriented or production-oriented. wal28949_ch01_001-030. minimize Designed for customer convenience. and market opportunities. and marketing generally plays a secondary role in formulating and implementing strategy. primary focus on functional primary focus on customers’ needs performance and cost. a costs. Emphasis on product benefits and and price.

As a result. Consequently.16 It is not surprising. etc. accountants. in an industry dominated by large.. or intangible benefits other firms cannot match. especially for alliances or joint ventures.17 But the bottom line is that an orientation toward the market—competitors. As industries mature. physicians. Unfortunately. BMW. or offering frequent price promotions—to maintain market share and hold down unit costs. For example. sales volume levels off. many service industries—including banks. increasing advertising budgets. during the industrialization that occurred from the mid-1800s through World War I. Firms often respond to such changes with aggressive promotional activities—such as hiring more salespeople. and potential customers—is usually crucial for continued success in global markets.18 Similarly. Toyota. that many of America’s most market-oriented firms—and those working hardest to become market-oriented—are well-established competitors in relatively mature industries. Of course. Ford. for instance. Worse. for example. lawyers. a firm must seek new market segments or steal share from competitors by offering lower prices. managers can most readily appreciate the benefits of a market orientation. and the environment shifts from a seller’s market to a buyer’s market. New entrants are attracted and existing producers attempt to differentiate themselves through improved products and more efficient production processes. then. The partnership between French automaker Renault-Nissan and the Russian car manufacturer AvtoVAZ discussed in Exhibit 1. superior services. but it can create some opportunities as well. they become more competitive.g. wal28949_ch01_001-030.)—being responsive to competitor actions may be even more important than a strong customer focus. Industries that are in earlier stages of their life cycles or that benefit from barriers to entry or other factors reducing the intensity of competition are likely to have relatively fewer market-oriented firms. the popularity—and even the appropriateness—of different business philosophies also may vary across countries. and insurance companies—were slow to adopt the marketing concept. and marketers are often given a bigger role in developing competitive strategies. The Influence of Different Stages of Development across Industries and Global Markets The previous discussion suggests that the degree of adoption of a market orientation var- ies not only across firms. a given industry’s characteristics may make some components of a market orientation more critical for good performance than others. dynamic competitors—as in the global automobile industry (e. 16 Section One Introduction to Strategy As industries grow. customers. many service organizations are working much harder to understand and satisfy their customers.7. At this stage. Simply spending more on sell- ing efforts usually does not create a sustainable competitive advantage. For instance. A production orientation was the dominant business philoso- phy in the United States. a primary focus on developing product and production technology may still be appropriate in developing nations that are in the midst of industrialization. in part because of governmental regulations that restricted competition.indd 16 14/12/12 12:26 PM . this kind of sales-oriented response to increasing competition still focuses on selling what the firm wants to make rather than on customer needs. industry capacity often grows faster than demand. But with the trend toward deregulation and the increasingly intense global competition in such industries. but also across entire industries. International differences in business philosophies can cause some problems for the glo- balization of a firm’s strategic marketing programs. Given that entire economies are in different stages of development around the world. Consider. competitors can easily match such aggressive sales tactics. airlines. and technological differences among brands tend to disappear as manufacturers copy the best features of each other’s products.

and techniques of marketing in the future. (3) the rapid development of new information and com- munications technologies. and Carol Matlack. Togliatti is a decrepit.” most successful cheap car. Recent Developments Affecting the Strategic Role of Marketing In the future. 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. The no-frills Source: Based on material in Carol Matlack. the French carmaker Renault-Nissan nology and know-how the company will provide us. 57–58. 2008. starting at about $9. new busi- ness school graduates who both understand the marketing management process and are savvy with respect to one or more of these ongoing developments can play an important role—and gain a potential competitive advantage—within even the largest firms. For more information should also help Renault appeal to Russian car buyers and about Renault’s acquisitions and alliances. The key reason the firm pany’s Lada sedans are turned out by 40-year-old equip. see the company capture a larger share of that country’s growing market. 2008.com. (2) the growth of the service sector of the economy and the importance of service in maintaining customer satisfaction and loyalty.” www. They begin to believe there is one best way to satisfy their customers. Its partnership with AvtoVAZ BusinessWeek. These developments include (1) the increased globalization of markets and competition. Consequently. and marketing strategies. will make the plant ideal for producing the Logan lineup of cars that the firm introduced in 2004.businessweek. website at www. Nevertheless. Strategic Inertia In some cases. more efficient plants near the AvtoVAZ factory. Such newly minted managers can bring fresh perspectives and valuable insights concerning how these emerging trends are likely to impact their organizations’ customers. the strategic planning process needs to be ongoing and adaptive. wal28949_ch01_001-030.com. cording to Chairman Sergei Chemezov. It is impossible to predict exactly how these trends will play out. mile-long building where the com. February 29. and Marketing Strategies 17 EXHIBIT 1. These changes are rapidly altering the context in which marketing strategies are planned and carried out and the information and tools that marketers have at their disposal. and (4) the growing importance of relationships for improved coordination and increased efficiency of marketing programs and for capturing a larger portion of customers’ lifetime value.7 Renault’s Partnership with Russian Automaker AvtoVAZ Benefits Both Parties The AvtoVAZ car factory in the central Russian city of But AvtoVAZ will also benefit from the partnership. Some recent impacts of these four developments on marketing management are briefly summarized below and will be continuing themes throughout this book. tools.000. All the participants. competi- tors. especially on the production side. agreed to the deal with Renault was “the modern tech- ment. in environments where such changes hap- pen frequently. has become the world’s Takes on a Russian Relic. March 17. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. may also encourage global auto parts suppliers to build Renault figures that Russia’s low labor and energy costs new. The partnership Even after investing more millions to modernize the plant. need to pay constant attention to what is happening with their customers and competitors. “Carlos Ghosen’s Russian Gambit.renault. whether from marketing or other functional departments. Such strategic inertia is dangerous because customers’ needs and competitive offerings change over time. We will also speculate from time to time about how these ongo- ing trends may reshape the tasks. Business. Thus.indd 17 14/12/12 12:26 PM . pp. “Renault’s Ghosen Logan.” ac- recently paid $1 billion for a 25 percent stake in AvtoVAZ. strategic inertia will be even more dangerous in many industries because they are facing increasing magnitudes and rates of change in their environments.

a few years ago Dell attempted to maintain its long-standing low-cost position in the personal computer industry by—among other things—reducing the number of technicians in its customer call centers and limiting each technician’s train- ing to only a few specialized problem areas. restaurants. This is especially a dan- ger when intense price competition pushes a firm to cut costs by reducing customer service and support. the intangible nature of many services can create unique challenges for marketers. As markets have become crowded with global competitors offering similar products at ever-lower prices. and maintenance often are provided in conjunction with a physical product.”19 Service businesses such as airlines. culture. and services are the fastest-growing sector of most other developed economies around the world. and about their competitors’ offerings and prices. For instance. legal systems. preferences.indd 18 14/12/12 12:26 PM . As a result. Consequently. and despite expensive attempts to improve service—including the use of indepen- dent retail outlets to sell and service Dell equipment—the firm’s market share. retention. installation. Its production may or may not be tied to a physical product. We will discuss these challenges— and the tools and techniques firms have developed to deal with them—throughout this book. in turn. and loyalty over the long term. increasing numbers of customers spent 30 minutes or more on hold when they called Dell for help.21 Information Technology The computer revolution and related technological developments are changing the nature of marketing management in two important ways. pro- motional appeals. and buying habits. and stock price have still not fully recovered. As the definition suggests. Dell’s customer satisfaction rating in the United States plum- meted.20 Of course. or distribution channels—must be tailored to local conditions for the strategy to be effective. can justify higher prices and margins in the short term and help improve customer satisfaction. new technologies are making it possible for firms to collect and analyze more detailed information about potential custom- ers and their needs. Those additional benefits. services such as financing. bad customer service can have the opposite effect. and consulting firms account for roughly two-thirds of all economic activity in the United States. international differences in infrastructure. and 45 percent were transferred at least once before they found a technician with the expertise to solve their problem. profits. 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. For instance. 18 Section One Introduction to Strategy Globalization International markets account for a large and growing portion of the sales of many orga- nizations. First. Such ancillary services have become more critical to firms’ continued sales and financial success in many product-markets. and the like often mean that one or more elements of the marketing program—such as product features. Although many of the decisions and activities involved in marketing ser- vices are essentially the same as those for marketing physical goods. user train- ing and assistance. Even when similar marketing strategies are appropriate for multiple coun- tries. delivery. But while global markets represent promising opportunities for additional sales growth and profits. a recent study of chief marketing officers conducted by IBM across 19 industries in 64 different countries found that while 80 percent still relied on traditional marketing research and corporate benchmarking as their primary sources of wal28949_ch01_001-030. hotels. the creative design and effec- tive delivery of supplemental services have become crucial means by which a company may differentiate its offering and generate additional benefits and value for customers. differences in market and competitive conditions across country boundaries can require firms to adapt their competitive strategies and marketing programs to be successful.

11. Chapter One Market-Oriented Perspectives Underlie Successful Corporate.24 Roughly 80 percent of those sales were business-to-business transactions. wholesalers.8 suggests. new information and communications technolo- gies are enabling firms to forge more cooperative and efficient relationships with their suppliers and distribution channel partners. February 26.23 A second impact of information technology has been to open new channels for com- munications and transactions between suppliers and customers. such as Priceline brands Source: Adapted from “A Survey of E-Commerce: Shopping Around the web. though. and financing arrangements to fit such segments. and Cisco Systems. such as E*Trade. Lands’ End. Many high-tech firms such as Oracle Corp. and worldwide volume of about $8 trillion seems a reasonable guess for 2012.8 Categories of E-Commerce Business Consumer Business-to-Business (B2B) Business-to-Consumer (B2C) Examples: Examples: Business • Purchasing sites of Ford. retailers. such as those in the upper-left quadrant of Exhibit 1. improve cash flow. such as Sears. and selected service firms amounted to over $3. Perhaps even more important. such as eBay. Sales information from the retailer’s checkout scanners is sent directly to the supplier’s computers. such as Dell. and 48 percent are tracking customer reviews and ratings.8) accounted for only about 8 percent of retail sales in the United states in EXHIBIT 1.indd 19 14/12/12 12:26 PM . Global sales over the internet are growing so fast that solid estimates of their volume www are hard to come by. Procter & Gamble and 3M have formed alliances with major retailers—such as Kroger and Walmart—to develop auto- matic restocking systems. make sales. prices. Business. internet revenues of manufacturers. In contrast. minimize inventory levels. However. wal28949_ch01_001-030. Sofitel Hotels members. 42 percent examine third-party reviews. 2000.22 Thus. For example. producers and distribution channel Ryanair. Such paperless ex- changes reduce mistakes and billbacks. Marks & Spencer Consumer-to-Business (C2B) Consumer-to-Consumer (C2C) Example: Examples: Consumer • Sites that enable consumers to bid • Auction sites. 26 percent said they are currently tracking blogs. such as 3M and Walmart • Websites of traditional retailers. And many firms rely on their websites to communicate product information to potential customers. which figure out automatically when to replenish each product and schedule deliveries direct to each of the retailer’s stores. and increase customer satisfaction and loyalty. and even some more traditional companies such as Ford. promotional appeals. iTunes • Supply chain networks linking • Producers’ direct sales sites.4 trillion in the United States in 2009 (the most recent census data available at the time of this writing). Amazon. p. and Marketing Strategies 19 market feedback. and deal with customer problems. As Exhibit 1.” The Economist. Oracle. information technology is making it possible for many firms to identify and target smaller and more precisely defined market segments—sometimes segments consisting of only one or a few customers—and to customize product features. one simple way of categorizing these new channels is based on whether the suppliers and customers involved are organizations or individual consumers.8. internet sales from businesses to consumers (the upper-right quadrant in Exhibit 1. QXL on unsold airline tickets and other • Blogs praising/criticizing companies or goods and services. Cisco • E-tailers. conduct all or a large portion of their purchasing activities over the web.

25 to 34 year olds already make more than a quarter of their purchases online.28 As more firms embrace the use of multifunctional teams or network structures. and highly adaptive to succeed and prosper in the future. service. About 30 percent of the respondents in a recent study said they used social media to help avoid brands their friends did not like. they will rely more heavily on suppliers. manage. In many firms. Similarly. the web is presenting marketers with new strategic options—as well as new competitive threats and opportunities—regardless of what or to whom they are selling. The Future Role of Marketing In light of such changes. But social media like Facebook. Twitter. more firms are trying to develop and nurture long-term relationships and alliances. particularly among younger buyers. as organizations become more focused and specialized in developing unique core competencies. and satisfy customers.27 Similar kinds of cooperative relationships are emerging inside companies as firms seek mechanisms for more effectively and efficiently coordinating across functional depart- ments the various activities necessary to identify. 20 Section One Introduction to Strategy 2011—roughly $188 billion. dis- tributors. and 28 percent said they relied on their friends for news about hot new products or brands. All of this suggests that the ability to create. Consequently. adversarial exchanges with customers. Such cooperative relationships are thought to improve each partner’s ability to adapt quickly to environmental changes or threats. that such marketing activities may not always be car- ried out by marketing managers located in separate functional departments.S. and satisfy- ing customers’ needs—will become even more critical for the successful formulation and implementation of strategies at all organizational levels. wal28949_ch01_001-030. tightly focused on customer needs and desires. and YouTube also impact people’s decisions. Instead of engaging in a discrete series of arm’s-length. online retail sales are forecast to exceed $270 billion by 2015. channel members. however. It is important to note. the boundaries be- tween functions are likely to blur and the performance of marketing tasks will become everybody’s business. and others will become a key strategic competence for firms in the future—and that is what marketing is all about. attract. and new technologies—such as 4G phones and geolocation apps—will spur further growth. it is apparent that firms in most. In the United States for in- stance. and suppliers on the open market. if not all. to gain greater ben- efits at lower costs from its exchanges. consumer purchases over the internet continue to grow rapidly worldwide. Among U. 78 percent report gathering information online before making a purchase. However. Therefore. and to increase the lifetime value of its customers. In turn. distributors.indd 20 14/12/12 12:26 PM . we will devote all of Chapter 11 to marketing strategies for e-commerce and discuss specific examples and their implications in every chapter. Relationships across Functions and Firms New information technologies and the ongoing search for greater marketing efficiency and customer value in the face of increasing competition are changing the nature of exchange between companies. the planning and execution that used to be the responsibility of a product or marketing manager are now coordinated and carried out by cross-functional teams. such as the one between 3M and Walmart. industries will have to be market-oriented. and other partners to perform activities—including marketing and sales tasks—that fall outside those areas of competence. consumers with internet ac- cess. dealers. web-based information is affecting consumer purchase patterns even when the purchases are made in traditional retail outlets. Most start their online search with a search engine like Google (58 percent).26 Clearly. or by visiting a manufac- turer’s website (24 percent). analyzing.25 Also. this suggests that the effective performance of marketing activities—particularly those associated with tracking. and sustain exchange relationships with customers. vendors.

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 appro- priateness and ultimate success: (1) the company’s internal resources. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. Instead. wants. (2) the environmental context—such as broad social.indd 21 14/12/12 12:26 PM . and Marketing Strategies 21 FORMULATING AND IMPLEMENTING MARKETING STRATEGY—AN OVERVIEW OF THE PROCESS This book examines the development and implementation of marketing strategies for in- dividual product-market entries. They are the focus of a market opportunity analysis and are discussed in more detail following. Of course. and shifting economic conditions. and the company itself should occur before designing a marketing strategy. such strategic marketing programs are not created in a vacuum. Ad- justments are made. most marketing strategies never get implemented in quite the same way as they were drawn on paper. Marketers refer to these elements as the 4Cs.9 briefly diagrams the activities and decisions involved in this process.9 suggests that a substantial amount of analysis of customers. and new activities undertaken in response to rapid changes in customer demands. But a thorough and ongo- ing analysis of the market and the broader environment enables managers to make such adjustments in a well-reasoned and consistent way rather than by the seat of their pants. This reflects our view that successful strategic decisions usually rest on an objective. and it also serves as the organizational framework for the rest of this book. But as we have seen. competitors. detailed. Therefore. because all levels of strategy must consider such factors. competitive actions. whether goods or services. marketers often play a major role in providing inputs to—and influencing the de- velopment of—corporate and business strategies. Those decisions are the primary focus of this book. capabilities. (3) the relative strengths and weaknesses of competitors and trends in the competitive environment. and characteristics of current and potential customers. general managers and senior managers in other functions need a solid understanding of marketing in order to craft effec- tive organizational strategies. and evidence-based understanding of the market and the environmental context. Marketing managers also bear the primary responsibility for formulating and imple- menting strategic marketing plans for individual product-market entries or product lines. when to do it. Business. Analysis Comes First—The Four “Cs” Exhibit 1. and strategies. and how. Planning and executing a marketing strategy involves many interrelated decisions about what to do. economic. Exhibit 1. For that reason. and technol- ogy trends—in which the firm will compete. Every chapter details either the deci- sions to be made and actions taken when designing and implementing strategies for vari- ous market situations or the analytical tools and frameworks you will need to make those decisions intelligently. the marketing objectives and strategy for a particular product-market entry must wal28949_ch01_001-030. 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 posed by competitors and trends in the external environment. and (4) the needs. it is important to note the basic focus of this framework and the sequence of events within it. A Decision-Making Focus The framework has a distinct decision-making focus. Conversely.

the roles marketers and other functional managers play in shaping the strategic direction of their organizations and business units.indd 22 14/12/12 12:26 PM . or an existing product or product wal28949_ch01_001-030.9 The Process of Formulating and Implementing Marketing Strategy External Corporate objectives and strategy environment (Chapter 2) Business-level objectives and strategy (Chapter 3) Market opportunity analysis • Understanding market opportunities (Chapter 4) • Forecasting and market knowledge (Chapter 5) • Customer analysis. the first step in developing a strategic marketing plan—for a new venture. In other achievable with the company’s available words. a new product. Chapters 2 and 3 describe resources inherent in the firm’s corporate in more detail the components of corporate and business strategies and and business-level strategies. 22 Section One Introduction to Strategy EXHIBIT 1. segmentation. Thus. and targeting decisions (Chapter 6) • Positioning decisions (Chapter 7) Formulating strategies for specific market situations • Strategies for new market entries (Chapter 8) • Strategies for growth markets (Chapter 9) • Strategies for mature and declining markets (Chapter 10) • Strategies for the new economy (Chapter 11) Implementation and control • Implementing business and marketing strategies (Chapter 12) • Controlling marketing strategies and programs (Chapter 13) Strategic Issue be achievable with the company’s available resources and capabili- The marketing objectives and strategy for ties and consistent with the direction and allocation of resources in- a particular product-market entry must be herent in the firm’s corporate and business-level strategies. Market Opportunity Analysis A major factor in the success or failure of strategies at all three levels is whether the strategy elements are consistent with the realities of the firm’s external environment and its own capabilities and resources. there should be a good fit—or internal consistency—among resources and capabilities and consistent with the direction and allocation of the elements of all three levels of strategy.

Market Segmentation. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. Chapter 6 discusses some of the considerations in selecting a target segment. Business. Targeting. an insight that is easily (and often) overlooked. circumstances. seek different benefits from the product. 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. rely on different sources of information about products. It’s also necessary to examine the management team that will be charged with implementing whatever strategy is developed in order to determine if they have what it takes to get the job done. and characteristics that lead them to respond in a similar way to a particular product or service offering or to a particular strategic marketing pro- gram. personal characteristics. social circumstances. and so forth. and Marketing Strategies 23 line—is to undertake an analysis of the 4Cs. Thus. wal28949_ch01_001-030. In Chapter 5. Chapter 4 provides a framework for examining these issues and dramatizes how different the attractiveness of one’s market and one’s industry can be. as well as specific aspects of the target customers and their needs and of the particular firm and what it brings to the party. one of the manager’s most cru- cial tasks is to divide customers into market segments—distinct subsets of people with similar needs. On the other hand. customers who do purchase the same product may be motivated by different needs. the manager must decide how to position the product or service offering and its brand within a target segment. Understanding Market Opportunities Understanding the nature and attractiveness of any opportunity requires conducting an examination of the external environment. the manager must decide which segments represent attractive and viable opportunities for the company. and Positioning Decisions Not all customers with similar needs seek the same products or services to satisfy those needs. on which segments to focus a strategic marketing program. that is. Finally. and we examine the factors that drive the pace at which innovations are adopted over time. We also briefly explore where to obtain the market knowledge required—the data to fill in the holes in one’s understanding of any market opportunity— including sources both inside and outside the firm. Measuring Market Opportunities Understanding the overall attractiveness of a market opportunity is one thing. we outline several approaches to evidence- based forecasting. and obtain the product from different distribution channels. including the markets served and the industry of which the firm is a part. that is. Preparing an evidence-based forecast of the sales that can be achieved over the short and intermediate term is quite another and is a particularly difficult task for new products. especially those of the new-to-the-world variety. After defining market segments and exploring customer needs and the firm’s competi- tive strengths and weaknesses within segments. Marketing managers in various line or staff positions—or entrepreneurs themselves. this examination involves a look at broad macro is- sues such as environmental trends that are driving or constraining market demand and the structural characteristics of the industry as a whole. so that the nature and attractiveness of the market opportunity is well understood. Chapter 6 examines dimensions for measurement and analytical techniques that can help managers identify and define market segments in both consumer and organiza- tional markets. In turn. Issues and analytical techniques involved in brand positioning decisions are discussed in Chapter 7. in start-up settings—typically carry out this responsibility. Their purchase decisions may be influenced by individual preferences.indd 23 14/12/12 12:26 PM .

Written plans also provide a concrete history of a product’s strategies and performance over time. Therefore. This depends on whether the strategy is consistent with the resources. and product design and the development of cross-functional product teams to encourage com- munication among the firm’s engineers. however brief. and resource allocations over the planning period for either an existing or a proposed product or service. the coordination and control systems. Chapter 9 discusses strategies appropriate for building or maintain- ing a product’s share of a growing market in the face of increasing competition. the or- ganizational structure. Chapter 12 discusses the structural variables. Chapter 13 examines ways to evaluate marketing performance and develop contingency plans when things go wrong. Chapter 8 examines some marketing strategies for introducing new goods or services to the market. competencies.29 Managers must design a strategy to fit the company’s existing resources. marketing actions. the discipline involved in producing a wal28949_ch01_001-030. The Marketing Plan—A Blueprint for Action The results of the various analyses and marketing program decisions discussed previously should be summarized periodically in a detailed formal marketing plan. or of assigned responsibilities for taking action. and procedures—or try to construct new structures and systems to fit the chosen strategy. . This evaluation and control process provides feedback to man- agers and serves as a basis for a market opportunity analysis in the next planning period. and the external environment and providing guidelines for objectives. Although some firms—particularly smaller ones—do not bother to write their market- ing plans. most organizations believe that “unless all the key elements of a plan are written down . 24 Section One Introduction to Strategy Formulating Marketing Strategies for Specific Situations The strategic marketing program for a product should reflect market demand and the com- petitive situation within the target market. . and personnel and corpo- rate culture characteristics related to the successful implementation of various marketing strategies. there will always be loopholes for ambiguity or misunderstanding of strate- gies and objectives.indd 24 14/12/12 12:26 PM . 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. and marketers. market research. Written plans are necessary in most larger organizations because a marketing manager’s proposals usually must be reviewed and approved at higher levels of management and because the approved plan provides the benchmark against which the manager’s performance will be judged. Finally.”31 This suggests that even small organizations with limited resources can benefit from preparing a written plan. which aids institutional memory and helps educate new managers assigned to the product. The final tasks in the marketing management process are determining whether the strategic marketing program is meeting objectives and adjusting the program when per- formance is disappointing. But demand and competitive conditions change over time as a product moves through its life cycle.30 A marketing plan is a written document detailing the current situation with respect to cus- tomers. Chapter 10 considers strategies a manager might adopt in mature or declining markets. Chapter 11 explores how all of the preceding strategies might be influenced or modified by the rapidly evolving conditions being created by e-commerce. and the skills and experience of company personnel. competitors. designers. For example. Samsung’s brand-building program would not have been so successful without its substantial investments in digital R&D. planning and coordination processes. different strategies are typi- cally more appropriate and successful for different market conditions and at different life cycle stages.

Plans typically follow a format similar to that outlined in Exhibit 1. Action plans This is the most critical section of the annual plan for helping to ensure effective implementation and coordination of activities across functional departments. strategy. III. VI. Business. market share. V. they can be shorter. promotions. distribution. • When the action will be engaged in. we will say more about it in Chapter 12 when we discuss the implementation of marketing programs in detail. VII. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. VIII. only) IV. strategy. It specifies • The target market to be pursued. Objectives Specifies the goals to be accomplished in terms of sales volume. may present contingency plans to be used if performance falls below expectations or the situation changes. II. objectives. and profit. etc. In general. content. Projected profit-and-loss Presents the expected financial payoff from the plan. X. and marketing actions are based on rigorous analysis of the 4Cs and sound reasoning. and organization across companies.g. • What specific actions are to be taken with respect to each of the 4 Ps. wal28949_ch01_001-030. Current situation and trends Summarizes relevant background information on the market. • How much will be budgeted for each action. Because a written marketing plan is such an important tool for communicating and coordinating expectations and responsibilities throughout the firm. Performance review (for an Examines the past performance of the product and the elements of its existing product or service marketing program (e. But because the written plan attempts to summarize and communicate an overview of the stra- tegic marketing management process we have been examining.). and actions incorporated in the plan and their expected outcomes for quick management review.indd 25 14/12/12 12:26 PM . including size and growth rates for the overall market and key segments.10. and trends therein. and in some highly volatile industries such as telecommunications or electronics. Key issues Identifies the main opportunities and threats to the product that the plan must deal with in the coming year and the relative strengths and weaknesses of the product and business unit that must be taken into account in facing those issues. EXHIBIT 1. though planning periods for some big-ticket in- dustrial products such as commercial aircraft may be longer. Controls Discusses how the plan’s progress will be monitored. Marketing strategy Summarizes the overall strategic approach that will be used to meet the plan’s objectives. and Marketing Strategies 25 formal plan helps ensure that the proposed objectives. marketing plans are developed annually. competition and the macroenvironment. Contingency plans Describes actions to be taken if specific threats or opportunities materialize during the planning period..10 Contents of a Marketing Plan Section Content I. Marketing plans vary in timing. • Who is responsible for each action. statement IX. it is worthwhile to briefly examine the contents of such plans here. Executive summary Presents a short overview of the issues.

Based on these analyses. customer satisfaction levels. and “place” or distribution) necessary to implement the strategy. you’ll find that much of the work your marketing plan entails will get done as a result. we look at marketing plans for new products. Thus.. Here. “How do I go about doing what’s necessary so that. for existing products. 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 pe- riod. and. the competitive situation.indd 26 14/12/12 12:26 PM . estimates of sales potential. promotion. much of what you’ll find here applies to marketing plans for existing businesses or product lines as well. we’re only at Chapter 1!” you might say. the major trends in the broader environment that may affect the product. and it helps students who take nonmarketing jobs to better understand and appreciate marketing perspectives. such a project prepares marketing graduates to “hit the ground running” when they enter the job market. This is the homework portion of the plan where the manager summarizes the results of his or her analysis of current and potential custom- ers. we suggest you develop your own outline that best serves your context. wal28949_ch01_001-030. different from the one in Exhibit 1. but not fundamentally. Some plans also specify some contingencies: how the plan will be modified if certain changes occur in the market. Marketing A common approach many instructors take in designing a course in marketing management is to fo- cus the course around an application-oriented project. the actions associated with each of the 4 Ps (the product. either for a real company with real goods or services or for something entrepreneurial or hypothetical that the students themselves conceive. it adds a considerable amount of fun to the course. which are especially important for proposed new products or services. market share. if your course involves preparing a marketing plan or something similar. price. you’ll find at the end of every chapter an exercise that identifies how that chapter’s learning contributes to the development of your marketing plan. As you’ll see. and it gives students some tangible output they can show prospective employers when they enter the job market. etc. If you do these exercises as you go along. The fact that this outline looks slightly. 26 Section One Introduction to Strategy There are three major parts to the plan. the marketing manager details his or her assessment of the current situation. This part usu- ally starts by detailing the objectives (e. past performance outcomes.g. From a student’s perspective. You might think of this material as a road map for the project work you’ll do in the course. Perhaps the most common such marketing management project is the develop- ment of a marketing plan.) to be achieved by the product or service during the planning period. sales volume. what follows is a more detailed set of guidelines for what each section of a good mar- keting plan entails. I can deliver a competently prepared marketing plan (or some similar assignment)?” We briefly discussed the contents of a typical marketing plan for an existing product or product line at the end of Chapter 1. the manager also may call attention to several key issues—major opportunities or threats that should be dealt with during the planning period.10 should be a clue to you that there’s no single “right answer” to how a marketing plan should be assembled. by the end of the course. the company’s relative strengths and weaknesses. competitive. “But. Such a Plan Exercise project allows students to actually apply what they learn. and the timing and locus of responsibility for each action. When used in conjunction with decision-oriented cases. Finally. Given the setting in which your project is to be carried out. often done by small teams of students. This section typically also includes forecasts. As you proceed through the book. First. where there are some extra challenges due to the lack of any history and the need to make lots of decisions from square one. and other assumptions underlying the plan. profits. or external environments. The second part of the plan details the strategy for the coming period. It then outlines the overall marketing strategy. such an approach gives students two laps around the track for each element of the course: once when the course material in a given chapter is applied to a case and a second time when it is applied to the course project.

public relations plan 6. What benefits will you offer. etc. augmented product. rebates.) —Consumer promotion (discounts. • Identify the wants and needs your product serves. monthly for the first year. by category of activity. Marketing Strategy • What are your marketing objectives (SMART)? • What is your overall marketing strategy? • How will your offering be positioned? • Product decisions: features. attainable. trade and consumer promotion plan. —. in units. banners. push or pull strategy • Promotional strategy: integrated marketing communications objectives and plan. and profit contribution) in not more than two pages. and/or behavioral variables). and what product features will deliver them? 4. brand • Pricing decisions: pricing strategy.) wal28949_ch01_001-030.Identify relevant trends in any of the six macro trend categories that support or detract from the demand for your new product or service. media plan. Business. geographic.indd 27 14/12/12 12:26 PM . coupons. etc. relevant to your mission. • Identify its critical success factors. and time-bound) of the business. service. —Identify any unmet or poorly served needs that your new product or service will address. 2. copy platform. broken down into as many of the following categories as apply: —Advertising (creative and media expense) —Direct marketing (direct mail and/or telemarketing expense) —Internet marketing (website. dollars. Executive Summary • Summarize the product idea. personal selling plan. contests. samples. its target market. • State your value proposition or a positioning statement that outlines the benefits your prod- uct. The Product (Good or Service) or Business Idea • Identify the mission and SMART objectives (specific. and the results you forecast (sales. Forecast and Budget • Provide one or more spreadsheets that detail your sales and gross margin forecast and marketing budget and the activities that will comprise it for 3–5 years. Market Analysis • Indicate who constitutes your overall market and the segment you will initially target (de- fined according to one or more of the following kinds of factors: demographic. measurable. • Briefly describe the product or service and its target market. and number of potential customers). and Marketing Strategies 27 Outline: New Product Marketing Plan 1. • Assess the industry’s five competitive forces. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. Indicate. or business will provide to the target customer in order to differentiate your offering from currently available ones. 3. Competitor Assessment • Define the industry in which you will compete. • What direct and indirect competitors currently satisfy the needs of your proposed targets? • What competitive advantages and disadvantages will specific competitors have? Will you have? • What competitive responses to your entry are likely? 5. all planned marketing spending for the execution of your marketing strategy. pricing specifics • Distribution decisions: channel structure. gross margin. • For this market overall and for your target segment: —Indicate their size and current and anticipated growth rate (measured if possible.

“Losing Its Shine?” The Economist. whereas they see objective setting as a separate process. its market matures. however. Because a firm’s objectives are influenced and constrained by many of the same environmental and competitive factors as the other ele- ments of strategy. wal28949_ch01_001-030.” www. in that we view the setting of objectives as an integral part of strategy formulation. frequency. pp.indd 28 14/12/12 12:26 PM . etc.samsung. Contingency Plan • Identify what is likely to change or go wrong and what should be done if and when it does. 2005. “Samsung: Rethinking the Printer Busi- ness. however. January 5. “Samsung’s Rise in Digital TV. see Roger Kerin. Cliff Edwards. and the unit’s 2010 Annual Report and 2011 Audited Financial Statements on the company’s website at www. etc. and P. 2008. it seems logical to treat both the determination of objectives and the resource allocations aimed at reaching those objectives as two parts of the same strategic planning process. sales materials. 1 (Fall 2003). 8–9. pp.) • Indicate. Rajan Varadarajan.mhhe. “As Good as It Gets? Special Report: Samsung Electronics. p.com/walker8e. February 9.” www. What role should marketing managers play in helping to formulate business-level (SBU) strate- gies 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? Self-diagnostic questions to test your ability to apply the concepts in this chapter can be found at this book’s website at www. Endnotes 1.) —Other (sponsorships. Implementation and Control Plan • Provide an organizational chart for marketing people and functions. January 15. • Provide templates of strategic and/or operational control “dashboards” for key marketing management functions. 1990).com. 64–66. close rate. and its industry becomes more competitive.). travel) —Public relations (nonpaid media) —Customer service (inbound order taking. pp. CPM. October 4. 2. 2007. 7. commission. Provide appropriate evidence in a discussion that supports your contention that your planned marketing budget is sufficient to drive the sales you forecast.” The Economist. Moon Ihlwan. 71.businessweek. customer support. Vijay Mahajan. events. 25–31. This case example is based on material found in “Samsung’s Lessons in Design. Discussion 1. 2009.com/innovation. How should its business philosophy or orientation change? Why? 3. high-tech in- Questions dustry 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? 2. As the small entrepreneurial firm described in question 1 grows larger. 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. the level of effectiveness and efficiency you expect from each activity (reach. response rate. etc. For a summary of the definitions offered by a number of other authors. no. duration of sales cycle. 8. 28 Section One Introduction to Strategy —Trade promotion (allowances/discounts to your distribution channels) —Salesforce expenses (salary and fringes.businessweek. number of sales calls per week. using appropriate measures.com. Our definition differs from some others.” @issue: The Journal of Business and Design 9. Contemporary Perspectives on Strategic Market Planning (Boston: Allyn and Bacon.

MA: Marketing Science Institute. K. 16. al. 9–16. and George S. September 25. Quoted in Gary Hamel and C. they sometimes prove elusive. Slater.” 9. 46–55.. John P. Kirca. Anders Gustafsson. Gruca and Lopo L.” Journal of Marketing 58 (January 1994). 2003). Day and Prakash Nedungadi. and Sang-Hoon Kim. Business. “Preempting Competitive Risk Via Customer Focus: Entrepreneurial Firms in Japan and the U. “Market Orientation.” Report #03–114 (Cambridge. Andrews. pp. Leeflang. Webster Jr. Noble. 59–86. “A Cross-National Investigation into the Marketing Department’s Influence. 60–77.” Journal of Marketing 58 (April 1994). 17. Srivastava. and John Saunders. However. and V. Verhoef.” Journal of Marketing 57 (July 1993). Subin Im and John P. Peter S.” Insights from MSI. and forays into new businesses. 12. Narver and Stanley F. see John C. and the Moderating Influence of Competitive Environment. Prahalad and Gary Hamel.” Journal of International Marketing 19 (September 2011). 2003). “Marketing in the C-Suite: A Study of Chief Marketing Officer Power in Firms’ Top Management Teams. Competing for the Future (Cambridge.” Journal of Market- ing 66 (October 2002). 8–19. “Expanding the Role of Marketing: From Customer Equity to Market Capitalization. 8. pp. Christian Homburg. 1995. 31–44.. Creativity. 10. Day. and Marketing Strategies 29 3. and George S. “Creating a Superior Customer-Relating Capability. 121–26. 46–55. pp. Justin Martin. Amir Grinstein. Narver. Martin Natter. Journal of Marketing 69 (April 2005).” Journal of Marketing 54 (April 1990). Peter C. Charles H.” Journal of Marketing 63 (Special Issue 1999). “Market Orientation: A Meta- Analytic Review and Assessment of Its Antecedents and Impact on Performance. 2003). Jochen Reiner. Rajendra K. Sinha.” Journal of Business and Design 2 (Fall 1996). K. wal28949_ch01_001-030. pp. pp. pp. p. p. and Ajith Kumar. 25–39. “Giants Talk Synergy but Few Make It Work. Bearden. Elie Ofek. Prahalad. C. “Market Orientation. “Executing the New Marketing Concept. et. Pamela Morrison. “Market Orientation. see Laura Landro. pp.” Journal of Marketing 75 (January 2011). “Marketing. acquisi- tions.. 13. For example. pp. pp. Winter 1999. and the Moderating Influence of Competitive Environment. Bernard J.” Harvard Busi- ness Review 68 (May–June 1990). Pravin Nath and Vijay Mahajan. Slater and John C. Workman Jr. Quoted in Katherine Z.” Fortune. pp. 4.” Marketing Management 2 (1993). MA: Harvard Business School Press. Workman Jr. 168–79. “Ignore Your Customer. Rego. Stanley F. and Shareholder Value: An Organizationally Embedded View of Marketing Activities and the Discipline of Marketing. “Market Orientation: Antecedents and Consequences. and Liam Fahey. 1995. 14. Workman. Satish Jayachandran. May 1. 114–32. 1994). pp. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. pp. pp.” Marketing Management 3 (1994). Performance. “Market Orientation and Alternative Strate- gic Orientations: A Longitudinal Assessment of Performance Implications. and John P. H. MA: Marketing Science Institute.” The Wall Street Journal. “The Core Competence of the Corporation. Performance. and Harley Krohmer. Shervani. William Baker. 2. and Shareholder Value.” Journal of Marketing 58 (January 1994). Frederick E. Jaworski and Ajay Kohli. and New Product Performance in High-Technology Firms.. “The Effect of a Market Orientation on Business Profitability. For example. 7. 1–17. 1–18. Cash Flow. 79–91. Stanley F. B1. 15. “When Marketing Should Follow Instead of Lead. 6. 11.” Journal of Marketing 63 (April 1999).indd 29 14/12/12 12:26 PM . “The Right Stuff. although such corporate-level synergies often are used to justify mergers. “ A Cross-National Inves- tigation into the Marketing Department’s Influence Within the Firm.” Journal of Marketing 73 (Novem- ber 2009). MA: Market- ing Science Institute. Ahmet H. Tasadduq A. “Customer Satisfaction. “Marketing’s Influence within the Firm. 11. pp.” Managerial Representations of Competitive Advantage. 5. and Thomas S. Rohit Deshpande. Rajiv K.” Re- port #03–101 (Cambridge.. and William O.” Report #03–106 (Cambridge. Verhoef. Slater and John C. 119–136. p. pp. Business Pro- cesses. Narver. and Peter C.S.” Journal of Marketing 68 (April 2004). 24–41. pp. “Still a Major Player: Marketing’s Role in Today’s Firms. Kumar and Denish Shah.

Hult. Analysis for Marketing Planning. (Burr Ridge.” www. Jay Greene. Also see Jim Jansen. p. George S. pp. Basic Marketing: A Global Managerial Approach. “The Vanishing Mass Market. NJ: Pren- tice Hall.com/technology. “Satisfaction Not Guaranteed. For a more detailed discussion of formal marketing plans. 2009. Irwin. 1981). pp. March 2. 2002. 25. 1997).com. Principles of Marketing (Englewood Cliffs. October 12. and Anthony Bianco. 2. and G.” BusinessWeek. Thomas M. 75–76. pp. Jerome McCarthy and William D. 26–30. 37–52.” The Economist.” BusinessWeek.indd 30 14/12/12 12:26 PM . 20.” www. 469–479 (archived online at www. Census Bureau website at www. For examples.” Business Hori- zons 53 (2010).S. Aaron Baar. Revenues. Arik Hes- seldahl.businessweek. “Shoppers Combine Search. “Summary of U. Courtney Rubin. 61–79. 28.” www.” Pew Research Center’s internet and American Life Project. see Faith Keenan. and E-commerce: 2000–2009. 1993). 19. and Michael Ahearne. The Marketing Plan (New York: The Conference Board. Brian Hindo. 1989). 2006. E. 30. 146–63. “Creating a Superior Customer-Relating Capability. February 25. NJ: Prentice Hall. Philip Kotler and Gary Armstrong.mediapost.inc. Lehmann and Russell S. IL: Richard D. “Worried About Strategy Implementation? Don’t Overlook Marketing’s Role. July 12. Social Media to Fuel Decisions. 32–36. chap. David S.com).. see Jena McGregor. Achrol and Philip Kotler. Slater. 26. 68–72. Ravi S. Hopkins. 2011. pp. and Stanley F. pp. 2. “The Diffusion of Market Orientation Throughout the Organization: A Social Learning Theory Perspective. (Upper Saddle River. Florian Kraus. Olson. Eric M. see Donald R. 2008). June 19. Perreault Jr. 21. 2011. 27. Stanley Holmes. Sales. February 25. 22. 575. July 14. and Roger O.pewinternet. “CMOs on Social Media: Do As I Say. The Marketing Plan: A Handbook. December 2. pp.S. pp.” Also see Son K. 29. 2008. pp. and Marian Burk Wood. 23. 2012. “Dell: Scant Signs of Recovery. February 28. “Dell’s Disappointing Quarter. “Marketing in the Network Economy.census. 3rd ed. (New York: Irwin/McGraw-Hill. “A Mass Market of One. 2004.” BusinessWeek. and Aaron Ricadela. 2009.businessweek. 30 Section One Introduction to Strategy 18.” BusinessWeek. For examples. Shipments. “The Capabilities of Market-Driven Organizations.” Journey of Marketing 74 (September 2010). 61–72.com/technology. 31. 4th ed. wal28949_ch01_001-030.” www. “When Service Means Survival.org/reports/2010 (September 29. Winer.” Journal of Marketing 63 (Special Issue 1999). Crockett. 11th ed. 2010).” Journal of Marketing 58 (October 1994). 24. p. Day.” on the U. www. Day.sciencedirect. “Online Product Research. pp.gov. Lam. “Making It Click.com.

airports offer the company more favorable terms fering €99 fares from Dublin to London when the with respect to taxes. ing their flights since Ryanair carries 15 percent Therefore. side of London and Charleroi south of Brussels. 10 years. a low-price competitive strategy can be much room for them to stretch out and relax dur- profitable only when the firm’s costs are also low.indd 31 14/12/12 12:30 PM . seeking a competitive advantage by offering and stow their own bags and do without meals. tomers have to find their way to and from small portation for consumers within the European Un. Most recently Ryanair made a net profit substantially lower than even easyJet’s. and ground han- cheapest flights available on British Airways or Aer dling charges than more popular and congested air- Lingus cost more than twice as much. many of From the beginning.6 billion in 2011. 89 percent. Unfortunately. thereby allowing standardization of travel agents. drinks. For instance. Indeed. at a time when The firm’s operating efficiencies have helped the global airline industry collectively lost nearly $50 it successfully implement its low-price competi- billion. Such dered how the firm would ever make money of. and other in-flight services. The lack of congestion company has grown into one of Europe’s largest helps reduce turnaround times and thereby lowers and most profitable airlines with more than 8. Chapter Two Corporate Strategy Decisions and Their Marketing Implications Ryanair: Low Prices. But the Irish ports closer to major cities. they have to carry ion. its strong- of €375 million on revenues of €3. facilities fees. High Profits—But Increasing Competition1 When the Ryan family launched Ryanair as Europe’s underutilized regional airports such as Stansted out- first low-fare. There is not Of course. Not only do cus- focusing exclusively on providing low-cost air trans. operating policies are designed with efficiency in It is even difficult for customers to buy their tick- mind. est low-price competitor. travelers won. and nearly all 275 of those planes are puter reservation systems and no commissions to Boeing 737s. decade of the twenty-first century. the lowest fares of any airline operating in Europe. all of Ryanair’s functional activities and more seats per aircraft than traditional airlines. Over the first time record of any European airline. Ryanair earned healthy profits in 9 out of the tive strategy and hold its average fare below €35. the firm owns rather than leases ets because the company pays no fees to com- its airplanes. It also helps Ryanair achieve the best on- routes to 155 airports in 26 countries. The so many customer-unfriendly policies in its re- company also concentrates its flights to and from lentless pursuit of efficiency—like surcharges for 31 wal28949_ch02_031-057. the company has instituted maintenance activities and parts inventories.000 costs by increasing utilization rates for planes and employees flying nearly one thousand different flight crews. the firm’s executives have Ryanair’s cost savings come at the expense of cus- pursued a very straightforward corporate strategy. no-frills airline in 1985. tomer comfort and convenience. airports far from the big cities.

venience are those consumers willing to give up? ception of the sales commissions mentioned pre. and how much comfort and con- to cut costs below its competitors. On the other hand. influence the way it allocates its resources and leverages its competencies in order to maintain a competitive advantage. of customers who are willing to sacrifice comfort anair horror stories. the firm seeks to double its passen- ger volume—and revenues—in the next few years by increasing its flight frequency and market share on existing routes and by increasing the number of European cities it serves. First. are that segment across the various countries that among the few areas where Ryanair has not tried Ryanair serves. wal28949_ch02_031-057. some consumers may see those low more traditional airlines. Even the most frugal fares as a poor value since they have to schlep flyers would not seek out Ryanair’s cheap fares their own bags and land at remote airports. the firm has relied on rapid low costs and cheap fares. the question is whether it can con. in turn. mar- keting. facilitate the direct sale of tickets. and more planes. and it spends substantial sums on advertising and promotion to help build customer awareness and market share. attained largely by adding new routes those carriers are cutting flights to smaller cities. On the other hand. It also spells out goals and objectives for the company and specifies corporate development strategies for achieving those objectives. including The Guardian. no-frills flights will not be seen as such a bad value tinue to generate enough repeat business from after all. Clearly there is a sizable segment reader competitions dedicated to describing Ry. As we pointed out in Chapter 1. and the market environment when developing strategies at any level. it defines the overall mission and scope of the firm by clearly focusing on the price-conscious segment of airline passengers traveling within Europe. growth. Ryanair’s objectives and development strategy. But charging extra for baggage and snacks. however. the company’s marketing costs are about make money at fares lower than the major airlines the same per passenger-kilometer as those of can match. Specifically. With the ex. the double whammy of high Although Ryanair’s low-cost/low-price strat. With est growth objective of 5 to 10 percent per year competition like that. maybe Ryanair’s low-cost. STRATEGIC CHALLENGES ADDRESSED IN CHAPTER 2 The corporate strategy crafted at the inception of Ryanair has provided a clear sense of direction and useful guidance for the firm’s managers when developing competitive. 32 Section One Introduction to Strategy such things as using its wheelchairs—that several past customers to maintain its revenue stream newspapers.indd 32 14/12/12 12:30 PM . The firm must also consumers may increase if and when the maintain an extensive web site and call center to European economies get stronger. ducing the seats available for frequent flyers. The firm is investing heavily in new planes to enable it to schedule more flights to more cities. to bring in new customers. there may the full-service airlines to cut expensive customer be some turbulence on the company’s horizon. without being aware—and being frequently And the number of such convenience-oriented reminded—that they exist. In order to survive. its operating policies are designed to max- imize efficiency and limit costs so the company can profitably compete by offering the lowest fares in Europe. But how large is Advertising and promotion. services. fuel prices and slow economic growth have forced egy has been very successful so far. While Ryanair’s cost structure should enable it to viously. The successful formulation of Ryanair’s corporate strategy illustrates the importance of a detailed understanding of target customers. have created and profitability. through 2015. potential competitors. but without being able to match Ryanair’s For the past decade. and convenience for low fares. and re- given that the company has adopted a more mod. and other functional strategies because it speaks to the dimensions of strategy we discussed in Chapter 1.

a well-defined corporate strategy also influences and constrains the strategic decisions that marketers and other functional managers can make at lower orga- nizational levels. facilities. market segments. this chapter examines the components of a well-defined corporate strategy in more detail: (1) the over- all scope and mission of the organization. or functions (e. the firm’s competitive strategy of offering the lowest fares of any airline operating in Europe obviously constrains managers’ pricing decisions. reputation) might be developed and shared across the firm’s businesses? • What operational resources. competencies. On the other hand. technical. and its cost-cutting policy of avoiding travel agent commissions forced it to be a pioneer in the direct marketing of tickets over the web. salesforce) might the firm’s businesses share to increase their efficiency? wal28949_ch02_031-057. and (6) the search for syn- ergy via the sharing of corporate resources.1 Corporate Strategy Components and Issues Strategy Components Key Issues Scope. Exhibit 2.. For instance. mission. Implications for Marketers and Their Marketing Plans Although a market orientation—and the analytical tools that marketing managers use to examine customer desires and competitors’ strengths and weaknesses—can provide useful EXHIBIT 2. and intent • What business(es) should the firm be in? • What customer needs. (5) the allocation of corporate resources across the firm’s various businesses. and customer-based intangibles (e. (3) a source of competitive advantage. or programs across businesses or product lines. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 33 marketers’ close contact with customers and the external environment often means they play a crucial role in influencing strategies formulated at higher levels in the firm.indd 33 14/12/12 12:30 PM . (2) company goals and objectives. and/or technologies should be focused on? • What is the firm’s enduring strategic purpose or intent? Objectives • What performance dimensions should the firm’s business units and employees focus on? • What is the target level of performance to be achieved on each dimension? • What is the time frame in which each target should be attained? Source of competitive • What human. or other resources or competencies available to the firm advantage provide a basis for a sustainable competitive advantage? Development strategy • How can the firm achieve a desired level of growth over time? • Can the desired growth be attained by expanding the firm’s current businesses? • Will the company have to diversify into new businesses or product-markets to achieve its future growth objectives? Resource allocation • How should the firm’s limited financial resources be allocated across its businesses to produce the highest returns? • Of the alternative strategies that each business might pursue. R&D. brand recognition. In view of the interactions and interdependences between corporate-level strategy deci- sions and strategic marketing programs for individual product-market entries. which will produce the greatest returns for the dollars invested? Sources of synergy • What competencies. (4) a development strategy for future growth. knowledge.1 summarizes some of the crucial questions that need to be addressed by each of these six components.g..g. plants.

Finally. and achievement among employees. But it should also focus the firm’s efforts on markets where those resources and competencies will generate value for customers. all six components of corporate strategy have major implications for the strategic marketing plans of the firm’s various products or services.indd 34 14/12/12 12:30 PM . a corporate mission statement should clearly define the organization’s strategic scope. and distinctive competencies. an Israeli hummus producer. broadened its mission to focus on “market- ing superior quality food and beverage products for households and consumers dining out. growth strategy. like Wilson sporting goods. as well as a positive image of the firm among customers. in response to a changing global competitive environment. Lipton’s iced teas. We examine the marketing implications involved in both formulating and implementing these components of corporate strategy in the following sections. more nutritious snacks and drinks and striving for a net-zero impact on the environment. Taco Bell. and objectives which will underlie and constrain the plan you develop. Conse- quently. PepsiCo nar- rowed its scope to focus primarily on package foods (particularly salty snacks) and bever- ages distributed through supermarket and convenience store channels. and the divestiture of operations that no longer fit the company’s primary thrust. CORPORATE SCOPE—DEFINING THE FIRM’S MISSION A well-thought-out mission statement guides an organization’s managers as to which mar- ket opportunities to pursue and which fall outside the firm’s strategic domain. 34 Section One Introduction to Strategy insights to guide decisions concerning all elements of corporate strategy. Together.” That phrase essen- tially boils down to balancing the profit motive with the development of healthier. This new. and Gatorade sports drinks. Thus. relevance. In turn. such as Aquafina bottled water. narrower mission led the firm to (1) divest all of its fast-food restaurant chains. PepsiCo has either acquired or partnered with a Bulgarian nut packager. and synergy across its products. (2) acquire comple- mentary beverage businesses. A clearly stated mission can help instill a shared sense of direction.2 Market Influences on the Corporate Mission Like any other strategy component. they are par- ticularly germane for revealing the most attractive avenues for future growth and for de- termining which businesses or product-markets are likely to produce the greatest returns on the company’s resources. 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? For example. objectives. a California company that makes nutritional bever- ages such as smoothies. such as Tropicana juices. several years ago PepsiCo. an advantage over competitors. the manufacturer of Pepsi-Cola. PepsiCo’s new mission reflects (1) the firm’s package wal28949_ch02_031-057. they define the general strategic direction. and resource constraints within which those marketing plans must operate. and Pizza Hut. To provide a useful sense of direction. and other stakeholders. and (3) develop new brands targeted at rapidly growing beverage segments.” That clearly defined mission guided the firm’s managers toward the acquisition of several related companies. resources. the firm’s mission should be compatible with its established values. investors. an organization’s mission should fit both its internal characteristics and the opportunities and threats in its external environment. PepsiCo’s most recent mission continues to focus on packaged snacks and beverages sold through food retailers but also seeks “performance with purpose. such as Frito-Lay. and Naked Juice. More recently. the Marketing Plan Exercise at the end of the chapter asks you to outline the corporate mission. Obviously.

and distribution competencies. low-density products. the most useful mission statements focus on the customer need to be satisfied and the functions that must be performed to satisfy that need. it might have been more willing to expand its domain to incorporate newer technologies. and the like. W. and (3) a corporate culture that believes the company should be an active player in solving some of the social problems—such as obesity and global warming—the world faces. low-density products Physical Based on existing Railroad business Long-haul. 1st edition. 1978. Thus. Thus. Thomson Learning. wal28949_ch02_031-057. Criteria for Defining the Corporate Mission Several criteria can be used to define an organization’s strategic mission. Some firms are actively pursuing social programs they believe to be intertwined with their economic objectives. cross-couponing. For example. sales. 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. Social Values and Ethical Principles E An increasing number of organizations are developing mission statements that also at- tempt to define the social and ethical boundaries of their strategic domain. Penn Central did not respond to major changes in transportation technology.2 suggests.indd 35 14/12/12 12:30 PM . and they are specific as to the customer groups and the products or technologies on which to concentrate. coal-carrying railroad products or technology Source: Adapted from Strategy Formulation: Analytical Concepts. Theodore Levitt argues that Penn Central’s view of its mission as being “the railroad business” helped cause the firm’s failure. Many firms spec- ify their domain in physical terms. should it have diversified into the trucking business? Started an airline? As the upper-right quadrant of Exhibit 2. whereas others simply seek to manage their businesses according to the princi- ples of sustainability—meeting humanity’s needs without harming future generations. Nor did it respond to consumers’ growing willing- ness to pay higher prices for the increased speed and convenience of air travel. Hofer and D. such as the rapid growth of air travel and the increased efficiency of long-haul trucking.2 Characteristics of Effective Corporate Mission Statements Broad Specific Functional Long-distance transportation for Based on Transportation business large-volume producers of low- customer needs value. (2) its perception that substantial synergies can be realized across snack foods and beverages within supermarket channels via shared logistics. but basic customer needs tend to endure. focusing on products or services or the technology used. such as coal and grain. if Penn Central had defined its mission as satisfying the transportation needs of its customers rather than simply being a railroad. 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. Schendel. One problem with Levitt’s advice. The problem is that such statements can lead to slow reactions to technological or customer- demand changes.3 Products and technologies change over time. For EXHIBIT 2. If Penn Central had defined itself as a transporta- tion company. joint displays and sales promotions. Burlington Northern Santa Fe Railroad’s mission is to provide long-distance transportation for large-volume produc- ers of low-value. instead of seeing itself as being in the railroad business or as satisfying the transportation needs of all potential customers. by C. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 35 goods marketing. though.

S. mental. thereby disrupting trust between a firm and its suppliers the development of long-term exchange relationships and resulting in the or customers. whereas most laws and regulations emerge only after the negative consequences of an action become apparent. For instance. At United Technologies. To some extent. competencies.100 top global executives. thereby disrupting the likely loss of sales and profits over time. 36 Section One Introduction to Strategy example. In Germany. For example.” points out CEO Patrick Cescau. physical) to an individual. ethics is more proactive than the law.” might be viewed as simply legal puffery engaged in to make a sale. Particular actions may be legal but not ethical. workers’ councils often deal with issues such as sexual equality.indd 36 14/12/12 12:30 PM . crafting mission statements that specify explicit social values. for instance.5 Thus.”4 Unfortunately. goals. Thus. Some 40 percent of the Dutch-British giant’s sales and most of its growth now take place in developing nations. and workers’ rights. suppliers. In the future. Although such a question may be a good topic for philosophical debate. and the effects of climate change. water scarcity. 79 percent pre- dicted at least some responsibility for dealing with future social and political issues would fall on corporations. and governments around the world. Unilever has launched a variety of programs to help developing nations wrestle with poverty. race relations.7 Ethics is concerned with the development of moral standards by which actions and situ- ations can be judged. economic. social interest groups. the firm must invest in green technologies or its leadership in packaged foods. extreme and unsubstanti- ated advertising claims. customers. and other products could be imperiled. Consequently. it will be the only way to do business. 160 business ethics officers monitor the firm’s activities and relations with customers. but many marketers (and their custom- ers) view such little white lies as unethical. 30 percent of all spinach. “it’s also about growth and innovation.9 wal28949_ch02_031-057. and economic goals. or organization. These days. one survey of 135 development of long-term exchange purchasing managers from a variety of industries found that the more un- relationships and resulting in the likely loss ethical a supplier’s sales and marketing practices were perceived to be.. As environmental regulations grow stricter around the world. The firm’s motives are at least as much economic as moral. and a large portion of all processed fish. The ethical principles a firm hopes to abide by in its dealings with customers. suppliers. there is a compelling. soaps. such as “our product is far superior to Brand X. but only 3 percent said they currently do a good job dealing with so- cial pressures. In a recent McKinsey & Co. It focuses on those actions that may result in actual or potential harm of some kind (e. and employees tend to be more straightforward and specific than the broader issues of social responsibility discussed above. practical reason for a firm to impose ethi- Strategic Issue cal standards to guide employees. Ethical standards attempt to anticipate and avoid social problems. fewer firms have formal ethics bureaucracies.6 Outside America. and programs—with inputs from employees. “You can’t ignore the impact your company has on the com- munity and the environment. survey of more than 1. Unethical practices can damage the Unethical practices can damage the trust between a firm and its suppliers or customers. of sales and profits over time. many top managers are unsure about what kinds of social programs and principles best fit their organization’s resources. this reflects the fact that in other countries governments and organized labor both play a bigger role in corporate life. a global defense contractor and engineering firm.g. firms have formal codes of ethics.8 Why Are Ethics Important? The Marketing Implications of Ethical Standards One might ask why a corporation should take responsibility for providing moral guidance to its managers and employees. and Unilever food products ac- count for about 10 percent of the world’s tea. and one in five large firms have formal departments dedicated to encourag- ing compliance with company ethical standards. roughly two-thirds of U. and other stakeholders—is becoming a more important part of corporate strategic planning. group. the less eager were the purchasing managers to buy from that supplier.

Bribes were most common in sub- Saharan Africa. fines and penalties can increase the costs dramatically. and less than 1 percent in Denmark and Norway. Fluor—a multinational construction firm that earns more than half of its $17 billion revenue overseas—has a strict ethical policy against paying any bribes or kickbacks to win new projects. not all customers or competing suppliers adhere to the same ethical standards.11 Even when the fines imposed are not large.12 A company can reduce such problems by spelling out formal social policies and ethi- cal standards in its corporate mission statement and communicating and enforcing those standards. in a recent survey of over 90. found that the average capitalization loss following a Food and Drug Administration citation was about 1 percent. This dedication to high ethical standards and transparency helped make Flour the world’s most admired engineering firm in Fortune magazine’s survey in 2009. it is not always easy to decide what a firm’s ethical policies and standards should be. and the German authorities also fined Siemens a similar amount. Its executives also promote an open-door policy and a hot line for report- ing bribe requests and suggesting ways around sticky situations. For example. and thereby reduce future sales revenues. for example. the negative publicity surrounding the ex- posure of unethical practices can raise doubts about future sales revenues and cash flows. its former parent. for instance. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 37 Unfortunately. For example. thereby making investors more reluctant to commit funds and reducing the firm’s mar- ket capitalization. 5 percent in the European Union and North America. a German conglomerate. As a result. marketers sometimes feel pressure to engage in actions that are inconsistent with what they believe to be right. Exhibit 2. There are multiple philosophical traditions or frameworks that managers might use to evaluate the ethics of a given action. different firms or managers can pursue somewhat different ethical standards. more than one-quarter of respondents reported paying a bribe in the past year. and Halliburton. in 2009 American courts fined KBR. And those costs have been increasing in recent years as more countries pass strict laws against bribery—such as the Foreign Corrupt Practices Act in the United States and the Bribery Act in the United Kingdom—and as enforcement and fines have increased. that would mean a wealth loss of nearly $1 billion. with an $800 million fine. particularly across national cultures. but employees receive zero tolerance and face tough penalties for any infractions. For example.3 displays a comparison (across three geographic regions) of the proportion of company ethical statements that address a set of specific issues. $579 million for paying bribes to obtain contracts in Nigeria. Consequently.indd 37 14/12/12 12:30 PM . 19 percent in the Western Balkans and Turkey. And they hit Siemens. where more than half of respondents had paid at least one. compared to 23 percent in Latin America.13 Unfortunately. and consequently to unethical—and possibly illegal—behavior. 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. such as paying bribes to win a sale from a potential customer or to ensure needed resources or services from suppliers and govern- ment agencies. The firm puts all of its employees through online anticor- ruption training. A study of regulatory exposure of deceptive marketing practices in the pharmaceutical industry. Note that a larger number of companies in the United States and Europe appear to be more concerned with the ethics wal28949_ch02_031-057. But when employees are caught engaging in unlawful behavior— particularly bribery—by government regulators. a construction firm.000 business people in 68 different countries. For a large firm like Pfizer. We have already seen that customers’ perceptions of unethical behav- ior can damage their positive attitudes and loyalty toward the firm.10 Getting Caught Can Be Costly Such inconsistencies in expectations and demands across countries and markets can lead to uncertainty among a firm’s employees.

indd 38 14/12/12 12:30 PM .” Formal objectives provide decision criteria that guide an organization’s business units and employees toward specific dimensions and performance levels. companies are more concerned about proprietary information. nothing is relevant. wal28949_ch02_031-057. • A target or hurdle level to be achieved. and European companies more frequently have standards focused on workplace safety. Therefore. Those same objectives provide the bench- marks against which actual performance can be evaluated.3 Issues Addressed by Company Ethics Statements Fundamental guiding principles of company Purchasing Proprietary information Workplace safety Environmental responsibility Marketing Intellectual property Confidentiality of employee records Product safety Employee privacy Drug-related issues Technological innovation United States (N = 157) Europe (N = 20) AIDS Canada (N = 23) 0 20 40 60 80 100 Number of Companies Source: Ronald E. Corporate Ethics Practices (New York: The Conference Board. 1992). CORPORATE OBJECTIVES Confucius said. corporate objectives must be specific and measurable. Since many ethical issues in marketing are open to interpretation and debate. Comparing firms across regions. U. Reprinted by permission.S. Berenbeim. each objective contains four components: • A performance dimension or attribute sought. of their purchasing practices than those of their marketing activities. To be useful as decision criteria and evaluative benchmarks. 38 Section One Introduction to Strategy EXHIBIT 2. we will examine such issues and their implications individually as they arise throughout the remainder of this book. “For one who has no objective. • A measure or index for evaluating progress. • A time frame within which the target is to be accomplished. Cana- dian firms are more likely to have explicit guidelines concerning environmental respon- sibility.

and Marketing Objectives Performance Criteria Possible Measures or Indexes • Growth $ sales Unit sales Percent change in sales • Competitive strength Market share Brand awareness Brand preference • Innovativeness $ sales from new products Percentage of sales from product-market entries introduced within past five years Percentage cost savings from new processes • Profitability $ profits Profit as percentage of sales Contribution margin* Return on investment (ROI) Return on net assets (RONA) Return on equity (ROE) • Utilization of resources Percent capacity utilization Fixed assets as percentage of sales • Contribution to owners Earnings per share Price/earnings ratio • Contribution to customers Price relative to competitors Product quality Customer satisfaction Customer retention Customer loyalty Customer lifetime value • Contribution to employees Wage rates. It can be difficult to allocate those costs to specific strategic business units (SBUs) or products. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 39 EXHIBIT 2. Business-Unit. attainable. we find it useful to follow the SMART acronym when specifying objectives at all levels: specific. profit objectives at the SBU and product-market level are often stated as a desired contribution margin (the gross profit prior to allocating such overhead costs). measurable. such as the costs of corporate staff or R&D.indd 39 14/12/12 12:30 PM . and time-bound. two additional dimensions become im- portant: their relevance to higher-level strategies and goals and their attainability. relevant. promotions Employment stability. wal28949_ch02_031-057. Exhibit 2. When specifying short-term business-level and marketing objectives. turnover • Contribution to society $ contributions to charities or community institutions Growth in employment *Business-unit managers and marketing managers responsible for a product-market entry often have little control over costs associated with corporate overhead.4 Common Performance Criteria and Measures That Specify Corporate. benefits Personnel development. however. Consequently.4 lists some common performance dimensions and measures used in specifying corporate as well as business-unit and marketing objectives. Thus.

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. tools are available to evaluate the future impact of alternative strategic actions on shareholder value. Employees want competitive wages. if positive. but also it could make the organization more vulnerable to a take- over by outsiders who promise to increase its value to shareholders. customer value and firm can continue to provide attractive returns to shareholders only so shareholder value converge. look for cash dividends and the prospect of future dividends reflected in the stock’s market price.17 Finally. weaken service. are not always reliably linked to the true value of a company’s stock. customer value and shareholder value converge.15 Unfortunately. Customers want high quality at a competitive price. but those valuation methods have inherent pitfalls and can be difficult to apply at lower levels of strategy such as trying to choose the best marketing strategy for a particular product-market entry. For one thing. a growing number of executives of publicly held corporations have con- cluded that the organization’s ultimate objective should be to increase its shareholders’ economic returns as measured by dividends plus appreciation in the company’s stock price. wal28949_ch02_031-057. many firms set explicit objectives targeted at increasing share- holder value. as residual claimants. But some managers may continue to provide attractive returns to overlook this in the face of pressures to achieve aggressive short-term shareholders only so long as it satisfies and financial objectives and take cost-cutting actions that reduce product retains its customers. a firm can long as it satisfies and retains its customers. and lower customer value and satisfaction. 40 Section One Introduction to Strategy Enhancing Shareholder Value: The Ultimate Objective In recent years. including employees. Failure to do so not only will depress the firm’s stock price and inhibit the firm’s ability to finance future operations and growth. and business strategies that will pro- duce sufficient future cash flows to return positive value to shareholders. the market value of its shares. The firm’s continued existence depends on a financial relationship with each of these parties. Thus. The result.16 As we shall see later in this chapter. The firm’s ability to attain debt financing (its ability to borrow) depends in turn on projections of how much cash it can generate in the future. Similarly. there is a danger that a narrow focus on short-term financial. shows how much wealth the company has created. acquisitions. depends on investors’ ex- pectations of the firm’s future cash-generating abilities. shareholder-value objectives may lead managers to pay too little attention to actions necessary to provide value to the firm’s customers and sustain a competitive advantage. such broad shareholder-value objectives do not always provide adequate guidance for a firm’s lower-level managers or benchmarks for evaluating performance. suppliers. such as earnings per share or return on in- vestment. These are usually stated in terms of a target return on shareholder equity. a In the long term.14 To do so management must balance the interests of various corporate constitu- encies. standard accounting measures. or earnings per share. Given this rationale. debtholders. and therefore its ability to attain equity financing.indd 40 14/12/12 12:30 PM . Recently. a going concern must strive to enhance its ability to generate cash from the op- eration of its businesses and to obtain any additional funds needed from debt or equity financing. Shareholders. People willingly invest in a firm only when they expect a better return on their funds than they could get from other sources without exposing themselves to any greater risks. increase in the stock price. Suppliers and debtholders have financial claims that must be satisfied with cash when they fall due. quality. If a company does not satisfy its constituents’ financial claims. it ceases to be viable. some executives have begun expressing such corporate objectives in terms of economic value added or market value added (MVA). and stockholders. management’s primary objective should be to pursue capital investments.18 Strategic Issue In the long term. Thus. though. customers.

than for Lay’s potato chips. For example. More than 60 percent mentioned social responsibility. retention. which is battling for prominence in the growing vitamin-enhanced water category. found that about 80 percent of customers’ satisfaction scores were accounted for by nonproduct factors. loyal customers of one product can be lever- aged to provide synergies for other company products or services. two marketing managers responsible for different products may face very different goals and expectations—requiring different marketing strategies to accomplish—even though they work for the same organization. GAINING A COMPETITIVE ADVANTAGE There are many ways a company might attempt to gain a competitive advantage over com- petitors within the scope of its competitive domain. customer-focused objectives—such as satisfaction. This can result in inadequate promotional support and a loss of market share. such as order processing. Trying to achieve many objectives at once leads to conflicts and trade-offs. the investment and expenditure necessary to pursue growth in the long term is likely to reduce profitability and ROI in the short term. resources that wal28949_ch02_031-057. and 54 percent of the companies had R&D/new product development goals. a sustainable competitive advantage at the corporate level is based on company resources. In firms with multiple business units or product lines. and loyalty—are being given greater importance.21 As firms emphasize developing and maintaining long-term customer relationships. First.19 These percentages add up to more than 100 percent because most firms had several objectives.indd 41 14/12/12 12:30 PM . This is clearly demonstrated by a study of the stated objectives of 82 large corporations. 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. A study of one industrial paper company. Unfortunately. Therefore. Thus. In most cases. subobjec- tives often vary across business units and product offerings depending on the attractiveness and potential of their industries. and the resource allocation decisions made by corporate managers. such differ- ences in objectivies across product offerings at different life-cycle stages can sometimes result in a premature shift of marketing resources away from well-established brands toward the newer entrants. PepsiCo’s managers likely set relatively high volume and share-growth objectives but lower ROI goals for the firm’s SoBe Lifewater brand. Second. and customer service objectives. employee welfare. Thus. maximizing satisfaction and loyalty tends to make good sense no matter what other financial objectives are being pursued in the short term. Such market-oriented objectives are more likely to be consistently pur- sued across business units and product offerings. delivery.20 Managers can reconcile conflicting goals by prioritizing them.22 Since such factors are influenced by many functional departments within the corporation. the strength of their competitive positions. The largest percentage of respondents (89 percent) had explicit profitability objectives: 82 percent reported growth objectives and 66 percent had specific market-share goals. though. Another approach is to state one of the conflicting goals as a constraint or hurdle. however. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 41 The Marketing Implications of Corporate Objectives Most organizations pursue multiple objectives. Finally. given the huge profit implications of a customer’s lifetime value. they are likely to have a similar impact across a firm’s various businesses and products. for example. and postsale services. which hold a commanding 40 percent share of a ma- ture product category. customer satis- faction and loyalty are influenced by factors other than the product itself or the activities of the marketing department. For exam- ple. There are several reasons for this. satisfied. a firm attempts to maximize growth subject to meeting some minimum ROI hurdle. as has unfortunately been the case with PepsiCo’s flagship Pepsi-Cola in recent years.

the key point is that those strategies are built—at least in part—on the firm’s marketing-related resources and competencies.indd 42 14/12/12 12:30 PM . 42 Section One Introduction to Strategy other firms do not have. As we saw in Chapter 1. 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. Exhibit 2. the projected combined future sales and profits of a corporation’s business units and product-markets fall short of the firm’s long-run growth and profitability objectives. extensive market research operations. We devote Chapter 3 to a detailed discussion of these basic competitive strategies and their implications for marketing programs. to determine where future growth is coming from.5 outlines some specific options a firm might pursue while seeking growth in either of these directions. either through internal business develop- its current businesses and activities or diversification into new businesses. Thus. and a strategic marketing program for each of its product-market entries. a firm can go in two major directions in seeking future A firm can go in two major directions growth: expansion of its current businesses and activities or diversifi- in seeking future growth: expansion of cation into new businesses. It needs to provide one or more superior benefits at a price similar to what competitors charge or deliver comparable benefits at lower cost. Others have a brand name that customers recognize and trust. and/or cooperative long-term relationships with customers that give them a superior ability to identify and respond to emerging customer needs and desires.23 Many such unique resources are marketing related. Although one can conceive of a nearly infinite assortment of competitive strategies based on a firm’s superior resources and capabilities. high-margin market segments. including extensive global advertising campaigns and a restructuring of its retail distribution channels to emphasize upscale spe- cialty retailers. wal28949_ch02_031-057. The firm must employ its resources in such a way that customers will have a good reason to purchase from it instead of its competitors. some businesses have highly developed information systems. it may also produce synergy. To the extent that a single corporate resource—such as a prestigious corpo- rate brand or an excellent salesforce—might serve as the foundation for effective competi- tive and marketing strategies in more than one of a firm’s business units or product lines. that convert one or more of the company’s unique re- sources into something of value to customers. This is not surprising because some of its high-growth markets are likely to slip into maturity over time and some of its high-profit mature businesses may decline to insignificance as they get older. Samsung spent years developing technical R&D and product design expertise. cooperative alliances with suppliers or distributors that enhance efficiency. Then it needs to effectively com- municate those benefits or cost savings so they will be accurately perceived by poten- tial customers. ment or acquisition. Strategic Issue Essentially. The firm also underlook marketing actions aimed at building a brand image that communicates and reinforces its technical and design prowess. as we shall see later.24 But the fact that a company possesses resources that its competitors do not have is not sufficient to guarantee superior performance. which it employed effectively to launch a stream of very successful products aimed at upscale. For example. most can be classified into a few “generic” types. For example. management must decide on a strategy to guide corporate development. CORPORATE GROWTH STRATEGIES Often. and that are hard to acquire. or a body of satisfied and loyal customers who are predisposed to buy related products or services. that take a long time to develop. For now. The trick is to develop a competitive strategy for each division or business unit within the firm.

or outspending competitors on advertising or promotions. affinity groups. For example. As a result.25 Other examples include museums that sponsor special exhibitions to encourage patrons to make repeat visits and the recipes that Quaker Oats includes on the package to tempt buyers to include oatmeal as an ingredient in other foods. use it more often. Expansion by Developing New Products for Current Customers A second avenue to future growth is through a product-development strategy emphasiz- ing the introduction of product-line extensions or new product or service offerings aimed at existing customers. and Amazon was ranked as the world’s best customer service or- ganization in the annual J.com spent hundreds of millions of dollars early in its development on warehouses. additional growth may be possible by encouraging current customers to become more loyal and con- centrate their purchases. proprietary software. Arm & Hammer successfully introduced a laundry wal28949_ch02_031-057. and other order fulfillment and customer service activities. Amazon. Power-Business Week survey in 2009. such as cookies and desserts. use more of the product or service.com pursued a combination of all these actions—as well as forming alliances with web portals. the vast majority of the firm’s revenues around the world comes from repeat purchases. Amazon. This typically requires actions such as making product or service improvements. or use it in new ways.5 Alternative Corporat e Growth Strategies Current products New products Market penetration strategies Product development strategies • Increase market share • Product improvements • Increase product usage • Product-line extensions Current markets Increase frequency of use Increase quantity used • New products for same market New applications Market development strategies Diversification strategies • Expand markets for existing • Vertical integration products Forward integration Geographic expansion Backward integration New markets Target new segments • Diversification into related businesses (concentric diversification) • Diversification into unrelated businesses (conglomerate diversification) Expansion by Increasing Penetration www of Current Product-Markets One way for a company to expand is by increasing its share of existing markets. investments that helped earn the loyalty of its customers. Even when a firm holds a commanding share of an existing product-market. cutting costs and prices as Ryanair has done. D.indd 43 14/12/12 12:30 PM . even though the expense of such activities postponed the firm’s ability to become profitable. and the like—to expand its share of web shoppers. In addition to its promotional efforts. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 43 EXHIBIT 2.

As Utz-Hellmuth Felcht—the chairman of the firm’s management board—points out.27 Expansion by Diversifying Firms also seek growth by diversifying their operations. particularly new countries. This may involve the creation of marketing programs aimed at nonuser or occasional-user segments of existing markets. growing personal incomes and falling trade barri- ers are making them attractive potential markets for many consumer goods and services as well. Therefore. For instance. the large Ger- man specialty chemicals manufacturer. Nevertheless.com web site in order to expand the range of products its customers can purchase with one click. theaters. Each capitalized on baking soda’s image as an effective deodorizer and on a high level of recognition of the Arm & Hammer brand. For example. the majority of large global firms are diversified to one degree or another. Vertical integration is one way for companies to diversify. the vast number of untapped po- tential customers for the firm’s products means China offers greater promise for future sales growth than Western Europe and North America combined. Even developed nations can represent growth opportunities for products or services based on newly emerging technologies or business models. most of Europe’s fashion houses—like Ermenegeldo Zegna and Georgio Armani—own at least some of their own retail outlets in major cities in order to gain bet- ter control over their companies’ merchandising programs and more direct feedback from customers. many traditional retailers from Macy’s to Marks and Spencer to Walmart are pursuing growth by trying to attract more online customers. internet sales are projected to grow 50 percent between 2012 and 2015. Thus. wal28949_ch02_031-057. although total retail sales in the United States will likely grow relatively slowly—if at all—over the next few years. China is already the world’s largest market for flat-panel TVs and will likely become the largest market for smartphones and other electronics products in the near future.indd 44 14/12/12 12:30 PM . calls for greatly increased resources and marketing efforts to be directed toward China over the next few years. Indeed. Expansion by Selling Existing Products to New Segments or Countries Perhaps the growth strategy with the greatest potential for many companies is the develop- ment of new markets for their existing goods or services.28 Backward integration occurs when a firm moves upstream by acquiring a supplier. an oven cleaner. Forward vertical inte- gration occurs when a firm moves downstream in terms of the product flow. Zegna now earns 40 percent of its revenue from China. and a carpet cleaner. Similarly. and other performing arts organizations often sponsor touring companies to reach audiences outside major metropolitan areas and promote matinee per- formances with lower prices and free public transportation to attract senior citizens and students. as when a manufacturer integrates by acquiring or launching a wholesale distributor or retail outlet. In recent years such integrated retail outlets have also been important for estab- lishing a foothold in developing markets where independent retailers with a prestige image can be in short supply. Expansion into new geographic markets. For instance. For example. Amazon has added a number of independent retail partners to the Amazon .26 Although developing nations represent attractive growth markets for basic industrial and infrastructure goods and services. This is typically riskier than the various expansion strategies because it often involves learning new operations and deal- ing with unfamiliar customer groups. such as China. 44 Section One Introduction to Strategy detergent. orchestras. is also a primary growth strategy for many firms. the strategic plan of Degussa.

in- creased competition. firms may move into unrelated businesses because they have more cash than they need in order to expand their current businesses or because they wish to discourage takeover attempts. though. and manufacturing firms in a variety of industries that are often grouped around a large trading company that helps coordinate the activities of the various coalition members and markets their goods and services around the world. or product obsolescence. Unrelated diversification tends to be the riskiest growth strategy in terms of financial outcomes. Expansion by Diversifying through Organizational Relationships or Networks Recently. R&D know-how. many Western firms. The motivations for unrelated (or conglomerate) diversification are primarily financial rather than operational. firms have attempted to gain some benefits of market expansion or diversifica- tion while simultaneously focusing more intensely on a few core competencies.29 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. or marketing and distribution skills. To exploit the advantages of diversification. the investment required to vertically integrate often offsets the additional profitability generated by the integrated operations.30 This suggests that the ultimate goal of a corporation’s strategy for growth should be to develop a compatible portfolio of businesses to which the firm can add value through the application of its unique core competencies. By definition. more fortunate. Thus. are also forming alliances with suppliers. As we have seen. Most empirical studies report that related diversification is more conducive to capital productivity and other dimensions of performance than is unrelated diversifica- tion. or servicing of its products. But it increases the risks inherent in committing substantial resources to a single industry. and their growth and profitability rates may be more stable because they can offset declines in one business with gains in another. brand names. Also. an unrelated diversification involves two businesses that have no commonalities in products. Other. resulting in little improvement in return on investment.31 Perhaps the best models of such organizational networks are the Japanese keiretsu and the Korean chaebol—coalitions of financial institutions. or functional areas of expertise. The firm must seek new avenues of growth. production facilities. distributors. such as IBM. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 45 Integration can give a firm access to scarce or volatile sources of supply or tighter control over the marketing. The corporation’s marketing competen- cies can be particularly important in this regard. corpo- rate managers must make intelligent decisions about how to allocate financial and human wal28949_ch02_031-057. They have a broader range of areas in which they can knowledgeably invest. distribution. resellers. Such diversification mostly occurs when a disproportion- ate number of a firm’s current businesses face decline because of decreasing demand. PepsiCo acquired Cracker Jack to complement its salty snack brands and leverage its distribution strengths in grocery stores. They try to accomplish this feat by forming relationships or organizational networks with other firms instead of acquiring ownership. and even customers to expand their product and service offerings without making major new investments or neglecting their own core competencies. ALLOCATING CORPORATE RESOURCES Diversified organizations have several advantages over more narrowly focused firms. customers.indd 45 14/12/12 12:30 PM .

It analyzes the impact of investing resources in different businesses on the corporation’s future earnings and cash flows. The Boston Consulting Group’s (BCG) Growth-Share Matrix One of the first—and best known—of the portfolio models is the growth-share matrix developed by the Boston Consulting Group. Volume 10. Thus. “Strategy and the Business Portfolio. as shown in Exhibit 2. and models that measure customer equity to estimate the value of alternative marketing actions.6 a EXHIBIT 2. Then it can fund investments and expendi- tures in industries that represent attractive future opportunities. 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. Each busi- ness is positioned within a matrix. wal28949_ch02_031-057. The vertical axis indicates the industry’s growth rate.6 BCG’s Market Growth Relative Share Matrix High Stars Question marks 5 4 2 1 6 Market 3 growth rate 10% (in constant Cash cows 7 Dogs 11 dollars) 8 12 9 10 13 Low 10 1 0. It is computed by dividing the business’s absolute market share in dollars or units by that of the leading competitor in the industry. the market growth rate on the vertical axis is a proxy measure for the maturity and attractiveness of an industry. Similarly. in Exhibit 2. a business’s relative market share is a proxy for its competitive strength within its industry.” Copyright 1977. Three sets of ana- lytical tools have proven useful in making such decisions: portfolio models. Thus. Barry Hedley. Portfolio Models One of the most significant developments in strategic management during the 1970s and 1980s was the widespread adoption of portfolio models to help managers allocate cor- porate resources across multiple businesses. The growth-share matrix assumes that a firm must generate cash from businesses with strong competitive positions in mature markets. with permission from Elsevier. 9–15.indd 46 14/12/12 12:30 PM . value-based planning. This model represents businesses in rapidly growing industries as more attractive investment opportunities for future growth and profitability.1 Relative market share Source: Reprinted from Long Range Planning. 46 Section One Introduction to Strategy resources across the firm’s various businesses and product-markets.6. pp. and the horizontal axis shows the business’s relative market share.

As their industries mature.. Such businesses do not require much additional capital investment. Finally. whereas business 11 is the smallest. that of the next leading competitor (i. 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. and their share leadership position usually means they enjoy economies of scale EXHIBIT 2. although stars are critically important. • Question marks. in the exhibit. A star is the market leader in a high-growth industry. This is because the firm must continue to invest in such businesses to keep up with rapid market growth and to support the R&D and marketing activities necessary to maintain a leading market share. Their markets are stable. The implications of each are discussed below and summarized in Exhibit 2. Stars are critical to the continued success of the firm.7).indd 47 14/12/12 12:30 PM . • Stars. they move into the bottom-left quadrant and become cash cows. 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. or larger than. Paradoxically. Thus.7 Cash Flows across Businesses in the BCG Portfolio Model Question Stars Growth rate (cash use) High marks Cash flows Low Cash cows Dogs High Low Relative market share Desired direction of business development wal28949_ch02_031-057.e.7. the size of the circle representing each business is proportional to that unit’s sales volume.0 or larger).7) are called question marks or prob- lem children. Such businesses require large amounts of cash. But if man- agers fail. • Cash cows. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 47 business is in a strong competitive position if its share is equal to. Businesses in high-growth industries with low relative market shares (those in the upper-right quadrant of Exhibit 2. businesses 7 and 9 are the largest-volume businesses in this hypothetical company. it eventually turns into a dog as the industry matures and the market growth rate slows. If management can suc- cessfully increase the share of a question mark business. not only for expansion to keep up with the rapidly growing market. but also for marketing activities (or reduced margins) to build market share and catch the industry leader. they often are net users rather than suppliers of cash in the short run (as indicated by the possibility of a negative cash flow shown in Exhibit 2. it becomes a star. a relative share of 1.

34 Defining the relevant industry and served market (i. But this simplicity helps explain its popularity. If this assumption is inaccurate. Mar- ket growth is not always directly related to profitability or cash flow. • Dogs. for instance. Alternative Portfolio Models In view of the preceding limitations. such as iced tea. For instance. • The model implicitly assumes that all business units are independent of one another except for the flow of cash. bottled water. and fruit juices? • While the matrix specifies appropriate investment strategies for each business. Groupon and a host of other internet coupon sites currently face this dilemma. it is relatively easy to understand. rapid growth in one year is no guarantee that growth will continue in the following year. the target-market segments being pursued) also can present problems. resulting in intense competition. the business’s relative market share can shift dramatically. 48 Section One Introduction to Strategy and relatively high profit margins.33 If the external environment changes or the SBU’s man- agers change their strategy. Market share is more properly viewed as an outcome of past efforts to formulate and implement effective business-level and marketing strategies than as an indicator of en- during competitive strength. Consequently.32 Also. For example. This involves maximizing short- term cash flow by paring investments and expenditures until the business is gradually phased out. Low-share businesses in low-growth markets are called dogs because although they may throw off some cash. Simply providing a business with more money does not guarantee that it will be able to improve its position within the matrix. does Pepsi-Cola compete only for a share of the cola market or for a share of the much larger market for nonalcoholic beverages. Such improvements have focused primarily on developing more detailed. it does not consider whether there are any potential sources of competitive advantage that the business can exploit to successfully increase its share. the corporation can use the cash from these businesses to support its question marks and stars (as shown in Exhibit 2.. Another common strategy is to harvest dog businesses. While the model suggests that a firm should invest cash in its question mark businesses. it also means the model has limitations: • Market growth rate is an inadequate descriptor of overall industry attractiveness. such as a com- mon plant or salesforce.e. or losses. How- ever.7). multifactor measures of industry attractiveness and a business’s competitive strength and wal28949_ch02_031-057. if other SBUs depend on a dog business as a source of supply—or if they share functional activities. • Relative market share is inadequate as a description of overall competitive strength.indd 48 14/12/12 12:30 PM . it provides little guidance on how best to implement those strategies. Divestiture is one option for such businesses. they typically generate low profits. although it can be difficult to find an interested buyer. with that business—harvesting the dog might increase the costs or reduce the effectiveness of the other SBUs. Limitations of the Growth-Share Matrix Because the growth-share matrix uses only two variables as a basis for categorizing and analyzing a firm’s businesses. the model can suggest some inappropriate resource allocation decisions. a number of firms have attempted to improve the basic portfolio model. Some high-growth industries have never been very profitable because low entry barriers and capital inten- sity have enabled supply to grow even faster. this does not mean the firm should necessarily maximize the business’s short-term cash flow by cutting R&D and marketing expenditures to the bone—particularly not in industries where the business might continue to generate substantial future sales. • The outcomes of a growth-share analysis are highly sensitive to variations in how growth and share are measured.

the multifactor measures in these models can be subjective and ambiguous.36 First. the operating profit mar- gin.37 Second. The first five value drivers are self-explanatory. and the like—and weight them according to their relative importance. shareholder value created by a strategy is determined by the cash flow it generates. Corporate managers must first select factors appropriate for their firm—such as industry size. Finally. they assess the economic value a strategy is likely to produce by exam- ining the cash flows it will generate. They then rate each business and its industry on the two sets of factors. especially when managers must evaluate different industries on the same set of factors. Inc. pursuing. A number of value-based planning methods are currently in use. affected by six “value drivers”: the rate of sales growth the strategy will produce. and the market value of the debt assigned to the business. the income tax rate. However. they evaluate strategies based on the likelihood that the investments required by a strategy will deliver returns greater than the cost of capital. In this model. but all share three ba- sic features. for instance. 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. the business’s cost of capital (which is used to discount fu- ture cash flows back to their present value). and the duration of value growth. The amount of return a strategy or operating program generates in excess of the cost of capital is com- monly referred to as its economic value added. competitive intensity.indd 49 14/12/12 12:30 PM .8 indicates. in turn. in deciding which of two question mark businesses—each in attrac- tive markets but following different strategies—is worthy of the greater investment or in choosing which of several competitive strategies a particular business unit should pursue. Portfolio analysis provides little guidance. They are also more useful for evaluating potential new product-markets. These multifactor models are more detailed than the simple growth-share model and consequently provide more strategic guidance concerning the appropriate allocation of resources across businesses. rather than relying on distorted accounting measures. but the sixth requires some elaboration. Discounted Cash Flow Model Perhaps the best-known and most widely used approach to value-based planning is the discounted cash flow model proposed by Alfred Rappaport and the Alcar Group. or EVA. Thus. Value-based planning is a resource allocation tool that attempts to address such ques- tions by assessing the shareholder value a given strategy is likely to create. and differ- ent business units typically face different risks and therefore have different costs of capital.35 Value-Based Planning As mentioned. they estimate the shareholder value that a strategy will produce by discounting its forecasted cash flows by the business’s risk-adjusted cost of capital. fixed capital investment required by the strategy. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 49 on making the analysis more future-oriented. one limitation of portfolio analysis is that it specifies how firms should allocate financial resources across their businesses without considering the competitive strategies those businesses are. customer loyalty. investment in working capital. or should be. the conclusions drawn from these models still depend on the way industries and product-markets are defined. they combine the weighted evaluations into summary measures used to place each business within one of the cells in the growth-share matrix.38 This approach to evaluating alternative strategies is particularly appropriate for use in allocating resources across busi- ness units because most capital investments are made at the business-unit level. as Exhibit 2. The duration of value growth represents management’s estimate of the number of years wal28949_ch02_031-057. Next. such as return on investment. Also. The future cash flows generated by the strategy are. R&D spending.

39 Some Limitations of Value-Based Planning40 Value-based planning is not a substitute for strategic planning. a division of Simon & Schuster Adult Publishing Group. the man- ager must decide on the length of the planning period (typically three to five years). 1998 by Alfred Rappaport.indd 50 14/12/12 12:30 PM . 50 Section One Introduction to Strategy EXHIBIT 2. and managers can lose sight of the assumptions underlying them. wal28949_ch02_031-057. Revised and Updated Edition by Alfred Rappaport. Such decisions are tricky. and competitors’ actions. All rights reserved. Copyright © 1986. he or she must then estimate the residual value the strategy will continue to produce after the planning period is over. First. This estimate. product mix. There- fore. managers are likely to overestimate the future returns from a currently successful strategy. inaccurate forecasts can create problems in implementing value-based planning. working capital. Consequently. there are natural human tendencies to overvalue the financial pro- jections associated with some strategy alternatives and to undervalue others. unit prices. Projections of cash inflows rest on forecasts of sales volume. is tied to two other management judgments. in turn. While good forecasts are notoriously difficult to make. For one thing. they are critical to the validity of value-based planning. for they involve predictions of what will happen in the relatively distant future. the numbers derived from value-based planning can sometimes take on a life of their own. and expectations managers associate with each alternative. over which the strategy can be expected to produce rates of return that exceed the cost of capital. people tend to endow those numbers with the concreteness of hard facts. it is only one tool for evalu- ating strategy alternatives identified and developed through managers’ judgments. Expected cash outflows depend on projections of various cost elements. For instance. It does so by relying on forecasts of many kinds to put a financial value on the hopes. fears. and invest- ment requirements. from Creating Shareholder Value: A Guide for Managers and Investors. Once someone attaches numbers to judgments about what is likely to happen.8 Factors Affecting the Creation of Shareholder Value Creating Shareholder return Corporate shareholder • Dividends objective value • Capital gains Valuation Cash flow from Discount Debt components operations rate • Working • Sales growth capital • Value • Operating Value investment • Cost of growth profit margin drivers • Fixed capital duration • Income tax capital rate investment Management Operating Investment Financing decisions Source: Adapted with permission of The Free Press.

indd 51 14/12/12 12:30 PM . and returns might change if. The necessary purchase data can be gotten from the firm’s sales records. it was hard to justify the $2 million investment in terms of cost savings. petitive advantage from not making a strategic investment nec- essary to maintain the status quo is harder than documenting potential cost savings or profit improvements that an investment might generate.41 Each customer’s lifetime value is estimated from data about the frequency of their purchases in the category. prices. overvaluing others. More important. Putting a figure on the damage to a firm’s com- keeping current customers. which is the sum of the lifetime values of its current and future customers. Using Customer Equity to Estimate the Value of Alternative Marketing Actions A recent variation of value-based planning attempts to overcome some of the preceding limitations—particularly the inaccuracy of subjective forecasts and managers’ tendency to overestimate or underestimate the value of particular actions—and is proving useful for evaluating alternative marketing strategies. inventory costs were climbing. However. a small manufacturer of heavy- duty gears. Since it is only an analytical tool. some kinds of strategy alternatives are con- Some kinds of strategy alternatives are sistently undervalued. To realize its full benefits. a few years ago Cone Drive Operations. management must link value-based planning to sound strategic analysis that is rigorous enough to avoid the problems associated with undervaluing certain strategies. and failing to consider all the options. and improved customer satisfaction. This approach calculates the economic return for a prospective marketing initiative based on its likely impact on the firm’s customer equity. Particularly viewpoint is the tendency to underestimate the value of keeping worrisome from a marketing viewpoint is the tendency to underestimate the value of current customers. Strategic Issue On the other hand. and new business and nonlabor savings paid back the investment in just one year. value-based planning can evaluate alternatives. Because the company had only $26 mil- lion in sales. The impact of a firm’s or business unit’s past marketing actions on customer equity can be statistically estimated from historical data. but it can- not create them. com- bined with the firm’s contribution margin. the average quantity purchased. Cone retained nearly all of its old customers. faster order processing. Because market and competitive conditions. but a discounted cash flow analysis indicated the system would be an unwise investment. Particularly worrisome from a marketing consistently undervalued. and therefore customer perceptions and behaviors. Management decided to install the new system anyway. Profits were declining. Finally. This enables managers to identify the wal28949_ch02_031-057. The best strategy will never emerge from the evaluation process if management fails to identify it. for example. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 51 Evidence of past success tends to carry more weight than qualitative assessments of future threats. and historical brand-switching patterns. the underlying data needs to be updated on a regular basis—perhaps once or twice a year. and customers were unhappy because deliveries were often late. however. then. For example. another kind of problem involved in implementing value-based planning oc- curs when management fails to consider all the appropriate strategy alternatives. change over time. whereas brand-switching patterns can be estimated either from longitudinal panel data or survey data similar to that collected in customer satisfaction studies. faced a number of related problems. Managers may pay too little attention to how competitive behavior. the industry were suddenly beset by a slowdown in market growth and the appearance of excess capacity. many of whom had been seriously considering switching to other suppliers. the financial analysis underestimated intangibles such as improved prod- uct quality. Cone’s management thought that a $2 million computer-integrated manufacturing sys- tem might help solve these problems.

market segments. when the firm is competing in global markets. alternative customer relationship management policies should be evaluated along with the other marketing “value drivers” when designing marketing strategies for organizational markets. Corporate Identity and the Corporate Brand as a Source of Synergy Corporate identity—together with a strong corporate brand that embodies that identity— can help a firm stand out from its competitors and give it a sustainable advantage in the market. or customer- related intangibles—such as brand-name recognition and reputation—from other units within the firm. and personality projected by an organization. such as brand advertising. A centralized corporate R&D department. some argue that strong corporate-level coordination and support are necessary to maximize the strength of a firm’s brand franchise and to glean full benefit from accumulated market knowledge. customer knowledge. for example. such knowledge-based synergies are a function of the corporation’s scope and mission—or how its managers answer the question: What businesses should we be in? When a firm’s portfolio of businesses and product-markets reflects a common mission based on well-defined customer needs. impressions. 52 Section One Introduction to Strategy financial impact of alternative marketing “value drivers” of customer equity. Similarly. Once a manager calculates the implementation costs and capital requirements involved.indd 52 14/12/12 12:30 PM . In part. the firm’s organizational structure and allocation of resources also may enhance knowledge-based synergy. and the like. For instance. it is then possible to estimate the financial return for any similar marketing initiative in the near future. When dealing with organizational customers. loyalty programs. It is shaped by the firm’s mission and values. the company is more likely to develop core competencies. SOURCES OF SYNERGY A final strategic concern at the corporate level is to increase synergy across the firm’s various businesses and product-markets. However. is often more efficient and effective at discover- ing new technologies with potential applications across multiple businesses than if each business unit bore the burden of funding its own R&D efforts. or technologies. knowledge. an additional set of variables— characteristics of the interfirm relationship. The performance of one business can be enhanced by the transfer of competencies. commitment. such as trust. quality or service improvements. its functional wal28949_ch02_031-057. For example. and the number and decision-making authority of contacts within the customer firm—can also impact cus- tomer equity and value over time.42 Therefore. increasing the number of contacts called upon within customer organizations experiencing relatively high employee turnover tends to increase the financial returns from those companies. Knowledge-Based Synergies Some potential synergies at the corporate level are knowledge-based. and strong brand fran- chises that can be shared across businesses. the technical knowledge concerning image processing and the quality reputation that Canon developed in the camera business helped ease the firm’s entry into the office copier business. synergy exists when two or more businesses or product-markets and their resources and competencies complement and re- inforce one another so that the total performance of the related businesses is greater than it would be otherwise. Corporate identity flows from the communications. As mentioned.

This is where the firm’s corporate branding strategy enters the picture. employees. Examples include Microsoft software products (e. and The Body Shop have established formal policies. The question is when does it make sense to emphasize—and seek to gain synergy from—a strong corporate identity and brand name in a company’s branding strategy. etc. wal28949_ch02_031-057.com) companies.) and Volkswagen automobiles. Walt Disney. Cisco Systems. For example.g. The firm might adopt a dual branding strategy where each offering carries both a corporate identifier and an individual product brand. British Airways. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 53 competencies.. One rationale for such corporate identity programs is that they can generate synergies that enhance the effectiveness and efficiency of the firm’s marketing efforts for its individual product offerings. the actions of its personnel. 2. Microsoft Word. and other audiences and thereby generate a bigger bang for its limited marketing bucks. Finally. crite- ria. Thus. firms as diverse as Caterpillar. Essentially. Surprisingly. Unilever. shareholders. advertising. some of the conditions favoring a dominant corporate brand are rather obvious. Corporate Branding Strategy—When Does a Strong Corporate Brand Make Sense? Before a company’s reputation and corporate image can have any impact—either positive or negative—on customers’ purchase decisions. a firm might pursue one of three options concerning the corporate brand:44 1. For instance. This is the strategy pursued by Procter and Gamble.. its marketing communica- tions. and guidelines to help ensure that all the messages and sensory images they com- municate reflect their unique values. 3. and competencies.. Amazon.indd 53 14/12/12 12:30 PM . Disney has created an identity that helps stimulate customer demand across a wide range of product offerings—from movies to TV programs to licensed merchandise to theme parks and cruise ships. this question has not been subjected to much empirical research. By focusing on a common core of corporate values and competencies. Microsoft Windows. those customers must be aware of which specific product or service offerings are sponsored by the company. every impression generated by each product’s design. packaging. by consis- tently focusing on values and competencies associated with providing high-quality fam- ily entertainment. 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 custom- ers in at least most of its target markets. personality. IBM) and service (e. strong. the quality and design of its goods and services. as is the case with many high-tech (e. and promotional materials can help reinforce and strengthen the impact of all the other impressions the firm communicates to its customers.g. the image generated by various corporate activities.45 How- ever. Siemens.000 products because the firm’s reputation for in- novativeness and reliability is perceived positively by many of its potential customers regardless of what they are buying. and many other consumer package goods firms.43 In order to project a positive. and other factors. and consistent identity. The corporate brand (typically the company’s own name and logo) might serve as the brand name of all or most of the firm’s products in markets around the world. each product offering might be given a unique brand and identity—perhaps even different brands across different global markets—whereas the identity of the source company is de-emphasized or hidden.g. the 3M Company features the 3M logo prominently on virtually all of its 60.

The firm thought its huge and well- established snack salesforce would give its cookies a competitive advantage in gaining shelf space and retailer support. Disney. facilities. either in terms of having similar po- sitionings in the market or cross-product elasticities that might be leveraged to encourage customers to buy multiple products from the firm. over a specified time frame. of course. But because those salespeople were paid a commission on their total sales revenue. When such sharing helps increase economies of scale or experience-curve effects. The resulting lack of a strong sales effort contributed to Grandma’s failure to achieve a sustainable market share. is whether a firm’s decision-making structure influences brand strategy. Determine why that strategy does or does not make sense. Identify which (if any) of the growth strategies identified in Exhibit 2. This is due.indd 54 14/12/12 12:30 PM . Marketing Write a draft mission statement for your company. the sharing of op- erational facilities and functions may not produce positive synergies for all business units. compared to the other alternatives.47 For instance.000 salty-snack route salespeople to distribute the new line to grocery stores. a business whose competitive strat- egy is focused on new-product development and the pursuit of rapidly changing markets may be hindered more than helped when it is forced to share operating resources with other units. However. the company relied on its 10. Set the objectives that your plan or project is intended to accomplish. they were reluctant to take time from their salty-snack products to push the new cookies. and the like. such as its physical facilities. For instance.g. an exploratory study based on interviews with managers in 11 Fortune 500 companies suggests that a firm is more likely to emphasize a strong corporate brand when its various product offerings are closely interrelated. quality control systems. two or more businesses might produce products in a common plant or use a single salesforce to contact common custom- ers. The obvious question. etc. in part. the type of competitive strategy a business unit chooses to pursue can have a number of implications for corporate-level decisions concerning organizational structure and resource allocation as well as for the marketing strategies and programs employed within the business. Plan Exercise based on your still very preliminary thinking. employee training and reward programs. it can improve the efficiency of each of the businesses involved.46 The study also found that firms with strong corporate brands tended to have more centralized decision-making structures where top management made more of the marketing strategy decisions. when Frito-Lay attempted to enter the packaged cookie market with its Grandma’s line of soft cookies. Synergy from Shared Resources A second potential source of corporate synergy is inherent in sharing operational resources. wal28949_ch02_031-057. Finally. Marriot. many service organi- zations (e. As we shall see in Chapter 3. to the fact that services are relatively intangible and much of their value is directly generated by the actions of company personnel and facilitated by other firm- specific resources. Cathay Pacific. Thus. 54 Section One Introduction to Strategy A related point is that a strong corporate brand makes most sense when company-level competencies or resources are primarily responsible for generating the benefits and value customers receive from its various individual offerings. We will explore such organization design issues and their marketing strategy impli- cations in more detail later in Chapter 12. measured in terms of sales and/or market share and profit contribution. or vice versa. For example.. and functions across business units. Such sharing can limit a business’s flexibility and reduce its ability to adapt quickly to changing market conditions and opportunities.) emphasize their corporate brands.5 your plan will pursue.

bloomberg. Ethics in Business: A Perspective (Chicago: Arthur Andersen. and tonics. 2000. Suzanne Kapner. “The Duke of Discomfort.” p. p. pp. “At Pepsi. and Ryanair’s 2011 annual report available at www. 6. “Ryanair Faces Future Trouble. 30. 2.com/globalbiz. 5. 172–84.businessweek. What are some of the pos- sible 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? Self-diagnostic questions to test your ability to apply the concepts in this chapter can be found at this book’s website at www. December 12. “The New Ethics Enforcers. 71–73. b.” Bloom- berg Businessweek. April 22. November 12. pp. 3. 4. Fredrick Trawick. How might such a company expand its revenues by pursuing each of the different expansion strategies discussed in Exhibit 2.” Financial Times.” Bloomberg Busi- nessweek. 2005. “Marketing Myopia. 3. Felix Gillette. February 13. 2010. “Doing Well by Doing Good. “Flying the Un- friendly Skies. An oil company’s acquisition of an insurance company. wal28949_ch02_031-057. Theodore Levitt. Byrne. “Corruption Rises Over Three Years. 2000. “The Pepsi Machine.fortune. “Influence of Buyer Ethics and Salesperson Behavior on Intention to Choose a Supplier. 2006. Which diversification strategy is illustrated by each of the following acquisitions? What syner- gies or benefits might each purchase produce? a. 65–67.com. pro- duced and marketed a line of carbonated beverages consisting mainly of flavored soft drinks (not Questions including colas).” Journal of the Academy of Marketing Science 19 (Winter 1991). Swan. 1995.indd 55 14/12/12 12:30 PM .” BusinessWeek. pp. 76–77. located in a large metropolitan area of some 5 million people. McGee. 2006.” BusinessWeek. “Beyond the Green Corporation. Katrina Brooker. 66. 57. Engardio.” The Econo- mist.” A Special Report on Corporate Social Responsibility.” The Economist. They were sold in different types of packages and sizes to a wide variety of retail accounts.” Fortune. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 55 Discussion 1. April 10. 2012. 68–72. pp. 25–26.mhhe.cnn. 9. “Lining Up for Profits. pp. pp. 2008. Endnotes 1. September 6. More People Paid Bribes. 2010. “The Ryanair Advantage: Airport Charges and Maintenance. 55–66. January 19.” Fortune. 2007. Gail W. July–August 1960. 455–56. and Duane Stanford. 1988).” The Economist. soda water. 58–61. A tobacco company’s acquisition of a beer company. p. and Joseph Weber. 2008. 2008. 19.ryanair.com. A large retailer’s purchase of an interest in a company producing small appliances. February 6–February 12. “Just Good Business.com/news.” p. 2008. 17–23. For additional examples. John E. pp.” www. July 7. Mark Scott. “PepsiCo’s Indra Nooyi: Niche Brands are the Future. 7. c. a Renewed Focus on Pepsi. John A. 52. March 3. Pete Engardio. Critics argue that the BCG portfolio model sometimes provides misleading advice concerning how resources should be allocated across SBUs or product markets. pp. see Daniel Franklin. pp. I. This case example is based on material found in Andrea Felsted.com/walker8e. “PepsiCo’s New Formula. 64. 10. The Kelly Bottling Company. SR3–SR22.” www. Beth Kowitt.” www. 8. Betsy Morris. January 29. d. Rink. pp. Maria Ermakova and Chris Spillane. June 6. p. February 6. A packaged food company’s acquisition of a fast-food company that features hamburgers and french fries.5? 2. “The Pepsi Challenge: Can This Snack and Soda Giant Go Healthy?” Fortune. Robert A.” Harvard Business Review. p. 2002. 2010. “Doing Well by Doing Good. and David R.” The Economist.” BusinessWeek. December 10. pp. April 8. October 5. Cooke. “Beyond the Green Corporation. “Good Grief.

Farris. 2009. “New Look at Corporate Goals.edu. Gale and Donald J. Greased Palm. Phillip E. March– April 1990. March–April 1988. see Roland T. V. and Liam Fahey. “Using the Balanced Scorecard.upenn. 14–17. 168–79. “How Amazon Aims to Keep You Clicking. Report No. chap.” Journal of Marketing 58 (April 1994). Day and Prakash Nedungadi. “Marketing. and Valarie Zeithaml. Creating a Superior Customer-Relating Capability. Patrick Barwise.” Journal of Marketing 73 (November 2009). 22–31. and Rajendra K. “Putting Strategy into Shareholder Value Analysis. Also see Shelby D. Sundar G. Rust. May 14. “Return on Marketing: Using Customer Equity to Focus Marketing Strategy. pp. “The Capabilities of Market-Driven Organizations. and Diana C. November 21. and Paul E. and Roland T. 47. 179–92. p. pp. pp. Martha Myslinski Tipton. Shetty. 75–85. Tasadduq A. 26. Duane Stanford. 143–62.” Journal of Marketing 68 (October 2004). pp. pp. Mina Kimes. Hunt and Robert M. Day and Liam Fahey. “Using the Balanced Scorecard as a Strategic Management System.indd 56 14/12/12 12:30 PM . 3 (1993). 20. 25.” Journal of Marketing 59 (April 1995). and Shawn Tully. pp. “Invisible Hand. Neil T. “America’s Best Wealth Creators. Interview with Mr. The Global Crackdown on Corporate Bribery. a Renewed Focus on Pepsi. and David J.” Journal of Management 17 (1991).” BusinessWeek. 1. see also Robert S. “Debate: Duking It Out over EVA. 14. “Managerial Representa- tions of Competitive Advantage. 2006). Gordon Donaldson. “Regulatory Exposure of Deceptive Marketing and Its Impact on Firm Value. “U.knowledge. For an approach that estimates the impact of various marketing actions on customer equity as a means of evaluat- ing their financial returns. pp. “Would You Recommend Us?” BusinessWeek. 56 Section One Introduction to Strategy 11. pp.” Journal of Mar- keting 68 (January 2004). Rust. 1984). Norton. and George S. Day. pp. 23.” Harvard Business Review 74 (January–February 1996). Day. Tim Ambler. Law on Bribes Has Firms in a Sweat. Kaplan and David P. “The Tricky Business of Measuring Wealth. 1986). 12. “Crossing the ‘Zone of Indifference. 15. 227–243. 2003). 1997.” and Rajendra K. 34–40. pp. “At Pepsi. See also Ka- plan and Norton. and Margaret A. Gregory S. 156–62. and James Surowiecki. pp. p.” The New Yorker. MA: Marketing Science Institute. August 4.” Harvard Business Review. pp. 37–52. Jay B. 143. K.” California Management Review 12 (Winter 1979). 94–95.” Journal of Marketing 58 (October 1994). “The Comparative Advantage Theory of Competition. Robertson. 31–44. Swire. p. and Shareholder Value: An Organi- zationally Embedded View of Marketing Activities and the Discipline of Marketing. January 30. 2009. “Measuring Marketing Productivity: Current Knowledge and Future Directions. 232. Daniel P. 19. 44. 2010.K. 16.” Fortune. George S. 2009. pp. Bradley T. Marketing Metrics: 50+ Metrics Every Executive Should Master (Philadelphia: Wharton School Publishing. 68–69. “Fluor’s Corporate Crime Fighter. Carpenter. Katherine N. 03-101 (Cambridge. Creating Shareholder Value: The New Standard for Business Performance (New York: Free Press.wharton.” 22. Pfeifer. 99–120. 24.” The Economist. Finkelman. pp.” www. Srivastava. March 2. 17. 13. Peteraf. Barney.” Fortune. Morgan. pp. wal28949_ch02_031-057. Y. 1994. November 28. Bharadwaj. Srivastava.” Journal of Marketing 63 (Special Issue 1999).” Fortune. Shervani. Paul R. and Robin Wensley. Business Processes. February 16. Bendle.” p. 21. “The Cornerstone of Competitive Advantage: A Resource-Based View. pp. pp.” Strategic Management Journal 14 (1993). Tully. 2006. pp. 76–89. “Must Finance and Strategy Clash?” Harvard Business Review. no. December 28. 18.WSJ. Managing Corporate Wealth (New York: Praeger. Also see Dionne Searcey. Alfred Rappaport. Lemon. September 7. Reibstein. “Firm Resources and Sustained Competitive Advantage. www . Utz-Hellmuth Felcht transcribed on Knowledge@Wharton. September–October 1989.” Planning Review. 85–90. 26. Heather Green. Marsh. George S.com/law. “America’s Best Wealth Creators. 2012. Kumar. See also Jena McGregor. and George S. 2005. 71–79. 109–27.’” Marketing Management 2. Ungreasing the Wheels.

Swire. 34. “China Deluxe: Armani.” Journal of Marketing 63 (Special Issue 1999). Brand Leadership.” Journal of Marketing 73 (November 2009). “Luxury Clothier Zegna’s Marco Polo Moment.” BusinessWeek. 39. Cartier—Luxury Brands Are Rushing into China’s Red-Hot Market. Rajan Varadarajan. 37. 40. pp. Lemon.tech. chap. February 25. Ruekert and Orville C. 3. 68–80. 75–76. Gale. Miguel Helft. 30. For a more detailed typology of brand strategies or “architectures. see Rappaport. 45. Wally Olins. Creating Shareholder Value: A New Standard for Business Performance (New York: Free Press. “The Real Key to Creating Wealth. Report 91–100 (Cambridge. It is detailed in Alfred Rappaport. 1986). Mercedes.cnn. Corporate Identity (Cambridge.” Journal of Marketing 72 (July 2008).” Fortune. 1993. 46. Robert W. see Roger A. “Making It Click. “Expanding the Role of Marketing: From Customer Equity to Mar- ket Capitalization. and Terrence P. 18–19. wal28949_ch02_031-057. June 14. For a more detailed discussion of EVA and some practical examples.” Harvard Business Review. see Shawn Tully. chap. 31.” www. The limitations of value-based planning are discussed in more detail in George S.” see David A. see Kerin. 1990. 59–74. Day and Liam Fahey. pp. Building Corporate Brands: An Exploratory Study. Contemporary Perspectives on Strategic Market Planning (Boston: Allyn and Bacon. “Interfirm Relational Drivers of Customer Value. 28. 2010. Rego. pp.” Fortune. See also Aaker and Joachimsthaler. “Customer Equity Drivers and Future Sales. 38. April 30. Dior. 29. Report 01–100 (Cambridge. 36. A more in-depth discussion of the forecasts and other procedures used in value-based planning can be found in Rappaport. 6. and Donald J. Kerin. For a more detailed discussion of the uses and limitations of multifactor portfolio models. Robert W. 1995. “Putting Strategy into Shareholder Value Analysis. Kumar and Denish Shah. 119–136. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 57 27. 32. pp. 1993).. Gabriel J. Pare.” Journal of Marketing 73 (January 2009). 76–89. Creating Shareholder Value.” Also see Verena Vogel. Heiner Evanschitzky. March– April. further. 2012. 1987). pp. and Zeithaml.” Fortune. and Varadarajan. Mahajan. and Varadarajan. Walker Jr. Robert D. 35. For example. 33. For a detailed discussion of the shortcomings of accounting data for determining the value created by a strategy. chap. “An Empirical Comparison of Standardized Portfolio Models. 1990). 98–108. 2. or Kerin. Robert Jacobson argues that market share and profitability are joint outcomes from success- ful strategies and. Vijay Mahajan. 2012. pp. MA: Harvard Business School Press. that management skills likely have the greatest impact on profitabil- ity. 148–56. “Meet the anti-Groupon.indd 57 14/12/12 12:30 PM .” Journal of Marketing 47 (Spring 1983).fortune. For a more comprehensive review of the evidence concerning the effects of diversification on firm performance. Ramaseshan. September 20. Biehal and Daniel A. 38–50. July 26.” Journal of Marketing 52 (October 1988). The PIMS Principles: Linking Strategy to Performance (New York: Free Press. MA: Marketing Science Institute. and V. 9. and Carol Matlack and Eugene Tang. 43. Creating Shareholder Value. 2000). Achrol and Philip Kotler. pp. 8. Clay Chandler. The discounted cash flow model is the approach focused on in this chapter. pp. 156–62. pp. Mahajan. 131–32. MA: Marketing Science Institute. pp.” The Economist. chap. Aaker and Erich Joachimsthaler. pp. chap. Brand Leadership (New York: Free Press. see Neil Morgan and Lopo L. “Marketing in the Network Economy. Contemporary Perspectives on Strategic Market Planning. 42. pp. “Brand Portfolio Strategy and Firm Performance. Palmatier. “Return on Marketing: Using Customer Equity to Focus Market- ing Strategy. 2001). 41. 89–99.com. Buzzell and Bradley T. September 18. 2004. 47. For one recent exception. 146–63. and P. Sheinin. see Ravi S. Rust. Vijay Mahajan. “The New Champ of Wealth Creation. and B. Shared Marketing Programs and the Performance of Different Business Strategies. 1991). See “Distinguishing among Competing Theories of the Market Share Effect.” Journal of Marketing 72 (November 2008). Contemporary Perspectives on Strategic Market Planning. Yoram Wind. 44. pp.

and traffic control. and specialty chemicals for industrial applica. various business units to pursue their growth • The Electro and Communications Sector sup. sales—66 percent of its total revenue—from out- • The Consumer and Office Sector offers prod. facturing sandpaper a century ago. The firm makes ing from respirators for worker safety to clean- more than 60. One formal objective assigned to every business tains 38 such SBUs or product divisions organized unit is to obtain at least 30 percent of annual into six market sectors: sales from products introduced within the past four years.5 a variety of tapes. side the United States.indd 58 14/12/12 4:22 PM . The company supports its growth • The Industrial and Transportation Sector makes strategy with a R&D budget of more than $1. billion. splicing. and Protection Services the leader in dozens of technical areas from Sector markets a wide variety of products rang- fluorochemistry to fiber optics. Chapter Three Business Strategies and Their Marketing Implications Business Strategies and Marketing Programs at 3M1 The Minnesota Mining and Manufacturing materials for electronic displays. 3M is organized into a large number of customers and new products for new markets. which ing supplies to fire protection products. Today it is • The Safety. 3M attained $19. began manu.6 billion in global sales in 2011. The company also pursues growth through the tions ranging from electronics to aerospace to aggressive development of foreign markets. strategic business units (SBUs). better known as 3M. primarily on internal new product development. and an automobile manufacturing. objectives in different ways. however. additional organizational sector is responsible for • The Health Care Sector markets a variety of coordinating the firm’s marketing efforts across medical. nearly 5. for example. Security. and protective prod.6 billion in products and services. The company con. lead 3M’s tapes. abrasives. and dental countries. In 2011. commercial graphics. surgical. generated $29. pharmaceutical. Company. The Industrial Tape plies connecting. such as Post-it Differences in customer needs and life-cycle brand repositionable notes and Scotch brand stages across industries. As you might expect of a firm with so many emphasizing both improved products for existing products. touch screens. filters. Growth in this group results from extending leader in the sales of films and reflective 58 wal28949_ch03_058-084. operates in an indus- markets. adhesives. Division within the Industrial and Transporta- ucts for electronics and telecommunications tion Sector. try where both the product technologies and the customer segments are relatively mature and sta- • The Display and Graphics Sector is a world ble. ucts for homes and offices.000 different products. The company produced $6 billion in operating The corporation’s growth strategy has focused income.5 percent of total revenue.

Consequently. Can a variety of competitive new medical applications for emerging technolo. such as the drug delivery systems unit? As being the technological leader and introducing one management guru points out. totally different. has continued to pursue six sigma goals in 3M’s the firm spends little on advertising or sales pro. . the firm’s Drug Delivery Systems different market conditions. . reducing defects. hardwire a company for total quality management cessful. the more it is going to hurt break- tial resources to R&D and to the stimulation through innovation.indd 59 14/12/12 4:22 PM . For instance. a single corporate strat- variety of technologies for the delivery of medica. the pioneering nature of the drug such as allowing researchers to spend 15 percent delivery unit’s technologies calls for more extensive of their time on whatever projects interest them. though. Consequently. Six sigma is a qual- with other pharmaceutical firms. while he within the various business units. aimed at new ity control approach that uses rigorous statistical markets. and effective under. physicians. at existing customers. In contrast. and other medical uct improvements and line extensions targeted professionals. the unit innovative company in the world behind Google devotes a relatively large portion of its revenues to and Apple. ments in the firm’s corporate policies to accom- These differences in competitive strategy.. He has also reemphasized some problem-solving assistance and other services other company policies aimed at spurring crea- to customers. advertising in technical journals aimed at the phar- attaching weather stripping to auto doors). maintaining its commanding market share in Six sigma’s objectives and methods make good existing markets while preserving or even im. and it must sometimes sacrifice are needed . egy or company policy? George Buckley had to ad- tions that are inhaled or absorbed through the dress this issue when he took over as 3M’s CEO in skin. Its competitive strategy trial tape unit where the product line is well estab- is to differentiate itself from competitors on the lished and improving quality and lowering costs are basis of product quality and excellent customer important means of maintaining profitability. and expansion into global Although different business and marketing markets. 2005. strategies make sense for business units facing In contrast. improving quality. To be suc. the in. It sells a with. in 2011 ranked 3M as the third most and stimulate primary demand. maceutical industry. analysis to remove variability from a process—such The competitive strategies of 3M’s various as order fulfillment or product delivery—thereby business units also differ. the unit must devote substan. what about a business whose competitive strategy But the drug delivery systems unit’s strategy focuses on innovation and new product develop- is to avoid head-to-head competitive battles by ment. a survey of global executives by develop awareness among prescribing physicians. its main objective is the capabilities that are needed. Thus. prod. it does maintain a large. they pose a dilemma Division within the Health Care Sector develops for top management. sense for mature businesses such as 3M’s indus- proving its profitability.g. he has loosened the reins a bit motion for its mature industrial tape products. For instance. The mind-set that is needed. “The more you a stream of unique new products. Chapter 3 Business Strategies and Their Marketing Implications 59 the scope of adhesive technology (for instance. well-trained firm’s research labs and some of its pioneering technical salesforce that provides valuable business units. often through alliances program throughout the firm. Most of the unit’s growth comes from de. in modate some of the strategic differences across turn. influence the strategic marketing programs the firm’s business units. But service. wal28949_ch03_058-084. strategies and marketing programs be consistent gies developed in 3M’s many R&D labs. for discontinuous innovation are short-run profitability to fund the product devel. promotion to attract potential alliance partners. and lowering dustrial tape unit is primarily concerned with costs. mature businesses. His predecessor had instituted a “six sigma” veloping new products. six sigma).” opment and marketing efforts needed to accom. by deemphasizing the six sigma approach in the However. of primary demand. CEO Buckley has made adjust- plish that goal. (e. the metrics that volume growth. For instance. tivity among the firm’s scientists and engineers. Consequently. Booz & Co.

Recent empirical evidence shows that when there is a good fit be- Strategic Issue tween a business’s competitive strategy and the strategic marketing When there is a good fit between a programs of its various product or service offerings. The company’s managers have done a good job of monitoring and adapt- ing their strategies to the market opportunities. Next. technological advances. market share. the business itability than when the two levels of strategy are inconsistent with one will achieve better results. on the other hand. What generic competitive strategies might a business pursue. The firm’s marketing and sales managers play critical roles both in developing market-oriented strategies for individual products and in influencing and helping to formulate corporate and business-level strategies that are responsive to environmental conditions. 3M’s industrial tape unit attempts to maintain its commanding market share and high profitability by differentiating itself on the basis of high product quality and good customer service. Each strategy fits with those at other levels as well as with the unique competitive strengths and competencies of the relevant business unit and the company as a whole. seeks high growth via aggressive new product and market development. most of the strategic marketing programs within 3M’s drug delivery unit involve relatively large expenditures for market- ing research and introductory advertising and promotion campaigns aimed at achieving sales growth. 60 Section One Introduction to Strategy STRATEGIC CHALLENGES ADDRESSED IN CHAPTER 3 The situation at 3M illustrates that large firms with multiple businesses usually have a hierarchy of strategies extending from the corporate level down to the individual product- market entry. are likely to give birth to new competitive strategies or make some old ones obsolete. including how business units should be designed. and competitive threats in the company’s external environment. we examine the interrelationships between different business competitive strate- gies and elements of the strategic marketing programs for the various products within the business. We’ll pay particular attention to the ques- tion of how a business might choose to compete.2 Therefore. Thus. Thus. How does—or should—a particular competitive strategy influence or constrain wal28949_ch03_058-084. the business will business’s competitive strategy and the achieve better results in terms of sales growth. corporate strategy addresses such issues as the firm’s mission and scope and the directions it will pursue for future growth. this chapter focuses on what marketing decision- makers can and should do to help ensure that the strategic marketing plans they develop are appropriate in light of the available resources and competitive thrust of the business that is their organizational home.indd 60 14/12/12 4:22 PM . 3M’s corporate growth strategy focuses primarily on developing new products and new applica- tions for emerging technologies. those strategies are usually in- ternally compatible. First. and in what environmental circumstances is each strategy most appropri- ate? We’ll also explore whether the same kinds of competitive strategies are relevant for small. or strategic fit. we briefly examine the strategic decisions that must be made at the business level. Finally. The drug delivery unit. such as the growth of e-commerce. One key reason for 3M’s continuing success is that all three levels of strategy within the company have usually been characterized by good internal and external consistency. the strategic marketing program for each product-market entry within a busi- ness unit attempts to allocate marketing resources and activities in a manner appropriate for accomplishing the business unit’s objectives. At the same time. As we saw in Chapter 2. The major strategic question addressed at the business-unit level is: How should we compete in this business? For instance. and prof- strategic marketing programs of its various product or service offerings. single-business organizations and entrepreneurial start-ups as for large multi-SBU firms such as 3M and whether technological shifts. another.

The managers in each SBU must then make recommendations about (a) the unit’s objectives. wal28949_ch03_058-084. (b) the scope of its target customers and offerings. marketing. What should 3M and the marketing manager responsible for inhalers do under such circumstances? Finally. more competitive pricing) that are not con- sistent with the aggressive product development strategy of the business unit. resources. This does not mean a SBU should not share resources. customers. and activities you will include in your mar- keting plan? STRATEGIC DECISIONS AT THE BUSINESS-UNIT LEVEL The components of a firm engaged in multiple industries or businesses are typically called strategic business units (SBUs). Thus. SBU-level managers. The first step in developing business-level strategies is for the firm to decide how to divide itself into SBUs. such as production. particularly those in market- ing and sales. Chapter 3 Business Strategies and Their Marketing Implications 61 marketing programs for the business’s product offerings? What happens if the market posi- tioning or specific marketing actions that would be most effective for appealing to a prod- uct’s target customers do not fit very well with the competitive strategy of the larger business unit? For example. and (d) how resources should be allocated across its product-market entries and functional departments. the firm avoids duplication of effort and maximizes economies of scale within its SBUs. Why does that com- petitive strategy make sense given the capabilities and resources available? What does it imply for the marketing objectives. such as a manufacturing plant or a salesforce. objectives.g. (c) which broad competi- tive strategy to pursue to build a competitive advantage in its product-markets. The rationale for breaking larger firms into semiautonomous SBUs usually stems from a market-oriented desire to move strategic decision-making closer to the customers the business is trying to reach. and distribution. they may require marketing actions (e. R&D and engineering. Minimizing diversity across a SBU’s product-market entries enables the unit’s manager to better formulate and implement a coherent and internally consistent business strategy. and the allocation of resources across SBUs in its portfolio. in the sense that no other SBU within the firm com- petes for the same customers with similar products. the Marketing Plan Exercise at the end of the chapter asks you to identify the business-level competitive strategy that is being—or should be—pursued by the business unit or entrepreneurial start-up that houses your product-market entry. markets. strategic business units have the following characteristics: • A homogeneous set of markets to serve with a limited number of related technologies. • A unique set of product-markets. But the SBU should determine how its share of the joint resource is used to effectively carry out its strategy. • Responsibility for their own profitability. and competitive strategies to pursue. However.indd 61 14/12/12 4:22 PM . and competitors and are respon- sible for successfully implementing the strategy. bear the primary responsibility for collecting and analyzing relevant in- formation and generating appropriate strategies for their businesses. How Should Strategic Business Units Be Designed? Ideally. Top-level corporate man- agers typically reserve the right to review and approve such decisions to ensure their over- all consistency with the company’s mission. as some of the products made by the drug delivery unit at 3M—such as the inhalers they make for delivering asthma medications—become well established and mature.. Those managers are more familiar with a given SBU’s products. • Control over those factors necessary for successful performance. with one or more other business units. Managers within each of these business units decide which objectives.

requiring similar technologies. 3M’s medical products unit includes a wide range of products involving very different technologies and production processes. the choice is often other. In these firms. production facilities. They are grouped within the same business unit. 3. In some firms. because all address health needs. though. the firm’s top managers approved a major investment in a new plant and a substantial introductory advertising budget. Similarity in the customer needs or the product benefits sought by customers in the target markets. the choice is often between technical/operational Strategic Issue compatibility on the one hand and customer homogeneity on the When designing SBUs. There are usually trade-offs between having many small homogeneous SBUs versus large but fewer SBUs that corporate executives can more easily supervise. 2. For example. In practice. Frequently management defines SBUs by product-markets between technical/operational compatibility and customer homogeneity. and employee skills. though. and can be sold through a common salesforce and distribution system. Those subobjectives obvi- ously must reflect the SBU’s overall objectives. and resource al- location decisions by corporate management. 62 Section One Introduction to Strategy As you might expect. What criteria should managers use to decide how product-markets should be clustered into a business unit? The three dimensions that define the scope and mission of the entire corporation also define individual SBUs: 1. they may vary across product-market entries according to the attractiveness and growth potential of individual market segments and the competitive strengths of the company’s product in each market. Technical compatibility. managers group product-market entries into SBUs based on similarities across customers or distribution systems. For instance. such as the use of similar production facilities and engineering skills. In most cases. A similar process of breaking down overall SBU objectives into a set of subobjectives should occur for each product-market entry within the unit. those subobjectives vary across SBUs according to the attractiveness of their indus- tries.indd 62 14/12/12 4:22 PM . For example. Consequently. Similarity in the personal characteristics or behavior patterns of customers in the target markets. the strength of their competitive positions within those industries. firms do not always meet all of these ideals when designing busi- ness units. managers may assign a SBU in a rapidly growing industry relatively high volume and share-growth objectives but lower ROI objectives than a SBU with a large share in a mature industry. This minimizes the coordination problems involved in ad- ministering the unit and increases its ability to focus on one or a few critical competencies. Business-Unit Objectives Companies break down corporate objectives into subobjectives for each SBU. the consumer group maintained high profitability goals for its other established products—such as Scotch brand Magic Transparent Tape and Post-it brand wal28949_ch03_058-084. are marketed to physicians and other health professionals. but once again. the marketing synergies gained from coordinating technically different products aimed at the same customer need or market segment outweigh opera- tional considerations. 3M wanted to maximize Never Rust’s volume growth and market share even if the new line did not break even for several years. At the same time. when 3M’s consumer products group first introduced its Scotch-Brite Never Rust soap pads—a new form of scouring pad that will never rust or splinter because it is made from recycled plastic beverage bottles—its objective was to capture a major share of the soap pad market from well-entrenched competitive brands such as SOS and Brillo. however. particularly with respect to product technologies and opera- tional requirements.

Allocating Resources within the Business Unit Once a SBU’s objectives and budget have been approved at the corporate level. are probably more appropriate at the product-market level than at the business level. and the customer equity and cash flows each product entry will likely generate rather than analyzing industry attractiveness and the overall competi- tive strengths of the firm. Of course. most SBUs pursue a single competitive strategy—one that best fits their market environments and competitive strengths—across all or most of the product-markets in which they compete. Michael Porter distinguishes three strategies—or competitive positions—that businesses pursue to gain and maintain competitive advantages in their various product-markets: (1) overall cost leadership. the essential strategic question at the SBU level is: How are we going to compete in this business? Thus. as discussed in Chapter 2. or portfolio analysis tools for both. for instance. (2) differentiation—building customer perceptions of superior product quality. Chapter 3 Business Strategies and Their Marketing Implications 63 notes—to provide the cash required for Never Rust’s introduction and preserve the group’s overall profit level. and marketing competencies and resources continue to outweigh those of its competitors. As we shall see in Chapter 13. Unfortunately. as when multiple products are produced in the same plant or sold by the same salesforce. many firms use similar economic value. practice. will continue to work only if the firm’s R&D. engineering. Of course. wal28949_ch03_058-084. and performance in different businesses. determine the viability of any particular competitive strategy. and (3) focus. Because this allocation process is quite similar to allocating corporate resources across SBUs. attempts to model the impact of vari- ous marketing initiatives on customer equity. its man- agers must decide how the available resources should be allocated across the unit’s vari- ous product-market entries. The question is: What alternative strategies are available to a busi- ness unit? What are the basic. some firms have adopted activity-based costing systems in an attempt to resolve such prob- lems. On the other hand.4 HOW DO BUSINESSES COMPETE? As mentioned. design.5 The 3M drug delivery unit’s strategy of gaining revenue growth via technological leadership and aggressive new product and mar- ket development. competitive strategies most SBUs choose to pursue? Generic Business-Level Competitive Strategies Researchers have identified general categories of business-level competitive strategies based on overall patterns of purpose. This is because the product-market entries within a business unit often share the benefits of common investments and the costs of functional activities. at the SBU level managers must determine the attractiveness of individual target markets. value-based planning. the competitive position of their products within those markets. value-based planning is not a useful a tool for evaluating alternative resource allocations across product-market entries. or generic. the unit’s core competencies and resources. in which the business avoids direct con- frontation with its major competitors by concentrating on narrowly defined market niches. The difficulty of deciding what portion of such common investments and shared costs should be assigned to specific products increases the difficulty of applying a discounted cash flow analysis at the product-market level.indd 63 14/12/12 4:22 PM .3 but many difficulties remain. Consequently. business strategies are primarily concerned with allocating resources across functional activities and product-markets to give the unit a sustainable advantage over its competitors. together with the customer and competitive characteristics of its industry. or service.

Finally. businesses pursuing a prospector strategy focus on growth through the development of new products and markets. Structure. reactors are businesses with no clearly defined strategy. www. University. EXHIBIT 3. An analyzer business attempts to maintain a strong position in its core product- market(s) but also seeks to expand into new—usually closely related—product-markets. or better service than competitors. • Tries to protect its domain by offering lower prices. As you can see. and reactors. All rights reserved.7 They classify business units into four strategic types: pros- pectors. Copyright © 1978 McGraw-Hill. limited line of products or services but carefully follows a selected set of promising new developments in its industry. • Not as willing to assume the risks of new product or market development as its competitors. makes fewer and slower product-market changes than prospectors but is less committed to stability and efficiency than defenders. even if not all of these efforts prove to be highly profitable. • Seldom a first mover. penetration of new markets). • Offers relatively limited range of products or services compared with competitors. • Does not have as consistent a product-market orientation as its competitors. Used with the permission of Stanford University Press. The analyzer strategy falls in between these two. and these responses often lead to new rounds of competitive actions. Source: Adapted from Raymond Miles and Charies Snow. Defender • Attempts to locate and maintain a secure position in relatively stable product or service areas. Analyzer • An intermediate type. Organizational Strategy. defenders. Defender businesses concentrate on maintaining their positions in established product-markets while paying less attention to new product development. • Values being a “first mover” in new product and market areas.1 describes each of these business strategies briefly. 64 Section One Introduction to Strategy Porter describes firms that lack a distinctive strategy as being “stuck in the middle” and predicts that they will perform poorly.org.sup. higher quality.1 Definitions of Miles and Snow’s Four Business Strategies Prospector • Operates within a broad product-market domain that undergoes periodic redefinition. • Responds primarily when it is forced to by environmental pressures. 2003 by the Board of Trustees of the Leland Stanford Jr. as is the case with 3M’s industrial tape business unit. Exhibit 3. • Usually not at the forefront of technological/new product development in its industry. • Attempts to maintain a stable.indd 64 14/12/12 4:22 PM . analyzers.6 Robert Miles and Charles Snow identified another set of business strategies based on a business’s intended rate of product-market development (new product development. wal28949_ch03_058-084. • Competes primarily by stimulating and meeting new market opportunities but may not maintain strength over time in all markets it enters. • Responds rapidly to early signals concerning areas of opportunity. • Not as aggressive in marketing established products as some competitors. Reactor • Lacks any well-defined competitive strategy. tends to ignore industry changes not directly related to its area of operation. but often a second or third entrant in product-markets related to its existing market base—often with a lower cost or higher-quality product or service offering. 3M’s drug delivery busi- ness unit illustrates this. and Process.

Evidence suggests that a substantial portion of businesses fall into the reactor category.2 because the de- sire for rapid new product or market development is the overriding aspect of their strategy. Units primarily actively seeking concerned with to expand into maintaining a Competitive strategy related product. Thus. Exhibit 3. for instance. rather than the eight that one might expect. Chapter 3 Business Strategies and Their Marketing Implications 65 EXHIBIT 3. it is more germane to a discussion of the business’s target market strategy (as discussed in Chapter 6) than to its competitive strategy. We view reactor and prospector business units as two homogeneous categories. Prospectors are also shown as a single strategic category in Exhibit 3. we have combined the two typologies in Exhibit 3.8 By definition. Most businesses compete in a reasonably con- sistent way across all of their product-markets. such businesses do not have well-defined or consis- tent approaches either to new product development or to ways of competing in existing product-markets. reactors have no clear competitive strategy. such as offering the lowest cost or differentiating itself on quality or service. Each of our strategic categories could be further subdivided according to whether a business applies the strategy across a broadly defined product-market domain or concen- trates on a narrowly defined segment where it hopes to avoid direct confrontation with major competitors (the focus strategy of Porter). a defender business unit could pursue a variety of competitive approaches to protect its market posi- tion. neither is complete by itself. differentiated Units primarily markets with position in Units with no concerned with differentiated mature markets clearly defined attaining growth through offerings product-market aggressive development or Units with strong competitive pursuit of new Cost leadership core business. In other words.2 classifies business strategies on two primary dimensions: the unit’s desired rate of product-market development (expansion) and the unit’s intended method of competing in its established product-markets. One study.2 to provide a more comprehensive overview of business strategies. Therefore. Exhibit 3. whether their domain is broad or narrow. wal28949_ch03_058-084.2 Combined Typology of Business-Level Competitive Strategies Emphasis on new product-market growth Heavy emphasis No emphasis Prospector Analyzer Defender Reactor Units with strong Differentiation core business. For example. however. Although this distinction is useful. Units primarily product-market strategy actively seeking concerned with opportunities maintaining a to expand into related product. There is little need for a prospector business to consider how it will compete in the new product-markets it develops because it will face little or no competition—at least not until those markets become established and other firms begin to enter. found that 50 out of 232 businesses examined could be classified as reactors.indd 65 14/12/12 4:22 PM .2 describes only six business strategies. we will largely ignore them during the rest of this discussion. low-cost markets with position in low-cost mature markets offerings Even though both the Porter and Miles and Snow typologies have received popular acceptance and research support.

wal28949_ch03_058-084.indd 66 14/12/12 4:22 PM . and fast. the same set of generic competitive strategies is just as appropriate for small firms as for business units within larger ones. Pinkberry has been able to generate substantial global sales by adapt- ing their flavors and toppings to local cultures and tastes. and the two strategies blend into one. and Nutrella spread in Russia. in reality most of them—at least those that stand a reasonable chance of to defend. is essentially the same as the market positioning of its stores: shops that offer high-quality frozen yogurt with a large variety of unique flavors and toppings. For instance. They compete primarily by developing a unique product or service that meets the needs and preferences of a customer segment that is not being well served by established competitors. even though that would mean compet- ing head to head with other. in reality most of them—at least those that stand a reasonable chance of success—begin life as prospec- tors. even though such a strategy would mean paying less attention to its successful first entry? Should the firm switch to a defender strategy to leverage its initial success. friendly customer service. (2) offering more flavors and many more unique toppings than competitors. competitors? Should the firm create two separate SBUs with different competitive strategies. The entry’s marketing strategy should be ad- justed in response to such changes. These and similar issues related to strategic change are examined in more detail later in this chapter. probably bigger. for instance. Just like a SBU in a major corporation such as 3M. By adjusting their differentiated defender strategy from country to coun- try. and (3) generating promotional buzz via celebrity endorsements. date and pistachio toppings in Kuwait. but that may make it less compatible with the overall competitive strategy of the business. Therefore. while the taxonomy of competitive strategies is success—begin life as prospectors. even though it is small and resources are limited? These are the kinds of questions that arise when the market and competitive conditions facing a product entry change. the firm has been able to generate more than a quarter of its income from outside the United States. Pinkberry’s competitive strategy. too. 66 Section One Introduction to Strategy Do the Same Competitive Strategies Work for Single-Business Firms and Start-ups? Even small firms with a single business and only a few related product offerings or start- ups with a single product must decide how they will compete. which is typically harder to change in the short term. For example.S. Impressively.9 However. The critical question for a start-up firm is: What happens when the new product matures and competitors arrive on the scene? Should the firm continue to focus on developing a stream of new products to stay a step ahead of the competition. the distinction between business-level competitive strategy and marketing strategy tends to blur. still relevant to entrepreneurial firms. and that portion is expected to grow in the future. frozen dessert market is mature. there is one important difference between single-business and multi-SBU organizations. By definition they do not have an established market position firms. Most start- Strategic Issue ups do not have the resources to succeed by competing as a “me-too” Although the taxonomy of competitive competitor in a well-established and highly competitive product- strategies is still relevant to entrepreneurial market. Pinkberry frozen yogurt shops have captured a significant portion of the upscale ice cream/gelato/frozen yogurt market in the United States with a differentiated defender strategy. Their strategy enabled them to expand to l20 shops in only five years. even though the U. Therefore. Another difference applies to entrepreneurial start-ups. They have successfully differentiated their stores by (1) hiring and training friendly enthusiastic store personnel. their competitive strategies should be tailored to their unique resources and competencies and aimed at securing a sustainable advantage over existing or potential competitors. they offer green tea–flavored yogurt in Asian shops. In smaller single-business firms.

univer- sities. 87 identified their firms as analyzers. a service can be defined as “any activity or benefit that one party can offer to another that is essentially intangible and that does not result in the ownership of anything. Services such as applications engineering. Its production may or may not be tied to a physical product.3. wal28949_ch03_058-084. For instance.2 is equally valid for service businesses. Chapter 3 Business Strategies and Their Marketing Implications 67 Do the Same Competitive Strategies Work for Service Businesses? What is a service? Basically. For instance. Other service businesses focus narrowly on defending established positions in current markets. however.indd 67 14/12/12 4:22 PM .”11 We typically associate services with nonmanufacturing businesses. Many organizations are concerned with producing and marketing a service as their pri- mary offering rather than as an adjunct to a physical product. Still others can best be described as analyzers pursuing both established and new markets. Thus. For instance. whereas the latter can be experienced. businesses that compete in multiple global markets almost always pursue one of the two types of analyzer strategy. almost all businesses are engaged in service to some extent. They must continue to strengthen and defend their competitive position in their home country—and perhaps in other countries where they are well established—while simultaneously pursuing expansion and growth in new international markets. A study of the banking industry provides empirical evidence that service businesses actually do pursue the same types of competitive strategies as goods producers. and maintenance can be crucial for building long-term relationships between manufacturers and their customers. The crucial question is this: To be successful. differentiate their offerings on the basis of high service qual- ity or unique benefits. American Express’s Travel Related Services Division has developed a variety of new services tailored to specific segments of the firm’s credit-card holders. might best be described as a low-cost analyzer. and 31 as reactors. services can be thought of as intangibles and goods as tan- gibles.2. even though service is often an indispensable part of a goods producer’s offering. and some European countries where it has established large market shares. some service businesses adopt prospector strategies and aggressively pursue the development of new offerings or markets.12 Do the Same Competitive Strategies Work for Global Competitors? In terms of the strategies described in Exhibit 3. When examined on a country-by-country basis. Canada. it competes more like a prospector when attempting to open and develop new markets in emerging economies such as China and Mexico. an airline whose competitive strategy is discussed in Exhibit 3. although 3M’s industrial tape group competes like a differentiated defender in the United States. such as Marriott. 157 as defenders. These organizations include public-sector and not-for-profit service organizations. Other firms. Fifty-four of the ex- ecutives reported that their banks were prospectors. the same business unit might be viewed as pursuing different competitive strategies in different countries. The former can rarely be experienced in advance of the sale. Emirates. training. attempt to minimize costs and compete largely with low prices. such as churches. even tested. The 329 bank CEOs who responded to the survey had little trouble categorizing their institu- tion’s competitive strategies into one of Miles and Snow’s four types. particu- larly in consumer durable and industrial products businesses. must service organizations employ different competitive strategies than goods manufacturers? The framework we used to classify business-level competitive strategies in Exhibit 3. installation.10 Using this distinction. and arts organizations. system design. before purchase. Similarly. hospitals. such as Super 8 or Days Inn in the lodging industry. delivery. Some service firms.

earning $492 million in prof.3 Emirates Airline—Competing for Business Travelers while Building New Markets Habib Fekih was traveling the Mideast as a defend its share of that market by offering good service salesman for European plane manufacturer with very low fares. July 5. expanding its routes to “secondary” is simply the geographic location of Dubai. www. only 10 percent of those revenues came from outside China. For instance. the Vierling Group serves as Huawei’s exclusive distributor in Germany. In other words. China. As a result of these strategic adjustments. Huawei relies heavily on alliances with established distributors and value-added resellers to develop and implement marketing programs in developed markets. Aggressive expansion via the pur- Airbus in 1985. but at prices as much as 40 percent lower. the year Dubai’s ruling fam. Consequently. was able to compete very effectively in its home market as a low-cost analyzer. reduces the number of middle- men necessary between manufacturers and end users. pp.indd 68 14/12/12 4:22 PM .13 Will the Internet Change Everything? Some analysts argue that the internet will change the way firms compete. Huawei had to expand its product line and develop new equipment with more innovative features and greater functionality. “It was the joke of are 12 percent lower than the newest 747. And when its recent aboard two leased planes. 2010. Therefore.3 billion in 2011. 75–77. In order to compete more effectively in the developed markets of Europe and the Americas.. and thereby increases competition. This allows its in 2011 on sales of nearly $16 billion. chase of new planes from Boeing and Airbus has made ily started a small airline called Emirates to the company’s fleet of 142 all wide body jets the young- shuttle Pakistani workers between Karachi and Dubai est and most efficient of any airline. Emirates’ cost per pas- Emirates is a joke no longer. July for Emirates’s flights.” The Econo- Of course. located in Shenzhen. It provides airports like Manchester in the United Kingdom and Kol- a convenient hub that has enabled Emirates to offer kata in India. generated increased demand and new customers Source: Steve Rothwell and Andrea Rothman. 18–19. to more convenient routes for business travelers shuttling implement a very successful low-cost analyzer strategy. For example. and the Emirates Group’s 2011–12 the West. many other airlines fly between Asia and mist. and still make money. line. The rapid growth of many Asian economies in recent years has.” about 500 passengers. The A380’s operating costs heads Airbus’s Mideast subsidiary. cuts transaction costs. This suggests that a single SBU may need to engage in different functional activi- ties (including different strategic marketing programs)—and perhaps even adopt different organizational structures to implement those activities—across the various countries in which it competes.com.4 billion in revenues in 2001 selling internet switches and routers pat- terned after the equipment manufactured by Cisco Systems and Alcatel. 2010. “Rulers of the New Silk Road. and it carries the day. For the time being. who now will be even more efficient. between Europe or the United States and Asia. the firm greatly increased its R&D spending and product development efforts. 68 Section One Introduction to Strategy EXHIBIT 3.14 One possible wal28949_ch03_058-084.theemiratesgroup. 5. and nearly two-thirds of those sales came from outside of China. Hua- wei’s revenues topped $32. improves the functioning of the price mechanism. The internet www makes it easier for buyers and sellers to compare prices. pp. It also developed marketing programs geared to generating brand awareness and trial among potential customers. In other words. It has grown into the senger mile is lower than any other intercontinental air- world’s 10th largest airline. it could be a successful airline. Huawei Technologies Co.” recalls Fekih. “Emirates Wins with Big Planes and Low Costs. it had to compete more like a prospector in those markets. so Emirates has attempted to strengthen and Annual Report on the firm’s website. However. in turn. and the firm has also signed a distribution deal with IBM. and will be even lower in coming years. “Nobody believed Emirates order of 90 Airbus A380 superjumbo jets is delivered.” Bloomberg Businessweek. The company earned $2. the company to charge lower fares while still maintain- One important factor underlying Emirates’s success ing good service.

com. they are less likely to be swayed by superficial distinctions between brands. Unique new products and services will continue to emerge and provide a way for the in- novator to gain a competitive advantage. goals and objectives. Each strategy also involves some important differences on the other four dimensions— differences that are outlined in Exhibit 3. But if a firm offers unique benefits that a segment of customers perceives as meaningful. Although we agree that the internet has increased both efficiency and competitive- ness in many product-markets. at least in the short term.2 are defined largely by their dif- ferences on only one dimension: the nature of the competitive advantage sought. Reorder rates for custom-clothing buyers are 35 percent higher than for buyers of Lands’ End’s standard items. the internet is primarily a communications channel. even though each customized gar- ment costs more and takes longer to arrive. Chapter 3 Business Strategies and Their Marketing Implications 69 outcome of all these changes is that it will be harder for firms to differentiate themselves on any basis other than low price. stance. All the business-level competitive strategies focused on differentiation will become less viable. including price information. the internet has played a major role in developing logistical alliances among organizational buyers and their suppliers. As customers gather more information from the internet and become better informed. we said that all strategies consist of five components or underlying dimensions: scope (or breadth of strategic domain). the largest e-tailer as of early 2012. at least until its competitors offer something similar. the goods and services themselves will continue to offer different features and benefits. Consumer goods and services firms. about 40 percent of shoppers who buy clothing at Lands’ End—both men and women—choose a customized garment tailored to their per- sonal dimensions over the standard-sized equivalent. For in- their relationships with their customers. to effectively implement a prospector strategy—should be successful regardless of whether they are the lowest-cost producers in their industries. And customers who customize are more loyal to the company. Such The internet will make it easier for firms to personalization should differentiate the firm from its competitors in the customize their offerings and personalize customer’s eyes and improve customer loyalty and retention. wal28949_ch03_058-084. a basis for achieving a sustainable competitive advantage. we doubt that competition will focus exclusively on price. also are using the internet’s interactive capabilities to acquire and communicate information and build customer relationships. it should still be able to differentiate its offering and command a premium price. For example. Finally. Thus. Those differences provide insights concerning the conditions under which each strategy is most appropri- ate and about the relative importance of different marketing actions in implementing them effectively.4 and discussed as follows. resource deployments. over the past few years. Amazon. and even internet portals. For one thing. But the generic strategies summarized in Exhibit 3.15 HOW DO COMPETITIVE STRATEGIES DIFFER FROM ONE ANOTHER? In Chapter 1. Although it facilitates the dissemination of information. In addition.indd 69 14/12/12 4:22 PM . and synergy. is generally not the lowest priced. firms with the resources and competencies necessary to produce a continuing stream of new product or service offerings that appeal to one or more customer segments—that is. innovation is likely to continue—and probably accelerate—in the future. the internet will make it easier for firms to customize their Strategic Issue offerings and personalize their relationships with their customers. whereas firms pursuing low-cost strategies will be more successful.

The scope of such businesses often undergoes periodic redefinition. narrow. The latter is the approach taken by 3M’s drug delivery systems business. tend to operate in relatively well-defined. businesses pursuing this interme- diate strategy are often in industries that are still growing or experiencing technological wal28949_ch03_058-084. 70 Section One Introduction to Strategy EXHIBIT 3. domains. Its mission is to satisfy the health needs of a broad range of patients with new products developed from technologies drawn from other business units within the firm. Mature/stable/well. Broad/dynamic Mixture of defender defined domain. and prospector mature technology mature technology technology and strategies and customer and customer customer segments segments segments not well established • Goals and objectives Adaptability Very Little Little Extensive Mixture of defender (new product and prospector success) strategies Effectiveness Low Low High Mixture of defender (increase in and prospector market share) strategies Efficiency High High Low Mixture of defender (ROI) and prospector strategies • Resource Generate excess Generate excess Need cash for Need cash for deployment cash (cash cows) cash (cash cows) product development product development (question marks or but less so than do stars) prospectors • Synergy Need to seek Need to seek Danger in sharing Danger in sharing operating synergies operating synergies operating facilities operating facilities to achieve to achieve and programs— and programs— efficiencies efficiencies better to share better to share technology/ technology/ marketing skills marketing skills Differences in Scope Both the breadth and stability of a business’s domain are likely to vary with different strategies. defender businesses. They usually have a well-established core business to defend. At one extreme. prospector busi- nesses are typically organized around either a core technology that might lead to the devel- opment of products aimed at a broad range of customer segments or a basic customer need that might be met with products based on different technologies. However. and stable domains where both the product technology and the customer segments are mature. At the other extreme. defined domain. and often their domain is primarily focused on that business. can affect the variables the corporation uses to define its various businesses. in turn. and Synergy Low-Cost Differentiated Dimensions Defender Defender Prospector Analyzer • Scope Mature/stable/well.4 How Business Strategies Differ in Scope. Thus. This. fall somewhere in between the two extremes. Resource Deployments. prospector businesses usually operate in broad and rapidly chang- ing domains where neither the technology nor customer segments are well established. whether low-cost or differentiated. Objectives.indd 70 14/12/12 4:22 PM . Analyzer businesses. whether low-cost or differentiated.

it is very difficult for any SBU. both defender strategies should lead to better returns on investment. analyzer—businesses devote a relatively large proportion of resources to the development of new product-markets. Chapter 3 Business Strategies and Their Marketing Implications 71 changes. On the other hand. This suggests that managers should choose a competitive strategy with a view toward maximizing performance on one or two dimensions.4 indicates. we focus on only three performance dimensions of major importance to both business-unit and marketing managers: 1. The outcomes of a business’s programs relative to the resources used in implementing them.17 Differences in Resource Deployment Businesses following different strategies also tend to allocate their financial resources differently across product-markets. Once again. Effectiveness. Over the longer term. and activities within each functional area. substantial up-front investment. Good performance on one dimension often means sacrificing performance on another. 2. managers must review and adjust the domain of such businesses from time to time. As Exhibit 3. Differentiated defenders likely pro- duce higher returns than low-cost defenders. Adaptability can be measured in a variety of ways. but to keep things simple. to simultaneously achieve outstanding performance on even this limited number of dimensions because they involve substantial trade-offs. As a result. develop- ing successful new products or attaining share growth often involves large market- ing budgets. Effectiveness is commonly measured by such items as sales growth relative to competitors or changes in market share. they must pay attention to the emergence of new customer seg- ments and/or new product types. Common measures of efficiency are profitability as a percent of sales and return on investment. assuming that the greater expenses involved in maintaining their differentiated positions can be more than offset by the higher margins gained by avoiding the intense price competition low-cost competitors often face. but the most common ones are the number of successful new products introduced relative to competitors or the percentage of sales accounted for by products introduced within the last five years. functional departments.16 For example. the chosen strategy should promise discounted cash flows that exceed the business’s cost of capital and thereby increase shareholder value.indd 71 14/12/12 4:22 PM . both low-cost and differentiated analyzer strategies are likely to fall between the two extremes. and a shaving of profit margins—all of which reduce ROI. Efficiency. Prospector—and to a lesser degree. regardless of its competitive strategy. However. Differences in Goals and Objectives Another important difference across generic business-level strategies with particular rel- evance for the design and implementation of appropriate marketing programs is that dif- ferent strategies often focus on different objectives. Consequently. high operating costs. at least in the short term. while expecting to sacrifice some level of performance on the others. prospector businesses are expected to outperform defenders on both new product development and market-share growth. The success of a business’s products and programs relative to those of its competitors in the market. SBU and product-market objectives might be specified on a variety of criteria. Adaptability. of course. The business’s success in responding over time to changing conditions and opportunities in the environment. Because such product-markets usually require more cash to develop than they produce wal28949_ch03_058-084. 3.

For instance. on the other hand.indd 72 14/12/12 4:22 PM . Synergies that enable such businesses to increase economies of scale and experience curve effects are particularly desirable. increase inter- dependence among SBUs and limit their flexibility. wal28949_ch03_058-084. as well as the use of joint resources. the sharing of operating facilities and programs may be an inap- propriate approach to gaining synergy for businesses following a prospector strategy. they tend to be the smallest as a percentage of sales under a low-cost defender strategy. The pri- mary means of gaining such operating synergies is through the sharing of resources. DECIDING WHEN A STRATEGY IS APPROPRIATE: THE FIT BETWEEN BUSINESS STRATEGIES AND THE ENVIRONMENT Because different strategies pursue different objectives in different domains with different competitive approaches. At the other extreme. Differences in Sources of Synergy Because different strategies emphasize different methods of competition and different functional activities. they are “question marks” or “stars. We discuss this in more detail later. They are the “cash cows. however. formed an “operating group” of several otherwise autonomous business units that make different types of elec- trical motors and tools. engineering skills. or market knowledge—expertise that can help improve the success rate of their prod- uct development efforts. businesses pursuing these strategies often need infusions of financial re- sources from other parts of the corporation. Thus. therefore. Commitments to internally negotiated price structures and ma- terials. Emerson Electric. the group was able to reduce the costs of both per-unit production and marketing. low-cost defenders should seek operating synergies that will make them more efficient. 72 Section One Introduction to Strategy short term. and programs. they do not all work equally well under the same environmen- tal circumstances. and functional activities across product-market entries within the business unit or across related business units. and a com- mon salesforce. a given source of synergy may be more appropriate for some strate- gies than for others. By sharing production facilities. 3M’s drug delivery systems business attempts to find medical applications for new technologies developed in many of the firm’s other business units. marketing budgets tend to be the largest as a percentage of a SBU’s revenues when the business is pursuing a prospector strategy.” Resource allocations among functional departments and activities within the SBU also vary across businesses pursuing different strategies. marketing activities. focus the bulk of their resources on preserving exist- ing positions in established product-markets.5 outlines some major market. It is more appropriate for such businesses to seek synergy through the sharing of a technology. At one extreme. facilities. To a lesser extent. this also may be true for both types of analyzer strategies. Such sharing can reduce a SBU’s ability to adapt quickly to changing market demands or competitive threats. These product-markets are usually prof- itable. defender businesses typically generate excess cash to support product and market development efforts in other business units within the firm. for instance. The question is: Which environmental situations are most amenable to the successful pursuit of each type of strategy? Exhibit 3.” Defenders. facilities. In portfolio terms. They help reduce unit costs and strengthen the strategy’s basis of competitive advantage.

Technology Newly emerging Basic technology Basic technology Basic technology technology. but costs are higher and production capabilities. maturity possible. Competition Few established Large number of Small to moderate Small to moderate competitors. of new competing technologies—still likely. one or though acquisitions though acquisitions of major market more competitors and consolidation and consolidation segments. current life cycle. product stable. competitors’. industry competitor holds structure still structure stable. improvements well as emergence likely. commanding share evolving. few major undeveloped. customer services. and strengths in R&D or of supply and/or marketing research marketing research product engineering. many well developed but fully developed and fully developed and applications as yet still evolving.5 Environmental Factors Favorable to Different Business Strategies Differentiated External Factors Prospector Analyzer Defender Low-Cost Defender Industry and market Industry in Industry in late Industry in maturity Industry in maturity introductory or early growth or early or decline stage of or decline stage of growth stage of life maturity stage life cycle. replacement replacement but some potential demand. but number of well. position or strong strengths are in product engineering. segments may still be undeveloped. sales. current cycle. targeted at major to repeat purchases/ to repeat purchases/ customer segments. demand.indd 73 14/12/12 4:22 PM . few major stable. structure stable. all major segments. as yet unidentified offerings currently sales primarily due sales primarily due and/or undeveloped. single likely. distribution. maturity major segments. or distribution. industry competitors. Chapter 3 Business Strategies and Their Marketing Implications 73 EXHIBIT 3. process engineering and marketing capabilities. We next discuss the reasons each strategy fits best with a particular set of environmental conditions. segments. marketing. over time. enable it to be low- has either low-cost SBU’s outstanding cost producer. industry competitors. technological. one offerings targeted at offerings targeted at customer segments or more product all major segments. over time. wal28949_ch03_058-084. sales. number of well- structure still future shakeout established established emerging. R&D. but of markets means of markets means continuing growth relative shares of relative shares of may allow rapid competitors tend to competitors tend to changes in relative be reasonably stable be reasonably stable shares. industry competitors. modifications and modifications or modifications or improvements—as improvements likely. and competitive conditions—plus a business unit’s strengths relative to its competitors—that are most favorable for the successful implementation of each generic business strategy. not as strong as than at least some capabilities that some competitors’. process engineering marketing. may not be as strong in one or more sales. hold large shares in possible. Business’s relative SBU (or parent) has SBU (or parent) has SBU has no SBU (or parent) has strengths strong R&D. product good R&D. product outstanding superior sources engineering and engineering. many potential of life cycle. or as some competitors. or and quality control service capabilities service capabilities and/or in marketing.

because competitors such as Procter & Gamble and Colgate-Palmolive introduced competing brands with advertising and promotion budgets much larger than Minnetonka could match. Success on both dimensions requires strengths across virtually every functional area. Thus. Honda. Appropriate Conditions for a Defender Strategy A defender strategy makes sense only when a business has something worth defending. At the same time. are investing billions in a variety of different technologies to develop a new generation of cars. and other functional areas that identify new technology and convert it into innovative products and second. and devote substantial resources to. Appropriate Conditions for an Analyzer Strategy The analyzer strategy is a hybrid. product engineering.6. Industry structure is often unstable because few competitors are present and their relative market shares can shift rapidly as new products are intro- duced and new markets develop. the firm was eventually forced to change its strat- egy and concentrate on manufacturing products under licenses from larger firms. however. as discussed in Exhibit 3. Because they emphasize the development of new products and/or new markets. marketing. In either case. On one hand. including Toyota. and many others. stable industry. Consistent with the “constant improvement” principles wal28949_ch03_058-084. However. marketing research. shifting customer needs. the most successful prospectors are usually strong in. Few businesses have the resources and competencies needed to successfully defend an established core business while generating revolutionary new products at the same time. 74 Section One Introduction to Strategy Appropriate Conditions for a Prospector Strategy A prospector strategy is particularly well suited to unstable. In some cases. rapidly changing environ- ments resulting from new technology. two broad areas of competence: first. auto manufacturers around the world. and sales—functions necessary for the identification and develop- ment of new market opportunities. analyzers are concerned with defending— via low costs or differentiation in quality or service—a strong share position in one or more established product-markets. Therefore. Automobile manufacturing is an example of such an industry. and few businesses (or their parent companies) have such universal strengths relative to com- petitors. Recent changes in the industry’s environment—such as rising fuel prices and concerns over the impact of auto emissions on global warming—have underscored the need for more efficient and ecologi- cally friendly technologies. it may lack the resources to maintain its early lead as product-markets grow and attract new competitors.indd 74 14/12/12 4:22 PM . but technology continues to advance. analyzers are often not as innovative in new product development as prospectors. This dual focus makes the analyzer strategy appropriate for well- developed industries that are still experiencing some growth and change as a consequence of evolving customer needs and desires or continuing technological improvements. even though a prospector business has strong product development and marketing skills. It is most appropriate for units with a profitable share of one or more major segments in a relatively mature. R&D. They may not be as profitable in defending their core businesses as defenders. Competitors are rela- tively few and well established. or both. such industries tend to be at an early stage in their life cycles and offer many opportunities for new product-market entries. For example. the business must pay attention to new product development to avoid being leapfrogged by competitors with more techno- logically advanced products or being left behind in newly developing application segments within the market. Minnetonka was the pioneer in several health and beauty-aid product categories with brands such as Softsoap liquid soap and Check-Up plaque-fighting toothpaste. The actions of Toyota and Honda illustrate one problem with an analyzer strategy. the market is relatively mature except in emerging econo- mies like China and India.

United States and Europe—have forced manufacturers which are purportedly 25 percent more fuel efficient to continue investing heavily in new designs and tech- than gas engines. December 10. Pillsbury’s prepared-dough products SBU— now part of the General Mills Company—has pursued a differentiated defender strategy for years. 2008. it was in the electric motors. quality control.” The Economist. But they devote relatively few resources to basic R&D or the development of in- novative new products. and “Revenge of the Petrolheads. To that end. 2010. Honda is focusing on fuel cell efficient. process engineering. Toyota has created a special battery re. version of the Prius. vehicles from China. In 2008 the firm began production on a fuel cell it will be harder for customers to justify paying a price model called the FCX Clarity. 2011. 89–90. of total quality management. Chapter 3 Business Strategies and Their Marketing Implications 75 EXHIBIT 3. complete with more than 100 engineers for R&D. The Chinese government is sup- Longer term.businessweek. But since every Clarity currently costs an estimated “China Charges into Electric Cars. 73. cost reductions via economies of pp. The firm’s strategy. www. New hybrid models—including one in the firm’s gine. at like the General Motors’ Volt (introduced as the least for the short term. customer and technicians. But as those cars become more For the longer term. the installation of charging stations. a tank of hydrogen and boast better fuel efficiency than comparable gas or hybrid cars. including those that nology to improve the efficiency of their traditional gas carry the luxury Acura brand. Pure strongest position to respond to the double whammy of electric cars. Electric cars come in two varieties. most have been reconfigurations of the same basic dough-in-a-can technology. 138–148. and perhaps product engineering wal28949_ch03_058-084. a defender strategy works best in industries where the basic technology is not very complex or where it is well developed and unlikely to change dra- matically over the short term. like the Nissan Leaf and the Mitsubishi rising gas prices and growing concerns over the impact i-MiEV. Differentiated Defenders To effectively defend its position by differentiation. can be recharged either by offerings and invest in R&D to further improve their ef. such as Soft Breadsticks. pp.” Fortune. and ter. Thus. 2010. p.6 Analyzer Strategies in the Auto Industry Given that Toyota was already selling 300. and diesel-powered cars. most successful defenders initiate process improvements.” technology ready for the mass market within 10 years. Honda hopes to have the Source: Ian Rowley. But while it has introduced a number of line extensions over the years. And all of the current competitors are nervously luxury Lexus line—were introduced in 2009 along with a looking over their shoulders in anticipation of electric lighter. increasingly stringent regulations con- Honda also plans to beef up its hybrid offerings in the cerning fuel efficiency and emissions—particularly in the short term.com July 2.indd 75 14/12/12 4:23 PM . more fuel-efficient version of the Prius. scale and experience will be critical for the car’s future. Brian Dumaine. the company is eyeing plug-in electric porting electric car technology more than any other cars. Range-extenders. and the firm has introduced a plug-in subsidies. and the like. country. The unit generates substantial profits from well-established refrigerated dough products such as Pillsbury Crescent rolls and Grands biscuits. a business must be strong in those functional areas critical for maintaining its particular competitive advantages over time.000 of its Prius Many other auto companies are placing their bets on gas-electric hybrid cars annually by 2008. but it also offers new clean-diesel engines. electric cars on “green” criteria will become smaller. which can go 280 miles on premium. those key functional areas include production.” The Economist. For instance. “A Sparky New Motor. $1 million to produce. in its larger cars. plugging into an outlet or by a small onboard gas en- ficiency. auto industry off guard that year. the relative superiority of the new hybrids and vehicles that run on liquid hydrogen and emit only wa. product improvements. can be driven for 100 miles or so before they of exhaust emissions on global warming that caught the need to be plugged in and recharged. Meanwhile. October 9. or line extensions to help protect and strengthen their established positions. If a business’s differentiation is based on superior product quality. was to rapidly expand its hybrid Ampera in Europe in 2010). Beijing has already pledged over $17 billion search division. “Japan’s New Green Car Push. November 1.

This combination of low margins and heavy investment can be prohibitive unless the parent corporation can commit substantial resources to the business or unless extensive sharing of facilities. some firms—particularly those in more developed economies—have tried to reduce their costs by outsourcing production and a few other corporate functions. However. Thus.com.20 Operating ef- ficiency is likely to become even more critical as the internet makes it easier for customers to compare prices across alternative suppliers or to obtain low-price bids via “buyers’ auc- tion” sites. and programs with other business units is possible. or flour or in industries producing low-technology components such as electric motors or valves. Marketing activities that track changing customer needs and competitive actions and communicate the product offering’s unique advantages through promotional and sales efforts to maintain customer awareness and loyalty are particularly important. Although low-cost defenders emphasize efficiency and low price as the primary fo- www cus of their competitive strategy. such businesses must also invest in more plant capacity in anticipation of future growth and in state-of-the-art equipment to minimize production costs. The effort to develop and maintain a quality differentia- tion can be worthwhile. it is not an effective way to build a sustainable low-cost advantage.18 Regardless of the basis for differentiation.indd 76 14/12/12 4:23 PM . 76 Section One Introduction to Strategy to develop product improvements. technologies. Some of the most effective businesses are those that work simultaneously to lower costs and improve quality and service. the business must establish the groundwork for such a strategy early in the growth stage of the industry. such a strategy is usually not so effective in fragmented markets desiring custom- ized offerings as it is in commodity industries such as basic chemicals. In recent years. This is because wal28949_ch03_058-084. such as customer call centers and human resources departments. A given entry’s marketing manager monitors and evaluates the product’s environmental situation and de- velops a marketing program suited to it. steel. though. Low-Cost Defenders Successful implementation of a low-cost defender strategy requires the business to be more efficient than its competitors. Thus. At the same time. the manager’s freedom to design such a program may be constrained by the business unit’s competitive strategy. because evidence suggests that superior product quality has a strong impact on a business’s return on investment—an important performance ob- jective for defenders. And because the efficiencies gained through outsourcing can be easily duplicated by competitors. outsourcing can lead to problems like reduced quality control and more complicated logistics that may raise the firm’s costs in other areas.19 The low-cost defender’s need for efficiency also forces the standardization of prod- uct offerings and marketing programs across customer segments to achieve scale effects. HOW DIFFERENT BUSINESS STRATEGIES INFLUENCE MARKETING DECISIONS Business units typically incorporate a number of distinct product-markets.MetalSite. marketing is also important for the effec- tive implementation of a differentiated defender strategy. such as www. it is important to keep in mind that businesses pursuing other strategies should also operate as efficiently as possible given the functional activities necessary to implement those strategies. However. Achieving and maintaining the lowest per-unit cost usually means that the business has to seek large volume from the beginning—through some combination of low prices and promotional efforts—to gain economies of scale and experience.

a business’s strategy does set a general direction for the types of target markets it will pursue and how the unit will compete in those markets. high-quality products may play a posi- tive role in determining the success of a prospector strategy. Second. 3M’s commercial graphics business. therefore. policies encouraging broader and more technically advanced product lines than those of competitors should be positively related to performance on the critical dimension of share growth. different key success factors inherent in the various generic busi- ness strategies. the SBU’s strategy influences the amount of resources committed to mar- keting and ultimately the budget available to an individual marketing manager within the business unit. Although a business strategy is a general statement about how a SBU chooses to compete in an industry. Until recently. and the target level of product quality relative to competitors. It does have some influence on marketing policies that cut across product-markets. First. Quality is hard to define.21 Differentiated defenders compete by offering more or better choices to customers than do their competitors. they are asked to attain. Even so. particularly differentiated defenders. Still.7 outlines differences in marketing policies and program elements that occur across businesses pur- suing different strategies. it can mean different things to different cus- tomers. because varying functions within the business unit are more im- portant under different strategies. Because prospector businesses rely heavily on the continuing development of unique new products and the penetration of new markets as their primary competitive strategy. the use of wal28949_ch03_058-084. the maintenance of relatively high product quality is likely to be more strongly related to the successful performance of defender businesses. Thus. different functions within the SBU—and different activities within a given functional area. This constrains the individual marketing manager’s freedom of action in two basic ways.indd 77 14/12/12 4:23 PM . their level of technical sophistication. such as marketing—are critical for the success of different strategies. The diverse and technically advanced product offerings of 3M’s drug delivery systems SBU are a good example of this. the SBU’s choice of strat- Strategic Issue egy influences both the kind of market and competitive situation that The SBU’s strategy influences the amount individual product-market entries are likely to face and the objectives of resources committed to marketing and ultimately the budget available. These policies concern the breadth or diversity of product lines. that unit may comprise a number of product-market entries facing different competitive situations in various markets. it is an important determinant of business profitability. Whether a prospector’s products should be of higher quality than competitors’ products is open to question. Exhibit 3. and those differences are discussed as follows. There are. It is risky to draw broad generalizations about how specific marketing policies and pro- gram elements might fit within different business strategies. they receive different proportions of the SBU’s total resources. and in the freedom individual marketing managers have in designing them. Chapter 3 Business Strategies and Their Marketing Implications 77 different strategies focus on different objectives and seek to gain and maintain a com- petitive advantage in different ways. Hambrick suggests that in product-markets where technical features or up-to-the-minute styling are key attributes in customers’ definitions of quality. Thus. Product Policies One set of marketing policies defines the nature of the products the business will concen- trate on offering to its target markets. In markets where the critical determinants of quality are reliability or brand familiarity. As a result. Both constraints have implications for the de- sign of marketing programs for individual products within a SBU. For example. there is likely to be a good deal of variation in marketing programs. has strengthened its competitive position in that market by developing products appropriate for custom-designed signs. across products within a given SBU. Thus. a major supplier of sign material for truck fleets.

Question mark (?) # uncertain relationship between strategy and marketing policy or program component. however. complex lines can lead to short production runs and larger inventories. maintaining techni- cal sophistication in a business’s products requires continuing investments in product and process R&D. alterations. more customized product lines may disappear. is more questionable if higher operating and administrative costs offset customer satis- faction benefits. For one thing.7 Differences in Marketing Policies and Program Components across Businesses Pursuing Different Strategies Strategy Differentiated Low-Cost Marketing Policies and Program Components Prospector Defender Defender Product policies • Product-line breadth relative to competitors ! ! " • Technical sophistication of products relative to competitors ! ! " • Product quality relative to competitors ? ! " • Service quality relative to competitors ? ! " Price policies • Price levels relative to competitors ! ! " Distribution policies • Degree of forward vertical integration relative to competitors " ! ? • Trade promotion expenses as percent of sales relative to competitors ! " " Promotion policies • Advertising expenses as percent of sales relative to competitors ! ? " • Sales promotions expenses as percent of sales relative to competitors ! ? " • Salesforce expenses as percent of sales relative to competitors ? ! " Key: Plus sign (!) # greater than the average competitor. broad and sophisticated product lines are less consistent with the efficiency requirements of the low-cost defender strategy. Those higher costs may detract from the business’s ability to maintain wal28949_ch03_058-084. broad. three-dimensional printing. or in addition to. including engineering and design services. film for individual signs was not economical. Minus sign (") # smaller than the average competitor. busi- nesses can distinguish themselves relative to competitors on the quality of service they offer. process reengineering. though. 78 Section One Introduction to Strategy EXHIBIT 3. installation. This kind of success in developing relatively broad and technically sophisticated product lines should be positively related to the long-term ROI performance of most differentiated defender businesses. competing on the basis of product characteristics.23 The appropriateness of an extensive service policy for low-cost defenders.indd 78 14/12/12 4:23 PM . or maintenance and repair ser- vices.22 Instead of. training of customer personnel. But the use of computer-controlled knives and a new Scotch-brand marking film produce signs of higher quality and at lower cost than those that are hand-painted. Such service might take many forms. However. Some of the efficiency problems associated with broader. with continuing improvements in computer-assisted design and manufacturing. A policy of high service quality is particularly appropriate for differentiated de- fenders because it offers a way to maintain a competitive advantage in well-established markets. and the like. For another.

they are likely to devote a larger percentage of sales to trade promotions than are defender businesses. Promotion Policies Extensive marketing communications also play an important role in the successful im- plementation of both prospector and differentiated defender strategies. the costs and benefits of new product and market development by prospector businesses require and justify relatively high prices. Distribution Policies Some observers argue that prospector businesses should show a greater degree of forward vertical integration than defender businesses. and build primary demand for new and unfamiliar products. This is particularly true for defenders who rely on good customer service to dif- ferentiate themselves from competitors. however. wal28949_ch03_058-084. it seems more likely that a relatively high degree of forward vertical integration is found among defender businesses. The form of that communication. whereas prospectors rely more heavily on independent channel members—such as manufacturer’s representatives or wholesale distributors—to distribute their products. one study of 71 SBUs pursuing a range of competitive strategies sug- gests that investments aimed at improving service efficiency and thereby reducing costs generally do not have as positive an impact on a unit’s financial performance as service improvements aimed at increasing revenues via improved customer satisfac- tion and loyalty.25 The rationale for this view is that the pros- pector’s focus on new product and market development requires superior market intelli- gence and frequent reeducation and motivation of distribution channel members. for instance. Attempting to maintain tight control over the behavior of channel members is a more appropriate policy for defenders who are trying to maintain strong positions in established markets. The higher costs involved in differ- entiating a business’s products on either a quality or service basis require higher prices to maintain profitability.24 Pricing Policies Success in offering low prices relative to those of competitors should be positively re- lated to the performance of low-cost defender businesses—for low price is the primary competitive weapon of such a strategy. Prospectors rely on trade promotion tools such as slotting allowances. This can best be accomplished through tight control of company-owned channels. Thus. differentiated defenders and prospectors seldom adhere to a policy of low competitive prices. devotes substantial resources to ad- vertising in professional journals and distributing samples of new products. Thus. high advertising and sales promotion expenditures are likely to bear a positive relationship to the new product and share-growth success of such busi- nesses. as well as lowering ROI—at least in the short term.indd 79 14/12/12 4:23 PM . However. such a policy is inconsistent with both differentiated defender and prospector strategies. as well as to maintaining an extensive salesforce. Further. Chapter 3 Business Strategies and Their Marketing Implications 79 the low prices critical to its strategy. However. Differentiation also provides customers with additional value for which higher prices can be charged. quantity discounts. and other incentives to induce cooperation and support from their independent channel members. The drug delivery SBU at 3M.26 Because prospectors focus on new products where success is uncertain and sales vol- umes are small in the short run. particularly differentiated defenders. may differ under the two strategies. stimulate trial. these arguments seem inconsistent with the prospector’s need for flexibility in constructing new channels to distribute new products and reach new markets. Because prospectors must constantly work to generate awareness. liberal credit terms. Similarly.

the product’s target market is rapidly becoming more mature and competitive. on the other hand. they might form new prospector SBUs to pursue emerging technologies and industries rather than expecting established units to handle extensive new product development efforts. it can be very difficult for an entire SBU to make a successful tran- sition from one basic strategy to another.28 For example. As the product cate- gory matures. 80 Section One Introduction to Strategy Differentiated defenders.27 Therefore. differentiated defenders are likely to have higher salesforce expenditures than are competitors. Similarly. Consequently. salesforce. decision-making and coordination processes reward systems. some firms do not try to make major changes in the basic competitive strategies of their existing business units. These tasks can best be accomplished—particularly in industrial goods and services indus- tries—by an extensive. and even personnel. For example. some firms move them from the prospector unit that developed them into an ex- isting analyzer or defender unit or even into a newly formed SBU better suited to reaping profits from them as their markets mature. high ex- penditures on advertising. for instance. or the salesforce would detract from their basic strategy and might have a negative impact on their ROI. sales promotion. as individual product-market entries gain successful positions in growing markets. this attempted shift in strategy resulted in some culture shock. have enjoyed sufficient success that new divisions were formed to concentrate on defending them as their markets matured. such as Post-it repositionable notes. are primarily concerned with maintaining the loyalty of established customers by adapting to their needs and providing good service. Finally. for example.indd 80 14/12/12 4:23 PM . low-cost defenders appeal to their customers primarily on price. Initially. WHAT IF THE BEST MARKETING PROGRAM FOR A PRODUCT DOES NOT FIT THE BUSINESS’S COMPETITIVE STRATEGY? What should a marketing manager do if the market environment facing a particular product or service demands marketing actions that are not consistent with the overall competitive strategy of the business to which it belongs? What if. well-supported. however. many of Emerson Electric’s SBUs historically were successful low-cost defenders. Instead. but also different organizational structures. well-trained. Because such internal structures and processes are hard to change quickly. the SBU might switch from a prospector to an analyzer strategy and ultimately to one of the defender strategies. Thus. conflict. In view of the implementation problems involved. and mixed perfor- mance outcomes within those units. but it is housed in a prospector business unit that does not have the cost structure or the personnel to allow the aggressive pricing or excellent customer service that may be needed for the product to compete suc- cessfully? What if newly emerging technology demands that a mature product category undergo an innovative redesign even though the defender SBU does not have extensive R&D and product development capabilities? If a business unit is focused on a single product category or technological domain—as is the case with 3M’s industrial tape unit—the ideal solution might be for the whole SBU to change its strategy in response to shifting industry circumstances. wal28949_ch03_058-084. a number of innovative products developed at 3M. but accelerating technological change in their industries caused the corporation to try to convert them to low-cost analyzers who would focus more attention on new product and market development. The problem is that—as we shall see in Chapter 12—effective implementation of differ- ent business strategies requires not only different functional competencies and resources. such businesses are likely to make relatively low expenditures as a percentage of sales on those promotional activities.

and a few years later he in established markets. lyzer. Because the marketing manager responsible for a given product-market entry is usu- ally most closely tuned in to changes in the market environment. top management faces a choice of moving the product to a more benign unit of the firm or rejecting the recommended strategy. he or she bears the responsibility for pointing out any mismatches between what is best for the product and the capabilities of the organizational unit to which it belongs. at that time—was focused on defending strong positions His new company grew rapidly. If those resources are not available within the business unit or if the marketing strategy is inconsistent with the SBU’s objectives or competitive strategy. one to continue prospecting new products and markets and another to defend the firm’s initial product offering as its market matures. The marketer should develop a marketing strategy that makes the most sense in light of a detailed analysis of the available customer and competitive information and present a strong case for the resources necessary to implement the plan.8 Jim Watkins Takes a Hike When he was a product manager at the Pillsbury Com. Many successful entrepreneurial start-ups eventually reorganize into two or more business units. Chapter 3 Business Strategies and Their Marketing Implications 81 EXHIBIT 3. proposed the pioneering development and aggressive As Watkins had predicted in his original marketing plan. Watkins became firm called Golden Valley Microwave. James D. If the strategy is rejected. some firms that are technological leaders in their industries may divest or li- cense individual product-market entries as they mature rather than defend them in the face of increasing competition and eroding margins. top management rejected Watkins’s proposal as pioneer. Like a good ana- it was pursuing more of an analyzer strategy. which unit he worked for—and the entire Pillsbury Company in turn increased demand for more microwavable foods. In other words.indd 81 14/12/12 4:23 PM . Determine why that strategy does or does not make sense. Finally. as was the case with Jim Watkins. own line of microwavable foods. and began to market ActII microwave popcorn Consequently. introduction of a line of microwavable food products. But don’t be too critical of Pillsbury. but it eventually responded to the growing poten- being too risky and requiring resources and capabilities tial of microwave technology and successfully launched its that were in short supply. However. As a re. identify which type of busi- ness unit strategy your plan will pursue. largely through incremental line sold it to Conagra for many millions of dollars. R&D. including popcorn. the marketer will likely have to make compromises to the strategy to make it fit better with the competitive thrust of the SBU. Identify the Plan Exercise key capabilities and resources—marketing and otherwise—necessary to do so.8. even though an attractive opportunity may be lost. the availability of microwavable foods spurred a rapid in- starting with microwave popcorn. This approach is relatively common at firms such as 3M and DuPont. attracted venture convinced that microwave technology represented capital. founded a new pany in the early 1970s. the business crease in consumer demand for microwave ovens. wal28949_ch03_058-084. as discussed in Exhibit 3. he or she might opt to quit the firm and pursue the opportunity elsewhere. compared to the other alternatives. Marketing Using one or both of the Porter and the Miles and Snow frameworks. the company avoided playing the risky role of the sult. he developed a marketing plan that through large mass merchandisers such as Wal-Mart. Watkins subsequently quit Pillsbury. hired some food scientists to do the necessary a major opportunity for the packaged food industry. based on your still very preliminary thinking. But if the marketer has great confidence in the recommended strategy. extensions and product improvements.

Your division is a low-cost defender that maintains its position in the generic drug market by holding down its costs and selling generic products to dis- tributors and pharmacies at very low prices. Porter. K. “Customer Equity Drivers and Future Sales. “Worried About Strategy Implementation? Don’t Overlook Marketing’s Role. c. 3. b.” Business Horizons 53 (2010). “Return on Marketing: Using Customer Equity to Focus Marketing Strategy. “At 3M. 1980).com. and G. pp. pp. see Robin Cooper and Robert S. Pare. and Verena Vogel. For example. Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press. d.businessweek. Lemon. Rust.3m. If you were the general manager of the 3M Industrial Tape SBU discussed in question 2. September–October 1988. Prahalad and Gary Hamel. Marketing Organization Structure. Brian Hindo. pp. August 12.mhhe.S. Slater. 98–108. June 14. Objectives. 2011. 6. pp. Katherine N. pp. 1985). 49–65. Compare and contrast the prospector and low-cost defender business strategies discussed in this chapter on each of the following strategic dimensions: Questions a. Ramaseshan.” BusinessWeek-Indepth. Slater and Eric M. 82 Section One Introduction to Strategy Discussion 1.” Fortune. pp.com. What are the implications of this business strategy for each of the 4 Ps in the strategic marketing program you would develop for your division? Self-diagnostic questions to test your ability to apply the analytical tools and concepts in this chapter to marketing decision-making may be found at this book’s web site at www. and G. wal28949_ch03_058-084. The 3M Company’s Industrial Tape SBU pursues a differentiated defender strategy in an in- dustry where both the basic technologies and the customer segments are relatively mature and stable. Competitive Strategy (New York: Free Press. 4. Kaplan. for First Time. Thomas M. 127–32. pp. 2.” Harvard Business Review. A Struggle Between Efficiency and Creativity. p. and Terrence P. Scope.” Journal of Marketing 69 (July 2005). Tomas Hult. Deployment of resources. Eric M. June 2007.” Harvard Business Review 68 (May–June 1990). Will Daley. 124. Stanley F. in8–in14. pp. Hult. “Measure Costs Right: Make the Right Decisions. “Scotch Tape Plus Innovation Equals?” Fortune. and. 2. Stanley F. pp. C. and B. Jerry Useem. “A New Tool for Managing Costs. Heiner Evanschitzky. which objectives would you argue are most appropriate for your business unit in view of its strategy and its external environment? Why? 4. Material for this opening case was obtained from The 3M Company 2011 Annual Report and other information found on the company’s web site at www. “Marketing’s Contribution to the Implementation of Busi- ness Strategy: An Empirical Analysis. Slater. Is the objective imposed by top management of obtaining 30 percent of sales from prod- ucts introduced within the last four years an appropriate objective for such a SBU? What do you think top management hopes to accomplish by imposing such an objective on the Indus- trial Tape SBU? What are the potential disadvantages or dangers involved in imposing such an objective? 3. You are the marketing manager for a generic products division of a major pharmaceutical manu- facturer. 1055–67. 96–103. www. 79–91. and Strategic Behav- ior. and. 1993. 109–27. Olson. Olson. Endnotes 1. “The Performance Implica- tions of Fit among Business Strategy. Sources of synergy. Olson. and Valarie Zeithaml. 469–79.” Journal of Marketing 68 (January 2004). Michael E.” Journal of Marketing 72 (November 2008). Eric M. Your division uses the corporation’s excess manufacturing capacity to produce generic prescription drugs—drugs whose patents have expired and can thus be manufactured by any company that wishes to produce them.com/walker8e. Porter.” Strategic Management Journal 22 (November 2001). Roland T. April 26. “3M Moves Most Capital Spending Outside U.” Bloomberg Businessweek Online.indd 82 14/12/12 4:23 PM . Stanley F. 2002. 5. Also see Michael E. “The Core Competence of the Corporation.

“A Third Industrial Revolution. David Whitford.” Journal of Marketing 70 (January 2006). 1978 ). “Value-Based Differentiation in Business Relation- ships: Gaining and Sustaining Key Supplier Status. 575. “Strategy.cnn . 2006. Bruce Einhorn. p. Steger. “Giving the Boss the Big Picture. Principles of Marketing (Englewood Cliffs. Dexter Roberts. 7–24. MA: Addison-Wesley. and Jorge Silva-Risso.” BusinessWeek. 2006. and Pride. “The Great Fall of China. “Cost Cutting: How to Do It Right. Gordon Donaldson. 6–8. Distinctive Competence. Chapter 3 Business Strategies and Their Marketing Implications 83 7.” Journal of Marketing Research 43 (May 2006). Rajan Varadarajan. 2012. The Marketing Imagination (New York: Free Press. 2004. 2004. December 17. 2007.” Journal of Marketing. 13. see Rajiv Lal and Miklos Savary. Nanette Byrnes.” Bloomberg Businessweek. pp.com. pp.” The Economist. Charles C. P. 14. Hrebiniak. The Discipline of Market Leaders (Reading. pp. 2011 www. 8. January 30. pp. 51. 2010 www. 16. “Insourcing and Outsurcing: The Right Mix. Organizational Strategy. Robert E. May 15. 1984). or Both? Journal of Marketing 66 (October 2002). pp. 2004. “How the internet Lowers Prices: Evidence from Matched Survey and Automobile Transaction Data. 77–79. 9. Wolfgang Ulaga and Andreas Eggert. 48–50. Roland T.” Academy of Management Journal 26 (1983). Fiona Scott Morton. NJ: Prentice Hall. and Huawei Technologies Co. and Peter R. 61–72. 103–21. pp. December 22. and “The Printed World. 10. Donald C. 2008.businessweek . For example. Rust. Snow and Lawrence G. Also see Paul Markillie. “The Vanishing Mass Market.” February 5. and “You Choose. 2011. 15.” Administrative Science Quarterly 25 (1980). 17. May 7–13. The PIMS Principles: Linking Strategy to Performance (New York: Free Press. 21–35. pp. “The World’s Most Influential Companies—Huawei.money.” BusinessWeek. Nikolaus Franke. April 21. 24. 244–50. Rick Wartzman. 40–49. December 18. Theodore Levitt. December 13. 19. 50–52. and McKee. Buzzell and Bradley T. Peter Keinz. chap. Varadarajan. Leslie Patton. 21. see Michael Treacy and Fred Wiersema.” Fortune. Julie Schlosser. pp. pp. 168–81. and Organiza- tional Performance. pp. pp. pp. and Process (New York: McGraw-Hill . 12. and Florian Zettlemeyer. www. Peter Engardio. Paul Markillie.indd 83 14/12/12 4:23 PM . McKee. see Ronald Henkoff. Gale. 1989). “Strategic Adaptability and Firm Performance: A Market-Contingent Perspective. Philip Kotler and Gary Armstrong. 2010. Managing Corporate Wealth (New York: Praeger. April 9.” 22. p. 94–95.” wal28949_ch03_058-084. Hambrick. 2011. Dickson. Structure.” The Economist. pp. 18–20.” BusinessWeek. “More Clicks at the Bricks. 1987). 50–64. pp. and Spencer E. 20. pp. “Some Tests of Effectiveness. pp. and William M. Cost Reduction. pp. For another taxonomy of business-level competitive strategies that incorporates elements of both the Porter and Miles and Snow frameworks. “Strategic Adaptability and Firm Performance. “Getting Return on Quality. 3–20. Pride. February 12.” Businessweek. and Bruce Einhorn. 1995). Dickson. 1990.com and Peter Coy.” Bloomberg Businessweek. July 12. Anthony Bianco. “When and How Is the internet Likely to Decrease Price?” Marketing Science 18 (Fall 1999). Christine Moorman. Robert D.” 18. For examples. 1986). Snow. Rust.huawei. Hambrick. Ante.com. 5–26. “A Perfect Market: A Survey of E-Commerce. February 13. 23. pp. “Testing the Value of Custom- ization: When Do Customers Really Prefer Products Tailored to Their Preferences?” Journal of Marketing 73 (September 2009). Daryl O. 11.” The Economist. “Where In the World Is Cheap Labor?” March 22. “Some Tests of the Effectiveness and Functional Attributes of Miles and Snow’s Strategic Types.” The Economist. “Getting Return on Quality: Revenue Expansion. Also see Roland T. “Pinkberry Looks Abroad to Keep Its Cool.” Fortune. “Cashing In on the New World of Me. pp. Miles and Charles C. and Peter R. 2012. May 2.” BusinessWeek. 123–25. special report pp. 119–36. Christine Moorman. “The Future of Outsourcing. July 1989. 485–503. 6. 317–35. 13–20. and Chritoph J. pp. 2011 Annual Report.

Structure. 10–36. “The Service-Driven Service Company. “Some Tests of Effectiveness. Organizational Strategy. Connie J.” 26. and Process. and Ulaga and Eggert. and Michael L. See Hambrick. 84 Section One Introduction to Strategy 25. Schlesinger and James L. Miles and Snow.indd 84 14/12/12 4:23 PM . pp. Although Hambrick argues for the reverse relationship. Heskett. Gersick.” California Management Review 29 (1986). 29–44. “Some Tests of Effectiveness. 71–81.” Harvard Business Review 69 (September–October 1991). Leonard A.” 27. “Revolutionary Change Theories: A Multilevel Exploration of the Punc- tuated Equilibrium Paradigm. pp. wal28949_ch03_058-084. pp. William H.” Academy of Management Review 16 (1991). “Value-Based Differentiation in Business Relationships.” 28. and Elaine Romanelli. data from his study of 850 SBUs actually support our contention that defenders have more vertically integrated channels than do prospec- tors. “Convergence and Upheaval: Managing the Unsteady Pace of Organizational Evolution. G. and Hambrick. Newman. Tushman.

Targeting Attractive Market Segments Chapter 7. Section Two Opportunity Analysis Chapter 4. Differentiation and Brand Positioning wal28949_ch04_085-113. Measuring Market Opportunities: Forecasting and Market Knowledge Chapter 6.indd 85 14/12/12 12:50 PM . Understanding Market Opportunities Chapter 5.

indd 86 14/12/12 12:50 PM .wal28949_ch04_085-113.

compete with that. more than in cell phones. But how attractive are the industries erations. driven by technological veloped economies and by 2011. that serve this market? fewer than 1 million people would subscribe. features to the market. uses possible. rural farmers. Motorola in the dust. “Nokia has a world- investments should consider.indd 87 14/12/12 12:50 PM . however. just how at. users to upgrade their phones. the market for mobile telephony But in the turbulent mayhem that has char- has been an attractive one. In 1983. ers agree that the market for cell phone service and The market for mobile telephone ser. In the first quarter of 2012. by 2005. and many others brought countless new phone subscriptions than people in the world’s de. based on its voice and data services generates numerous op. leaving early and longtime leader 400 million cell phones were sold worldwide. New features such as acterized the global cell phone industry since its 87 wal28949_ch04_085-113. Chapter Four Understanding Market Opportunities The Cellular Telephone Business: Increasing Competition in a Growing Market1 From London to Tokyo to Nairobi to Chicago. vice has grown rapidly.” By all accounts. hip teenag. there were more cell Apple. it was projected that by 2000. built-in cameras. among others. Nokia rocketed to world leadership scriptions.cell color screens. three-quarters of change that made all the new features and new the world’s 5 billion people had cell phone sub. class product portfolio and very few rivals can tractive these markets and industries really are. most observ- about anyone else who wants to stay in touch. fishermen in Africa. be abating. however. cell phones themselves has been attractive indeed. and web browsers phones have become a “can’t do without it” have attracted new users and encouraged existing tool of time-pressed businesspeople. As a result of dramatic growth among both business Cell Phone Manufacturing and household users. and just Given torrid growth on all fronts. As industry entrants and current players considering additional analyst Neal Mawston noted. the num- ber of cell phone users had reached more than Rapid-fire advances from Nokia. BlackBerry. Nokia saw its global market The continuing growth in demand for mobile share grow to 40 percent by 2007. Anybody The Mobile Telephony Market who tries to get in a handset war with them is go- ing to get hurt. They are now enjoying huge economies of scale that success conveys. continuing strength in developed markets and its portunities in the cell phone manufacturing and cell growing dominance of the market for low-priced phone service industries. 2 billion worldwide! By 2007. when even though the market’s torrid pace appears to the first cellular phone system began op. Prospective handsets in the developing world. ers.

Nokia. significant challenges.” he crowed.” says AT&T’s John Stankey. ing of Apple’s touchscreen iPhone in 2007 took and they make a 35 percent margin. with the growing cell phone market—makers of ing Microsoft’s new Metro user interface. viders’ networks and raising their costs. even topped Apple in profits was relentless.6 million smart. selling 38 million units in the first quarter Norway’s Telenor. By early 2012. Huawei’s width at 10 times the rate of early smartphones. Despite (or as a result of) the fact that terface. towers. In the more fully developed Western markets. saw the price of its shares fall by snazzier phones was swamping the service pro- 90 percent between 2007 and 2012. Thus. introduced a plan that offered of 2012. Growing markets are one thing. cent. the price of Berry’s Research in Motion by storm. CEO Arun Sarin was delighted.indd 88 14/12/12 12:50 PM . go away? “I don’t think you can have an unlim- This recent history in the hotly competitive ited model forever. mobile telephone service has been an attractive “We are going to learn as much from India as one. Apple and Samsung won a calls for as little as 0. sales of Android phones India’s cell phone operators installed in one year overtook those of Apple. the pressure on prices and phone maker.03 million were ap. and comeback? Life is not easy if you’re a cell phone more—also hit the skids. cell phone manufacturing industry suggests that “More people get drunk at an open bar than a a rapidly growing market does not necessar.47 million and ZTE’s 3. “Prices there are two-and-a-half cents a minute. the industries that serve this market face we are going to take from India. The com. with its Lumia phones sport.” ily provide a smooth path to success. Too Samsung or one of the Chinese makers trump Another industry that had raced to keep pace Apple? Will Nokia. How do you traditional competitors like Nokia and Motorola do that?” as well as other smartphone makers like Black. a unit of sales. having largely missed the smartphone consumer demand for faster 4G service and phenomenon. mand for Apple’s iPad was chewing up band- Over the first three quarters of 2011. about stunning 49. but turbulent industries serving those markets are quite another. Pricing plans that offered unlimited data were proaching Apple’s unit sales of 5. plunged to dead last in some sur- ing demand for affordable smartphones in veys of consumer satisfaction. Together. up from 29. in the last 15 years. Just two and a half years later. Worse. 88 Section Two Opportunity Analysis inception.20 rupees per minute.S. With grow. United States. of the first provider to offer Apple’s iPhone in the course. winning a 56 percent as much network capacity as Germany had built global market share. Sarin moved on and in came cost- opening the door to a plethora of cell phone cutter Vittorio Collao as Vodaphone’s new makers who mimicked Apple’s touchscreen in. 4. cent. were not sitting idly by. four Chinese makers providers’ point of view. rapidly growing de- had moved into the top 12 globally by 2010. Google’s a cell phone minute in India had collapsed to Android operating system followed in 2008. The top Android smart. while the rapidly growing market for Hutchinson Essar. market. in the face of wan- Cell Phone Service Providers ing demand for 3G technology and stiff competi- tion from Ericsson and China’s Huawei. ing 67 percent of India’s third-largest operator. European leader Vodaphone bought hoping that orders for new 4G equipment would into India’s rapidly growing market by acquir. AT&T. bail them out. Longtime stalwarts maker! Alcatel-Lucent and Nokia Siemens Networks were both running losses in 2010. CEO. They were In 2007. Will Network Equipment Down. make a network equipment like switches. wal28949_ch04_085-113. part of the problem. cash bar.S. So will unlimited data plans phones in China alone. Newcomer Uninor.3 percent share of the smartphone half of 1 U. Nokia’s success did not last.3 percent a year earlier. 1 U. Samsung. The Chinese cell phone manufacturers. from the China driving their sales.

The attractiveness of the industry is also important. MARKETS AND INDUSTRIES: WHAT’S THE DIFFERENCE? We define a market as being composed of individuals or organizations who are interested in and willing to buy a good or service to obtain benefits that will satisfy a particular want or need and have the resources to engage in such a transaction. and investors comprehensively assess the attractive- Strategic Issue ness of opportunities they encounter. including the conditions that are currently prevailing in the industry in which they would compete and the likelihood that favorable conditions will prevail in the future. so that the market and competitive climate in which your product-market offering will compete is both well understood and properly docu- mented. the candy industry. coin-operated vending industry. as entrepreneurs and marketing decision makers ponder an opportunity to enter or attempt to increase their share of a growing market like that for mobile phones. wal28949_ch04_085-113. and other easy-to-eat fruits). there are the salty-snack industry (makers of potato and corn chips and similar products). in this chapter. What industries serve the student snack market? At the producer level. oranges. One such market consists of college students who get hungry in the middle of the afternoon and have a few minutes and enough spare change to buy a snack between classes. the environmental context in which it operates. readers of your plan will be unable to fully understand and buy into the marketing decisions your plan articulates. the Marketing Plan Exercise outlines the secondary data you will need to gather in preparing a marketing plan. As the seven domains framework suggests and the cellular telephony story shows. we address the 4 Cs that were identified in Chapter 1 as the analytical foundation of the marketing management process. Chapter 4 Understanding Market Opportunities 89 STRATEGIC CHALLENGES ADDRESSED IN CHAPTER 4 As the examples of the cellular phone manufacturing and service industries show. We frame our discussion of opportunity assessment using the seven domains shown in Exhibit 4. bananas. in terms of the company and its How attractive is the market we serve or people. We provide a framework to help manag- ers. and otherwise. as are the company’s or entrepreneurial team’s resources—human. Equally or more important are industry conditions and the degree to which specific players in the industry can. they also must carefully examine a host of other issues.1. We industry in which we would compete? Are do so by addressing the three questions crucial to the assessment of any the right resources—in terms of people market opportunity: How attractive is the market we serve or propose to and their capabilities and connections—in serve? How attractive is the industry in which we would compete? Are place to effectively pursue the opportunity at hand? the right human resources—in terms of people and their capabilities and connections—in place to effectively pursue the opportunity at hand? At the end of the chapter. serving a growing market hardly guarantees smooth sailing. the competition propose to serve? How attractive is the it faces. such decisions require a thorough examination of trends that are influencing mar- ket demand and are likely to do so in the future. however. Similarly. financial. like Nokia or Apple. Before digging more deeply into the framework. An industry is a group of firms that offer a product or class of products that are similar and are close substitutes for one another. Thus. entrepreneurs. and others too numerous to mention. Without your having established such a foundation of evidence. these industries differ and offer vary- ing bundles of benefits to hungry students. and the wants and needs of the customer it seeks to serve. establish and sustain competitive advantage at least for a while. whether favorably or otherwise. and so on. in today’s rapidly changing and hotly competitive world it’s not enough to have a large and growing market.indd 89 14/12/12 12:50 PM . Thus. the fresh produce industry (growers of apples. food service industry. Clearly. Distri- bution channels for these products include the supermarket industry. we clarify the difference between two oft-confused terms: market and industry.

The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan (London: FT/Prentice Hall. among others. but the entry of smartphones that include cameras may soon make digital cam- eras obsolete. often overlooked. Level down. in an evidence-based manner: How attractive is the market? How attractive is the industry? For a comparison of this approach to an older way of assessing the 4 Cs. not only did digital cameras make film and conventional cameras obsolete. 2010). and across Value Chain Target Segment Benefits Sustainable Advantage and Attractiveness Source: John Mullins.2. Strategic Issue Thus. 90 Section Two Opportunity Analysis EXHIBIT 4. or should it have worried about Hewlett-Packard. Agfa. sellers who look only to others in their own industry as competitors are likely to overlook other very real rivals and risk having their markets undercut by innovators from other industries. industries are composed of Markets are composed of buyers. industries sellers. as we’ve seen in the cellular arena. and other longtime players in the film and photoprocessing industries. The distinction. ASSESSING MARKET AND INDUSTRY ATTRACTIVENESS The seven domains framework enables marketers to answer two important questions. Sony.indd 90 14/12/12 12:50 PM . is an important one because are composed of sellers. Should Kodak have been more concerned with Fuji. wal28949_ch04_085-113. Further. Execute Propensity on CSFs for Risk Team Domains Micro Connectedness up. Ability to Aspirations. and various online players whose digital technologies have made photography’s century-old silver halide chemistry go the way of the buggy whip?2 To add insult to injury. ness.1 The Seven Domains of Attractive Opportunities Market Domains Industry Domains Market Attractiveness Industry Attractiveness Macro Level Mission. see Exhibit 4. The distinction is both markets and industries can vary substantially in their attractive- often overlooked. markets are composed of buyers.

At the micro level. for better or worse: the aging of the world’s population. The Demographic Environment As the saying goes. target market. weaknesses.2 Why Not a SWOT? For many years. sociocultural. specific target customers and companies themselves. according to current projections. economic. The macroenvironment can be divided into six major components: demographic. without regard to a particular company’s strategy.indd 91 14/12/12 12:50 PM . that is. then we address the micro-level analyses. The seven domains framework by the firm in a particular market and industry setting. such as those of market or industry attractiveness or the dents to conduct a SWOT analysis that enumerates the ability of the firm or its offering to achieve sustainable strengths. life insurance. strategy textbooks have taught stu. as a whole. there are cur- are governed to a significant extent by demographic changes. technological. organizes similar information as a SWOT.3 shows the projected increase in the portion of the population aged over 60 in several of the world’s most developed countries. in developing any coherent marketing strategy. Providers of health care. vacation homes. a rapidly growing middle class in emerging a countries. The key question marketing managers and strategists must ask in each of these arenas is what trends are out there that are influencing demand in the market of interest. The chart shows that in Italy. MACRO LEVEL Assessing market attractiveness requires that important macroenvironmental trends— or macro trends for short—be noticed and understood. All kinds of things influence one marketer or another is without limit. But what do these levels really mean? On both the market and industry sides. We develop and apply the relevant analytical frameworks for the macro-level analyses first. and threats faced competitive advantage. respectively. the macro-level analyses are based on environmental conditions that affect the market or industry. and natural arenas. opportunities. of course. for example. Aging Exhibit 4.1 shows. regulatory. These external and often uncontrollable forces or conditions must be reckoned with in assessing and shaping any opportunity and. indeed. demography is destiny. All kinds of things—from sales of music CDs to the state of public finances to society’s costs of health care to the financing of pensions—are governed to a significant extent by demographic Strategic Issue changes. Chapter 4 Understanding Market Opportunities 91 EXHIBIT 4. As Exhibit 4. MACRO TREND ANALYSIS: A FRAMEWORK FOR ASSESSING MARKET ATTRACTIVENESS. markets and industries must be assessed at both the macro and micro levels of analysis. Doing so is useful. or its role in its industry. and more. nearly half the population will be over 60 by the year 2040. explicitly. whether favorably or unfavorably. and other goods and services have taken note of the graying of the world’s population and are taking steps to develop marketing strategies to serve this fast-growing market. the effect of the AIDS plague on demography. respectively. but it fails to organize the and does so in a manner that addresses such questions output into answers to important strategic questions. While the number of specific demographic trends that might Demography is destiny. rently four major global demographic trends that are likely to influ- ence the fortunes of many companies. the analyses look not at the market or the industry overall but at individuals in that market or industry. wal28949_ch04_085-113. and increased levels of immigration.

perhaps. One marketer dealing with this challenge is Ferrari. “The Planet Is Ever Greyer: But as Longevity Rises Faster than Forecast. and some who are getting older may not be very attracted to goods or services that remind them of their age. Doing so. since many par- ents have died. isn’t always easy. 92 Section Two Opportunity Analysis EXHIBIT 4. “The profile of our customers means we have to pay attention to practicality and functionality without com- promising the sportiness. a 17 percent increase since 2001. At the end of 2010. making it easier to enter the car. the Elderly Are Also Becoming Healthier.” cutting- edge product if there ever was one—were people over 50.3 Aging Populations: % of the Population Aged over 60 US Australia 2000 Canada 2040* UK France Germany Sweden Japan Italy 0 10 20 30 40 50 *Projection Source: Norma Cohen and Clive Cookson.7 Across Africa. but one in which there is little ability to pay for the advanced drug therapies that offer hope to AIDS victims. whose aver- age customer is nearing 50 and getting older with each passing year. the hardest hit region. 2004.8 Growing Middle Class In the emerging economies of Asia and Latin America. Ferrari’s strategic marketing director. p. grandparents are raising an entire generation of children. some 25 percent of the early buyers of Apple’s iPhones—a “cool. one that presents a huge and rapidly growing market.”5 Aids The death toll due to HIV/AIDS in Africa.”3 The implications of the aging trend are not as clear-cut as they might appear. for example.indd 92 14/12/12 12:50 PM .” Financial Times. there is evidence that today’s elderly generation is both healthier and fitter than its predecessors. “There is a lot of evidence that disability among old people is declining rapidly. “The way the doors open on the Enzo. But progress is being made: the rate of annual new HIV infec- tions has fallen 21 percent between 1997 and 2010. Surpris- ingly. was some 8 million from 1995 to 2000.4 Further.” says Giuseppe Bonollo. 15. especially in recent years. Many people do not wish to be pigeonholed as elderly. fears that health and other facilities will be swamped by hordes of ailing pensioners may be mis- placed. “New data demolish such concerns. Thus. however. Pharmaceutical companies and world health organizations are struggling to develop strategies to deal with the AIDS challenge.6 and the pandemic continues. allows part of the roof and part of the door undermolding to come away as well. professor of geriatric medicine at Manchester University in the United Kingdom. it was estimated that some 34 million people were living with HIV worldwide. January 19. Though the definition of what constitutes middle wal28949_ch04_085-113. the pace of economic develop- ment in recent years has led to a rapid increase in the number of consumers deemed by demographers to be middle class. owing in part to a substantial increase in access to antiretroviral therapy in Africa and elsewhere.” reports Raymond Tillis.

of Marketing 75 (July 2011). Sheth. though. growing numbers are returning to their homelands. norms for socio-political how consumers in emerging markets think and behave. and governance.12 Whether it is Asian doctors in Great Britain or engineers in California’s Silicon Valley. “Impact of Emerging Markets on disrupt marketers’ accepted perspectives and require a Marketing: Rethinking Existing Perspectives and Practices. it is clear that no longer can we view emerging economies as consisting of a few rich people. exciting time to enter the marketing profession. Chapter 4 Understanding Market Opportunities 93 class varies (for example. the marketing function needs greater transparency emerging markets. job to job. While immigration from the developing to the developed world continues at a high rate.indd 93 14/12/12 12:50 PM . These characteristics— for those who bring to their jobs a deep understanding of including market heterogeneity. or season to season—as the poor do—is one definition). With the 2004 enlargement of the European Union from 15 to 25 countries. to more than 50 percent of the world’s total population by 2006.9 Asia is now home to 60 percent of the world’s middle class. The implications for marketers seeking to gain market share among Hispanic Americans are obvious. governance. many are taking what they’ve learned there to start new businesses in Mumbai. particularly tions and strategies are based.” Journal shift toward a truly global mind-set. Marketers. Bangalore. or Shanghai. compared to just 20 percent in 1980.4). for melting pot countries such as the United States and the United Kingdom have for centuries welcomed immigrants to their shores. such immigration is nothing new. 166–82. where there is little running water or electricity. the increasing imbalance between the economic prospects for those liv- ing in more developed versus less developed countries is leading to increased levels of immigration. where faster economic growth is creating economic opportunities that were absent years earlier. In one sense. inadequate infrastructure. wal28949_ch04_085-113. at least among the better-educated portion of the diaspora in the West. impoverished favelas of São Paolo. Brazil. fears grew that some countries in the “old EU” would be swamped with immigrants from the accession countries in Eastern Europe. take note (see Exhibit 4. Such markets tend to have charac. there are also emerging signs that. where per capita GDP is far less than the EU 15 average. unbranded competition. many years of immigration from Mexico and Latin America have made the Sun Belt a bilingual region. and in rural villages in India. Even in the crowded. In the United States. These challenges make today an on which many of our established marketing assump. and talent must be sourced and devel- teristics that differ from the traditional. Increased Immigration Not surprisingly.11 The recent economic turmoil in Europe may put an end to these fears. not living from hand to mouth. For marketers. there is no dispute that their numbers have risen dramatically. pp. and many now view Miami as the crossroads of Latin America.10 We take a closer look at the implications of this trend in Chapter 6.4 Changing Assumptions and Mind-Sets It’s not just a burgeoning middle class that is making So must anything change? Competencies need to marketers rethink how to better serve consumers in change. as high levels of unemployment in many parts of Europe make them lessattractive destinations than they once were. alongside huddling masses of the poor. and more—can Source: Jagdish N. EXHIBIT 4. mature markets oped on a global basis. a chronic shortage of resources. satellite dishes are popping up on tin roofs.

wal28949_ch04_085-113. including Fair Trade USA. and behavior of individuals in a given society. fitness and nutrition. Sugar and cholesterol—at least the bad LDL cholesterol—are out. When people’s incomes rise or fall. Cultures tend to evolve slowly. reached agreement with the Rainforest Alliance. Colombia. resisted calls to pay premium prices for coffee grown in a sustainable manner. Two trends of particular relevance today are greater inter- sociocultural trends can and do exert est in corporate social responsibility by businesses and trends toward powerful effects. Working out. Kraft. in the farming communities of North America and Europe. Fitness clubs. Spain. on farms that pay their workers a living wage and that respect the environment. when interest rates rise or fall. and environmental conditions in agriculture in the third world. and others—includ- ing Greece. Corporate Social Responsibility For years. Within and do exert powerful effects on markets for a great variety of goods this broadly stable pattern. Critics were furious. Sales of home exercise equipment are up. Mexico.13 Fast-forward to 2011. the world’s leading coffee marketers. and on restaurant menus. running neck and neck with Nestlé for the number one spot in market share globally. however. where selections are being revamped to make them appeal to customers who have adopted new eating habits. In 2003. where entire sections are now devoted to organic produce. at least in some circles. including Kraft and Nestlé. along with advice on how to purchase and use it to best advantage. paying a 20 percent premium to the farmers. The agreement called for Kraft to buy £5 million of Rainforest Alliance–certified coffee from Brazil. As we write. as Strategic Issue people tend to carry for a lifetime the values with which they grow up. 94 Section Two Opportunity Analysis The Sociocultural Environment Sociocultural trends are those that have to do with the values. The 20-ounce T-bone steak is a thing of the past.15 The Economic Environment Among the most far-reaching of the six macro trend components is the economic environ- ment. social. These trends are driving more than just the food business. The South Beach and Atkins diets. thanks to robust consumer demand.indd 94 14/12/12 12:50 PM . and sometimes suddenly. and more—mired in severe downturns with bleak near-term prospects. These days. adopted more inclusive policies that permitted large-scale producers into the game. Attendance at health and fitness clubs is booming. and services. the future of the developed economies appears to lie in the factories of exporters or in the purses and wallets of their—or China’s or India’s—shoppers. Sociocultural trends can take a generation Within this broadly stable pattern. Fair trade coffee was becoming a big business. natural and organic foods are in. however. a nonprofit organization that seeks to improve the working. however. when the fis- cal policy of governments results in increased or decreased government spending. Some third-party certification groups.14 Fitness and Nutrition Running. so some sociocul- tural trends can take a generation or more to have significant impact. where fields for- merly farmed with fertilizers are being transformed into organic ones. the national certification leader in the United States. worrying that small farmer cooperatives—those whom fair trade is supposed to help—will soon get squeezed out. entire sectors of economies are influenced deeply. and Central America in 2004. attitudes. however. sociocultural trends can or more to have significant impact. with some Western economies struggling to bounce back from recession. The implications of these sociocultural trends are playing out in grocery store produce departments.

Chapter 4 Understanding Market Opportunities 95 The implications of trends like these in consumer spending can be dramatic for marketers. to the rapidly growing markets of Asia and Latin America. Marketers every- where must face the fact that the so-called emerging markets are no longer just seen as sources of low-cost commodities and labor. right? what about discount airlines? Shouldn’t they be thriving in a troubled economic environment? Ryanair.” CEO Michael O’Leary said in an interview. to be sure. “Suddenly It’s Cool to Take the Bus. right? Not if you’re the operator of Strategic Issue a chain of check-cashing outlets or pawn shops. take their shoes off unless they want to. DePaul is not surprised.” Bloomberg Businessweek. “but it’s so much cheaper to string bus trips together than to fly. with their easy internet booking. Japan. are tough and people need to turn unwanted assets into cash quickly. “It’s not just high fuel prices—it’s wal28949_ch04_085-113. they are where any growth in demand must come from.com or www. April 17. “We take delivery of 50 aircraft this winter so instead of running around trying to open up new bases and routes in November and Decem- ber we’ll sit them on the ground. political and legal trends.5). “It’s the first time ever that we’ll go negative on traffic. September 29. In purchas- ing-power-parity terms.indd 95 14/12/12 12:50 PM .megabus. Take robust economic health. especially those that result in regulation or deregulation. but they can be far subtler than one might imagine. where barriers to foreign direct investment are helping retailers like Easy Day and Pantaloon grow.boltbus. which thrive when times Take robust economic health. the pessimists appear to hold the upper hand—it seems abundantly clear that the world’s wealth is moving inexorably eastward and south. eliminate 11 million gallons of fuel consumption Ben Austen.17 Tomorrow’s business leaders will need truly global perspectives to make the most of these changes.” On Megabus. As with the other macro trend components. can have powerful impact on market at- tractiveness. 2011. Asia is already the largest market for many product categories.aspx. and India) are already in Asia. and cash-strapped travelers are finding other ways to get around (see Exhibit 4. Doing so is not always easy. p. It’s good for everyone. There will still be strong growth next summer but trying to open up new routes with high oil prices is stupid in the winter.” says Crail.5 No Pat-Downs on Megabus Long distance discount bus operators like Mega-bus and the hassle factor at the airports that has left many fliers BoltBus. and there’s no tomers like Chicago’s Bobbie Joe Crail. street.com/default. and more than half of global GDP growth over the past decade has come from Asia. capacity. for example—there is a regulatory environment within which local and multinational firms operate. Rather. as we’ve just seen in the example of retailing in India (Exhibit 4. 63–67. passengers don’t have to side pickup.6). Whether the current economic difficulties in Europe are resolved smoothly or not—as we write. pp. annually and take 24. Or It’s good for everyone. however (see Exhibit 4. and power outlets on board. free WiFi. For more on Megabus or Boltbus. The Regulatory Environment In every country and across some countries—those that are members of the EU.000 cars off the road. “The bus can be security pat-down either! inconvenient. including the BRIC countries and others.” DePaul University reports that curbside carriers. three of the world’s four biggest economies (China. EXHIBIT 4.” A study by Chicago’s Sources: Brian Burnsed. “The Megabus Effect.6). disenchanted. see Professor of transportation Joseph Schwieterman at www. for example. announced that it would cut its capacity—grounding 80 of its 300 jets—for its winter season beginning in October 2011. 2008. for example. are winning cus. 64. Europe’s largest airline by passenger count.”16 The hundred-dollar price per barrel of oil has forced even the discounters like Ryanair and Southwest to raise prices. at current BusinessWeek European Edition. including cars (35 percent of global demand in 2009) and mobile phones (43 percent).

and creates inflationary pressures. easyJet. is one example of a company consumerism. The power of deregulation to influence market attractiveness is now well-known. and mass-merchandise megastores in 73 cities foreign direct investment by multi-brand chains like and predicted sales of $4 billion in 2012. cians’ mind-set that needs to change. have move across and sometimes within state boundaries. a trend of reregulation is taking hold.” he says. 96 Section Two Opportunity Analysis EXHIBIT 4. then. With supermarkets. business. and banking have been deregulated. Source: The Economist. and three main religions whose dietary and consumption like ducks to water. seen as a key cause of the 2007–2008 financial meltdown. “Customers are taking to choice types of cuisine. A similar story has followed in the European market. The rise of Southwest and other budget airlines led to lower fares across all routes and forced the major carriers to streamline operations and phase out underperforming routes. Easy Day. It is the politi- strictures carry considerable weight. A government-imposed ban on stores. In the United States.com. is the easy part. For example. Trade barriers are crumbling due to political unrest and technological innovation. airlines. on the speed at which the European and American econo- mies recover. been salivating for years at the prospect of transform. “Send for the Supermarketers. time soon? Pantaloon’s Kishore Biyani. But as one sometimes conflicting abundance of local rules. Asia. adapting to a bewildering and and-one-half times its nearest competitor.indd 96 14/12/12 12:50 PM . in part. compared to about twentieth century—never mind the twenty-first—any 20 percent in China and 35 percent in Brazil. Perhaps surprisingly.18 Whether this reregulation trend will gather steam—or spread to other industries. high- than 20 officially recognized local languages. the more observer of India’s retailing landscape puts it. and—perhaps most important—populist public policies ing India’s nineteenth-century retailing industry. 14 main lighting the tension. a plethora 2011. “Indians are learning to come to anywhere in the west. though. For more on Pantaloon or Easy Day. of state-by-state taxes (and delays) levied on goods that in or www. Deregulation has typically changed the structure of the affected industries as well as lowered prices. especially in Europe and the United States. specialty trying to do just that.Wiz. in which that protect small shop-owners.S. wal28949_ch04_085-113. and the general public throughout much of the world have be- come increasingly aware that overregulation protects inefficiencies. est and most successful retailer. and many develop- ing countries. the period following deregulation of the U. railroads. with volume two- For Easy Day. creating rapid growth in some markets as a result.pantaloonretail. where discount airlines Ryanair. marketers appear headed for an era in which public policy-makers will play an increasing regulatory role. only 7 percent of the country’s $435 billion in retail. Pantaloon’s America’s Walmart or France’s Carrefour would appear parent company Future Group is the country’s larg- to pave Easy Day’s road to runaway success. as a result of a perceived failure of the global financial services industry to self-regulate its practices.easydayindia. the effects of which are still playing out.” Much more difficult are the challenges entailed in deal- ing with a lack of cool-chain storage and distribution. Markets have also been liberated in western and eastern Europe. thinks prog- whose modern supermarkets would be at home most ress has been made. trucking. Will India’s retailing industry make it into the ing volume is done in chain stores. see www. With things still getting worse—not better—in some countries as we write. telecommunications. and others have made vacation destinations places to fly to rather than drive to. airline industry (1978–1985) gave rise to a new airline category—the budget airline. restricts entry by new competitors. Government. such as taxing products that lead to obesity—may depend.6 Modern Retailing in India? Good Luck! Western retailers.”April 16. potholed roads. sky-high prices for property. as well as Indian entrepreneurs.

Chapter 4 Understanding Market Opportunities 97 The Technological Environment In the past three decades. and ticketless air travel.” to-consumer sales. Technological progress is unlikely to abate. see www. computing. and other sites. Source: Andrew McKie. but also of reduced costs in communicating (voice or data). 2011. compact disks. sometimes earning entrepreneurial fortunes in the process. W8. perhaps sur. new lightweight materials. In addition to creating attractive new markets. August 5.7). ing recording costs (an ordinary laptop is all you need) prisingly.7 The Music Industry Brightens Technology. sometimes earning thereby place themselves and their firms at the forefront of the innova- entrepreneurial fortunes in the process. is. airlines. following mechanization of the British textile industry in the eighteenth century and Henry Ford’s invention of mass production in the twentieth. and this is now possible for everyone. Distance is no longer a factor—it costs about the same to make a trans-Atlantic call as one to your next-door neighbor.spotify. it can cost nothing at all! New developments in telecommunications and computing have led to the rapid conver- gence of the telecommunications. If you place the call on Skype. whose growing popular- in seven years. and mass customization—where things are designed on a computer and “printed” layer by layer on a 3D printer—may be the wave of the future. and genetically engineered drugs. and distribution costs lower. an amazing number of new technologies has created new mar- kets for such products as video recorders. distribution (books and other consumer and industrial EXHIBIT 4.” sold a million copies in its first week alone. and entertainment industries. while driv- music industry for more than a decade. wal28949_ch04_085-113. ever-more-powerful and ever- smaller computers. The Nielsen SoundScan report for the first half of 2011 “The internet has allowed for a lot more diversity in heralded the first rise in album sales in the United State music. Revenues from new music-streaming websites such as Spotify.” are making much of the difference. and marketing research firms).indd 97 14/12/12 12:50 PM .com. Consumers today enjoy check-free banking. “It is a healthy part of the artistic process is to be able to But it’s the newer music distribution mechanisms that show your work. which has made life very difficult for the music revenue 50 percent higher since 2006. technological developments are having a profound impact on all aspects of marketing practice. p. Music-hungry consumers have been downloading music from legal and illegal sites. and concert royalties have driven overall For more on Spotify.” says Britain’s Anna Calvi. advertising revenue from YouTube The Wall Street Journal European Edition. tion curve. how crops are grown. the death of the invoice. retail stores.19 Savvy mar- follow technological trends are able keters and entrepreneurs who follow technological trends are able to to foresee new and previously unheard foresee new and previously unheard of applications such as these and of applications. Technology can also change how businesses operate (banks. and how individuals learn and earn as well as interact with one another. this Way. For example. Lady Gaga’s May 2011 release. other direct. smartphones. The cost of producing smaller batches with wider variety is falling dramatically. Many of these innovations are the result not only of changes in computing systems. the source of a growing market for music. What’s next? Some observers say the digitization of manufacturing will bring on the third industrial revolution. the cost of process- ing an additional telephone call is so small it might as well be free. But things appear to be looking up (see Exhibit 4. thereby hammering the music industry and have forced the industry to change the way it distributes music. how goods and services as well as ideas are exchanged. Perfectly fitted hearing aids Strategic Issue and highly specialized parts for military jets are but two of the product Savvy marketers and entrepreneurs who categories for which this incredible future is here now. “Born ity has been driven in part by videos posted on YouTube. “Music Industry Sighs No More. including marketing communica- tion (ads on the web or via e-mail).

” Bloomberg Businessweek European Edition. for example. p. the United Kingdom’s largest supermarket chain.gsvc. and marketing research (monitoring supermarket purchases with scanners or internet activity with digital “cookies”). Sustainability and You Fuel-efficient cars are once again in favor.enel. Changes in the earth’s resources and climate can have significant and far-reaching effects. Another is to find new energy sources such as wind farms and hydroelectric projects. packaging (use of new materials). But business can do a number of things to turn problems into opportunities.com) have raised capital in hot IPOs. Mumbai. wal28949_ch04_085-113. “A Gold Rush in Green Business school students. Business plan competitions for so. tuna caught without netting dolphins. 24. More than $5 billion of its $29 billion in revenue comes from sustainable products. Tesla’s electric Global Social Venture Competition held annually at the cars are cool (www.teslamotors. and other products. organic fertilizers. are getting in on the Technology. discussion of the problems in the natural environment has stressed the threats and penalties facing business throughout the world.S. The skyrocketing price of oil has caused demand for gas-guzzling sport utility vehicles to plummet. a recent study has shown that social networks influence con- sumer decisions about staying with or leaving service providers.tsolar.com). including marketing. One is to invest in research to find ways to save energy in heating and lighting. and economic like Spain’s T-Solar (www.23 There is a growing recognition that creating a more sustainable natural environment is an important job. which can be used to make clothing. and seem. is reinventing itself as an eco-conscious com- pany.com). sustainability game.amerescosolar. In particular. the Global Social Venture Competition cially and environmentally friendly ventures. And. .com. hot. now motivate students to think in ingly everywhere else to invest in companies that hope triple bottom-line terms.com). and the more of all three? renewable unit of the Italian utility Enel (www. For example. and fed from a network of business schools sprung up in Silicon Valley. 98 Section Two Opportunity Analysis goods bought and sold via the web). April 25.8 Clean-Tech. Du- Pont. car- pet. including a new corn-based fiber called Sorona. The Natural Environment Everything ultimately depends on the natural environment. green energy returns: Wouldn’t the world be a better place if we had producer Ameresco (www.21 In general. environmental returns. around the world. recycled paper.20 We explore these kinds of changes and others in the ensuing chapters in this book. like the website at www. In virtually every corner of the clean-tech and green-tech arenas. in response to growing consumer concern in Britain about environmental issues. long synonymous with petrochemicals. 2010. Green-tech outfits Social returns. too. including Tesco. Sources: Mark Scott and Alex Morales. highly con- nected customers are more likely to defect from a service provider in response to others in their network doing the same. have begun adding carbon footprint labels to some of their products. high-efficiency LED lighting. rather than solely about profit. Green-Tech. and solar energy is Haas School of Business at the University of California. leading automakers to develop new hot-selling hybrid gas-electric vehicles such as the Toyota Prius. entrepreneurs and marketers are looking for ways to save the planet and deliver shareholder returns at the same time.22 Businesses have also seen opportunities in developing thousands of green products (those that are environmentally friendly) such as phosphate-free detergents. and clothes made from 100 percent organic cotton and colored with nontoxic dyes.8). U. a growing number of marketers.indd 98 14/12/12 12:50 PM . to create a more sustainable future. The world’s supply of oil is finite. Clean-tech and green-tech investment funds have Berkeley. which can go more than 50 miles on a gallon of gas. one to which today’s newly educated marketers can contribute (see Exhibit 4. London. EXHIBIT 4.

By most measures. threat of new entrants into the industry. EXHIBIT 4. and frozen meals. growing. is to construct a checklist based on Porter’s seminal work. and the threat of substitute products (see Exhibit 4. consumers and businesspeople have become hooked on cell phones. within the same industry.indd 99 14/12/12 12:50 PM . the key forces are rivalry among pres- ent competitors (for example. On the other hand. and other products and services whose demand depends on the reliable coming of Old Man Winter. Other natural trends. if global warming continues.25 The strength of the individual forces varies from industry to industry and. snowmobiles. Thus. and attractive market. A determine an industry’s long-term useful way to conduct a five forces analysis of an industry’s attractiveness attractiveness. This mix of forces explains why some industries are consistently more Strategic Issue profitable than others and provides further insights into which resources Five competitive forces collectively are required and which strategies should be adopted to be successful. YOUR MARKET IS ATTRACTIVE: WHAT ABOUT YOUR INDUSTRY? As we saw at the outset of this chapter. which we address in this section. But are cell phone manufac- turing and cellular services attractive industries? An industry’s attractiveness at a point in time can best be judged by analyzing the five major competitive forces. it may play havoc with markets for winter vacationers. Wendy’s versus Burger King versus McDonald’s) as well as the threat posed by substitute products (fast casual outlets such as Chipotle and Panera. especially when one competitor acts to improve its standing or protect its position. Rivalry among Present Competitors Rivalry occurs among firms that produce products that are close substitutes for each other. firms are mutually dependent: What one firm does affects others and vice versa. Porter’s Five Competitive Forces24 Five competitive forces collectively determine an industry’s long-term attractiveness—rivalry among present competitors.9). salad bars. Tracking such trends and understanding their effects is an important task. for example). over time. may significantly impact firms in many indus- tries serving a vast array of markets. this is a large. In the fast-food industry. Chapter 4 Understanding Market Opportunities 99 Trends in the natural environment are creating opportunities for companies like Du- Pont. the bargaining power of suppliers. the bargaining power of buyers.9 The Major Forces That Determine Industry Attractiveness Threat of new entrants Bargaining power Rivalry among Bargaining power of suppliers existing competitors of buyers Threat of substitute products wal28949_ch04_085-113. such as the depletion of natural resources and fresh groundwater. and the market for mobile communication has grown rapidly.

For cellular telephone operators. the amount of fixed and working capital required to produce a dollar of sales is large. the entire airline industry has not made a dime for investors in its century of existence. more difficult under the following conditions: • When strong economies of scale and learning effects are present. never mind for cell phone manufacturers. • There is little product differentiation—for example. but they are less likely to deter more innovative en- tries. gasoline. the try’s attractiveness. The results of this study suggest that a combination of effectively managing in- novation cycles while building entry barriers through cost advantages or proprietary technologies can enhance incumbents’ ability to sustain competitive advantage over time. Threat of New Entrants A second force affecting industry attractiveness is the threat of new entrants. The restaurant industry is a good example. • It’s easy for customers to switch from one seller’s products to those of others (low switching cost for buyers). • If gaining distribution is particularly difficult. however. Thus.26 • There are many small firms in an industry or no dominant firms exist.indd 100 14/12/12 12:50 PM . such as faster 4G networks. Consider cell phone service. The less the threat of new entrants. 100 Section Two Opportunity Analysis Ordinarily. High intensity requires firms to operate at or near capacity. As the noted investor Warren Buffett observed. New com- petitors add capacity to the industry and bring with them the need to gain market share. • If the industry has strong capital requirements at the outset. profitability decreases as rivalry increases. Rivalry is greater under the follow- ing conditions: • There is high investment intensity. Though there are several dominant firms whose products are differenti- ated through rapid technological change. that establishing entry barriers may be over- rated as a mechanism for sustaining one’s competitive advantage. on average. The greater the competitive rivalry in an industry. license re- quirements and the huge cost of obtaining bandwidth in government auctions make threat of entry into the cellular service industry relatively low in most coun- Strategic Issue tries. Thus. The cellular service industry is capital intensive. the greater will be an indus- The greater the threat of new entrants. 27 Entry barriers may well deter me-too entries. the problem of overcoming the cost disadvantage is made even more difficult. so this is good news for cellular operators. in which many of the largest airlines have fallen into (and sometimes exited from) bankruptcy. rivalry among service providers. entry becomes even more expensive. Nokia was able to do so in mobile-phone manufacturing in this way for quite some time. thereby putting strong downward pressure on prices when demand slackens. major appliances. high-investment–intensity businesses are. much less profit- able than those with a lower level of investment. and passenger-car tires. that is. the less attractive it is to current players or would-be entrants. if the existing firms share their output with their related businesses. At least one study suggests. Entry is less will be an industry’s attractiveness. • When strong product differentiation exists among current players. thereby making competition more intense. consumers’ switch- ing costs to change cell phone service providers or handsets are low. TV sets. wal28949_ch04_085-113. Also. since it takes time to obtain the volume and learning required to yield a low relative cost per unit. Consider the airline industry. If existing firms are vertically integrated. is brutal.

This is certainly the case with some large retailers such as Walmart and Carrefour in their dealings with their suppliers. the lower the buyer’s bargaining power. The greater the power of the high-volume customers served by an industry. What was once an arm’s-length adversarial relationship has turned into a cooperative one resulting in lower transaction costs. wal28949_ch04_085-113. then bargaining will be more aggressive. the bargaining power of suppliers in many industries has changed dramatically as more companies seek a partnership relationship with their suppliers.indd 101 14/12/12 12:50 PM . thereby alleviating the need for the supplier. • Buyer profitability—if buyers earn low profits and the product involved is an important part of their costs. • If suppliers can realistically threaten forward integration. Its impact can be significant. The greater the bargaining power of the key suppliers to an industry. One attractive dimension of the cellular phone service in- Strategic Issue dustry is that its customers have relatively little power to set terms and conditions for cellular phone service. improved quality derived primarily from us- ing a supplier’s technological skills to design and manufacture parts. including these: • The extent of buyer concentration. particularly when there is a lim- ited number of suppliers serving an industry. • The threat of backward integration. and their cell phone costs are typically not of great attractive will be that industry. • If prices of substitutes are high. thereby re- ducing the attractiveness of this industry. and added services and thus can affect competition within an industry. the less will be the overall attractiveness of the industry. and decreased transaction time in terms of inventory replenishments through just-in-time procurement systems. The extent to which buyers succeed in their bargaining efforts depends on several fac- tors. as when a few large buyers that account for a large portion of industry sales can gain concessions. It is exercised largely through increased prices or more onerous terms and conditions of sale. improved product quality. the less attractive will be that industry. relatively speaking. the less very concentrated. In recent years. Chapter 4 Understanding Market Opportunities 101 Bargaining Power of Suppliers The bargaining power of suppliers over firms in an industry is the third major determinant of industry attractiveness. Automakers’ power over suppliers of tires is a good example. where the cost of aluminum is a large part of the value added. Bargaining Power of Buyers An industry’s customers constantly look for reduced prices. • Switching costs that reduce the buyer’s bargaining power. Buyers are numerous and not The greater the power of the high-volume customers served by an industry. • The product’s importance to the performance of the buyer’s product—the greater the importance. Buyers play individual suppliers against one another in their efforts to obtain these and other concessions. The newly discovered power that governments worldwide have exerted by auctioning bandwidth for new cellular services has raised their bargaining power as suppliers of bandwidth to the cellular services industry. importance or expense. Their power is increased under the following conditions: • If the cost of switching suppliers is high. • When the supplier’s product is a large part of the buyer’s value added—as is the case with aluminum cans.

the cellular phone service industry. such as plastic bottles versus aluminum cans. compared to earlier in the industry’s history when there were fewer players (thus. This analysis indicates that. and substitutes are not likely to enter anytime soon.indd 102 14/12/12 12:50 PM . and each constrains the prices that can be charged by the other. we summarize one analyst’s judgment of the favorability of the five forces for the European cellular phone service industry in the year 2012. Thus industry attractiveness is brighter therein. digital photography over silver-halide film. tablet computers. supplier power and threat of substitutes are often more favorable. for which four or five of the forces might be favorable. Given this mixed outlook. no threatening substi- tutes on the horizon. and a cozier relationship with governments to provide bandwidth. Threat of substitutes Threat of substitutes is high: PDAs. customer switching costs are low.. packet switching. 102 Section Two Opportunity Analysis Threat of Substitute Products Substitutes are alternative product types (not brands) produced by other industries that per- form essentially the same functions. new service providers must purchase a bandwidth license by spending billions. since governments are more welcoming of telecom development. In emerging markets.10 Five Forces Analysis of the European Cell Phone Service Industry in 2012 Five Forces Score Rationale Rivalry among present Rivalry is high leading to high Products are differentiated through competitors customer churn: unfavorable new features and services. is not very attractive at this time. A Five Forces Analysis of the Cellular Phone Service Industry A useful way to summarize a five forces industry analysis is to construct a chart like that shown in Exhibit 4.g. and the faxing or e-mailing of documents versus over- night express delivery. the industry in 2012 was probably less attractive than some industries. while three are unfavorable. Thus. Thus. Supplier power Supplier power is high: moderately Governments in developed markets unfavorable have raised the price of additional bandwidth through auctions. especially when supply exceeds demand. Threat of new entrants Threat of new entrants is low: While rapid pace of technological moderately favorable change may bring new entrants based on new technologies (e. and laptops moderately unfavorable using Wi-Fi networks to access the web could cannibalize expected sales of 3G and 4G wireless network cell phones. There.10. Substitute products put a ceiling on the profitability of an industry by limiting the price that can be charged. less rivalry). consistent with the preceding discussion. strategists would consider EXHIBIT 4. Buyer power Buyer power is low: very favorable Even large customers have little power to set terms and conditions in this industry. aluminum cans are substitutes for plastic bottles and conversely. marketers who must decide whether to enter or continue to invest in this industry must make a judgment as to whether the rapid growth of the market—a favorable environ- mental context—is sufficient to offset the deteriorating attractiveness of the industry—the not-so-favorable competitive situation. in food-packaging. Overall conclusion: Only two of the five forces are favorable. at least in the European market. Thus. satellites). wal28949_ch04_085-113.

wal28949_ch04_085-113. an Ocean Strategy. glass. but a good way to identify the most suitable definition of the industry you are in is to consider whether the kinds of key suppliers. If two or more of them are different. tial customers (those that are potentially willing and able to buy). It is informative to measure market size and growth rates in customer numbers as well as in unit and value terms. an inherent assumption that’s all too on finding markets where there is little competition— frequent in strategic circles. Are Ball. or business users in B2B markets—the Markets can be measured in various challenge often lies in sizing the relevant market. “Blue Ocean Strat- the company and for the new buyers it served. where many of the customers are the same. So. jected the notion that there must be a trade-off between managers should focus more of their strategic efforts value and cost. out of today’s hotly contested industry spaces defined too. previously unknown market spaces as news broadcasting. growth for a decade or more. as is the case for Ball and AMCOR. On the industry side. the processes by which value is added. Rejecting the tired strate- blue oceans—and then take steps to exploit and protect gic logic of red oceans—overcrowded industries where these oceans.” they argue. it’s probably appropriate to say you are all in the same industry. of course. Instead. exactly which market or industry is to be analyzed. For more on Blue Ford’s Model T automobile created a blue ocean. On the market side and recall- ing that markets consist of customers—whether individual consumers.11.11 Competing in Blue Oceans Chan Kim and Renée Mauborgne argue that one way automotive industry that barely existed at the time.com. and the kinds of buyers are the same for your company and other companies whose industry you may consider yourself a part of. We further develop this theme later in this chapter. Thus.” Harvard Business Review. in units consumed of a class of goods or services. Their research found that companies that were they found. Henry egy. Rather than A key tenet of all these companies is that they re- focusing on “beating the competition. petition as a benchmark. Strategic Issue trade customers like retailers. Chan Kim and Renée Mauborgne. but key suppliers (aluminum versus petroleum-based plastics) and value-adding processes (aluminum cans and plastic bottles are made very differently) differ. see www. Markets can (and ways—in numbers of qualified potential should) be measured in various ways—in numbers of qualified poten- customers or in terms of value. and CNN in call blue oceans. you probably are in different industries. including the degree to which they believe they are likely to be able to establish and sustain competitive advantage. a maker of aluminum beverage cans. did Federal Express in overnight package delivery. they made compe- tition irrelevant by creating a huge leap in value for both Source: W. a five forces analysis of the aluminum can industry would consider the threat of substitutes from the plastic. October 2004.blueoceanstrategy. profitable. in terms of value (the aggregate spending on a class of goods or services) and so on. there’s the question of how narrowly or broadly to define one’s in- dustry. For an approach to strategic thinking that avoids the constraints of traditional industry definitions. to rapid. yet undiscovered by existing competition. If two or all three of these value chain elements are similar. EXHIBIT 4. in the same industry (the packaging industry) or different industries (aluminum containers and plastic packaging)? Are Ford and Mack truck in the same industry (automo- tive) or different industries (autos and trucks)? There are no simple answers here. CHALLENGES IN MACRO-LEVEL MARKET AND INDUSTRY ANALYSIS In order to analyze the attractiveness of one’s market or industry. a maker of plastic bev- erage bottles.indd 103 14/12/12 12:50 PM . by conventional boundaries is to develop what they Cirque du Soleil in circus (or is it theater?). and AMCOR. and often uncontested effective in creating blue oceans never used the com. companies seek ways of beating one another—can lead. Chapter 4 Understanding Market Opportunities 103 other factors. see Exhibit 4. one must first identify. and paper packaging industries.

104 Section Two Opportunity Analysis

EXHIBIT 4.12 Safaricom Outruns the Data
In October 2000, Michael Joseph, the newly arrived more buying power in Kenya than the figures foretold.
CEO of Safaricom, was pondering how best to relaunch Joseph’s gamble paid off. Safaricom’s launch was a hit
Safaricom’s mobile phone service in Kenya. Safaricom had from the start, and by 2006, more than 5 million Kenyans
taken over the formerly government-owned cell phone had cell phones, nearly one in every six Kenyans. By
operation, which had only 15,000 high-priced cell phone 2011, 25 million Kenyans, more than 60 percent of the
lines serving the business and government elite. Joseph total population, had cell phones.
wondered if there was enough buying power to enable
his company to target the mass market in Kenya. The
secondary data were not encouraging, since there were Sources: Charles Mayaka, “Safaricom (A),” United States
International University, 2005; Kachwanya, Mobile Monday—
only 10 land-based telephone lines per 1,000 people in
Kenya, “Kenyan Mobile Phone Penetration Is Now over 63%,”
Kenya and only 26 televisions per 1,000. GDP per capita June 7, 2011, http://mobilemonday.co.ke/2011/kenyan-mobile-
was a paltry $360, according to government figures. phone-penetration-is-now-over-63/. For more on Safaricom, see
He gambled that the data were wrong and there was www.safaricom.co.ke.

Information Sources for Macro-Level Analyses
In the developed economies, there is an endless supply of information about macro trends
and industry forces, including the popular and business press, the internet, supplier and cus-
tomer contacts, and so on. In emerging economies, however, such information is more diffi-
cult to find and can, in many cases, be misleading (see Exhibit 4.12).Thus, gathering relevant
data is not difficult, but it does take time and effort. A good place to start is with trade asso-
ciations and trade magazines, both of which typically track and report on trends relevant to
the industries they serve. Most local, state, and federal governments provide demographic
data easily accessible at their websites, such as www.census.gov in the United States.
Government sources and the business press are good places to look for economic trends
and data from Eurostat, the statistical office of the European Union (www. europa.eu.int/
comm/eurostat). Almost all sources of information are now readily available on the web.
A list of some of the most useful sources of secondary data for macro-level market and
industry analyses is provided in Exhibit 4.13.
The key outputs of a competent macro trend analysis for any market should include
both quantitative and qualitative data. Quantitative data should provide evidence of the
market’s size and growth rate, for the overall market as well as for key segments. Qualita-
tive data should include trends that will likely influence these figures in the future, whether
favorably or unfavorably.

UNDERSTANDING MARKETS AT THE MICRO LEVEL
A market may be large and growing, but that does not mean customers will buy what-
ever it is that is proposed to be offered if a particular opportunity is pursued. Most new
products, including those targeted at large and growing markets, fail because not enough
customers buy them. A colorless version of Pepsi-Cola—without the caramel coloring—
test-marketed unsuccessfully by Pepsi in the 1990s is but one of thousands of examples
that capable marketers have brought to market with little success.
Thus, in assessing market opportunities at the micro level, one looks individually at
customers—whether trade customers or end consumers or business users—to understand
the attractiveness of the target segment itself. While we devote an entire later chapter to
market segmentation and targeting (Chapter 6), it’s worthwhile to take a brief look at the
relevant issues for opportunity attractiveness here.

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Chapter 4 Understanding Market Opportunities 105

EXHIBIT 4.13 Some Information Sources for Market and Industry Analysis

Type of Information Library Sources Internet Sources
To find trade associations Gale Directory of Publications; www.gale.com
and trade magazines Encyclopedia of Associations; www.taforum.org
UK Trade Association Forum; European Trade
Associations
Information on specific Hoover’s Online Business; Ward’s www.hoovers.com
companies Business Directory; Dun and Bradstreet www.sec.gov/edgarhp.htm
Million Dollar Directory; Moody’s Industrial www.dnbmdd.com/mddi
Manual
U.S. demographic and Lifestyle Market Analyst www.census.gov
lifestyle data

Demographic data on a spe- Sourcebook of County Demographics;
cific region or local trade Sourcebook of Zip Code Demographics;
area in the United States Survey of Buying Power in Sales and
Marketing Management
International demo- Predicasts F&S Index United States, Europe, www.instat.com
graphics and world trade and International www.stat-usa.gov
www.cia.gov/cia/publications/
factbook/index.html
www.i-trade.com
ec.europa.eu/eurostat
Macro trends Statistical Abstract of the United States; www.unescap.org/stat/ (Asia)
Business Periodicals Index www.stat-usa.gov
E-commerce Red Herring magazine www.thestandard.com
www.ecommercetimes.com
www.comscore.com
www.emarketer.com
Proprietary providers of www.forrester.com
research reports www.gartner.com
Market share information Market Share Reporter www.scarborough.com
Average financial state- Annual Statement Studies, Risk Management www.rmahq.org/RMA/Rmauni
ments by industry Association, formerly, Robert Morris and verse/productsandservices/RMA
Associates bookstore/statementstudies/
default.htm
Given the rate of change on the web, some of the preceding internet addresses may change, and some print sources may
add websites.

Source: Adapted from pp. 27, 63, 124, and 158 from Find It Fast, 4th ed., by Robert I. Berkman. Updated July 2009. Some URLs may
have changed.

Opportunities are attractive at the micro level on the market side (see Exhibit 4.1) when
the market offering meets most or all of the following tests.28
• There’s a clearly identified source of customer pain, for some clearly identifiable set of
target customers, which the offering resolves. Thus, customer need is established.
• The offering provides customer benefits that other solutions do not. Thus, customers are
likely to buy your solution!
• The target segment is likely to grow.
• There are other segments for which the currently targeted segment may provide a
springboard for subsequent entry.

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106 Section Two Opportunity Analysis

For most companies and most goods or services, meeting the first two of these tests
is all about delivering what Patrick Barwise and Seán Meehan call generic category
benefits—the basics that customers expect a good marketer to provide in a particular prod-
uct category.29 Often, doing so involves effective implementation—something some com-
panies are not very good at—rather than a fancy strategy.
So, can an opportunity in a market that’s stagnant or declining at the macro level be an
attractive one? The answer is an emphatic yes! Starbucks transformed
Strategic Issue a boring and stagnant American market for coffee into a growth ma-
Can an opportunity in a market that’s chine. Nike did likewise in athletic shoes. Deliver what the customer
stagnant or declining at the macro level be wants and needs—that others don’t deliver effectively—and promote it
an attractive one?
successfully, and the world will beat a path to your door.
On the flip side, what about me-too products, mere knock-offs of others that are already
successful? While there’s often room for imitators and followers in fast-growing mar-
kets, as we’ll see in Chapter 9, even they typically need to do something different—better,
faster, or cheaper—in order to win a meaningful share of the market.

UNDERSTANDING INDUSTRIES AT THE MICRO LEVEL
We’ve seen that, on the market side (see Exhibit 4.1), a particular opportunity may look
attractive at the macro level but quite unattractive at the micro level—or vice versa, of
course. Does the same pattern hold on the industry side of the picture?
On the industry side, the key micro-level question to ask is whether whatever com-
petitive advantage there might be as a result of the benefits offered to the target mar-
ket—the market side, micro-level assessment, as we’ve just seen—can
Strategic Issue be sustained over a significant period of time. Nobody wants to en-
Entering a market without a source ter a market with something new, of course, only to have competitors
of sustainable competitive advantage
quickly follow and steal your thunder? Thus, entering a market without
is a trap!
a source of sustainable competitive advantage is a trap!
Let’s briefly examine how one can develop and sustain competitive advantage. To do so,
we’ll look, at the micro level, at the company itself rather than the broader industry of which it
is a part, which we examined earlier at the macro level. Opportunities are attractive at the micro
level on the industry side when the company itself meets most or all of the following tests.30
• It possesses something proprietary that other companies cannot easily duplicate or imi-
tate. Patents, at least defensible ones, can provide this, as can a well-known brand.
• The business has or can develop superior organizational processes, capabilities, or
resources that others would find it difficult to imitate or duplicate. In the 1970s, before
the Gap stores became a fashion brand in their own right, they sold only Levi-Strauss
merchandise, most of which was also available in department stores. Gap’s competitive
advantage was that its systems ensured that virtually every item in its huge assortment
of Levi’s was in stock in every size every day, something other stores simply found too
difficult to match in the days prior to bar codes and point-of-sale cash registers. Other
stores had piles of Levi’s, but often seemed to be out of the customer’s size. As Gap’s
early advertising proclaimed, “Four tons of Levi’s, in just your size!”
• The company’s business model is economically viable—unlike the many dot-com busi-
nesses that went bust at the dawn of the millennium!
A considerable body of research by strategic management and marketing scholars has
examined the issue of competitive advantage through what has become known as the
resource-based view of the firm. In general, this literature argues that gathering resources
that are valuable, rare, and inimitable by others (a tall order, at least in the long run) pro-
vides the best path toward competitive advantage. As we’ve previously noted, patents,

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Chapter 4 Understanding Market Opportunities 107

EXHIBIT 4.14 Sustainable Competitive Advantage in the Internet World
Yahoo! wasn’t the world’s first web portal. The iPod $999 million less—than Instagram’s $1 billion price tag,
wasn’t the first MP3 player that could download says Clemons.
tunes or play music on the go. Facebook wasn’t the The one weapon that some think can work is patents.
world’s first social network. All three companies ate Even here, though, companies’ troves of patents—for
another then-dominant company’s lunch. So is sustain- which others sometimes pay handsomely, as in Google’s
able competitive advantage a myth in today’s internet recent acquisition of Motorola Mobility for its large mobile
world? telecom patent portfolio—seem better suited to keeping
The Wharton School’s Kartik Hosanagar argues it lawyers busy, or your competitor’s lawyers (Apple’s?) off
is not. “To get consumers to switch, you cannot be as your back, than for actually deterring competitive moves.
good or slightly better. You have to be much, much bet- So will competitive advantage be sustainable for long
ter along dimensions that matter to consumers.” Unfor- in the new internet or mobile venture that you have
tunately, incumbents can often replicate new features been working on? Don’t count on it. But if your technol-
with the expertise and equipment they already have in ogy or your implementation is good enough or innova-
house, counters Hosanagar’s Wharton colleague Eric tive enough, as Instagram’s was, maybe somebody will
Clemons. When Google+ introduced new features in buy you before somebody else eats your lunch.
social networking, Facebook simply copied them. In
turn, Google+ will probably match whatever Facebook Source: Knowledge@Wharton, “King of the Hill: Can Established
does next, even copying what Facebook’s acquisition Tech Companies Be Bested?” April 25, 2012, http://knowledge
of Instagram brings them for a whole lot less—maybe .wharton.upenn.edu/article.cfm?articleid=2989.
--
brands, and superior capabilities or processes can deliver competitive advantage, at least
for some period of time. Another source of sustainable competitive advantage, according
to a recent study, is a genuine focus on getting to know both one’s customers and competi-
tors and widely sharing the information that results within the organization.30 For a dis-
cussion of sustainable competitive advantage in today’s internet world, see Exhibit 4.14.
Should you enter an industry—like social networks or mobile apps—where sustainable
advantage is going to be difficult to come by? Facebook’s Mark Zuckerberg did, and he’s
done pretty well. But we’re not all Mark Zuckerberg.

THE TEAM DOMAINS: THE KEY TO THE PURSUIT
OF ATTRACTIVE OPPORTUNITIES
Opportunities are only as good as the people who will pursue them. Thus, even if some
combination of market and industry factors renders an opportunity attractive at first blush,
there remain some crucial questions:
• Does the opportunity fit what we want to do?
• Do we have the people who can execute on whatever it takes to be successful in this
particular industry?
• Do we have the right connections? As the saying goes, “It’s not what you know, it’s
who you know.”
These three questions address the remaining three of the seven domains in our opportu-
nity assessment framework.

MISSION, ASPIRATIONS, AND RISK PROPENSITY
These days, every company has a mission statement, and every entrepreneur has a pretty
good idea of what she wants to do—software, a mobile app, running a retail shop, or what-
ever. Similarly, everyone has some idea about what size opportunity is deemed attractive.
For some companies, if an opportunity lacks the potential to reach, say, $100 million in

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108 Section Two Opportunity Analysis

sales, it’s too small. For some entrepreneurs who wish to run lifestyle businesses, if an
opportunity will require more than 20 people to pursue it, it’s too big. Finally, everyone
and every company has views on how much risk is acceptable. Are we prepared to bet
the ranch, mortgage the house, or risk a shortfall in the progression of our ever-increasing
quarterly earnings that we deliver to Wall Street?
Notwithstanding the merits of a particular opportunity in market and industry terms, it
must also measure up to the expectations of the people who will pursue it, or they’ll say,
“No, this one’s not for us.” Most airline caterers probably will not pursue opportunities in
fast-food despite their ability to source meals in a consistent—if not the tastiest—manner.
Most large companies will not pursue opportunities to serve very small niche markets.
It’s not worth their time and attention to do so. Many entrepreneurs—or at least their
spouses—are unwilling to mortgage the house. Whatever the tests for a given individual or
company, they must be met if an opportunity is to be deemed attractive.

ABILITY TO EXECUTE ON THE INDUSTRY’S
CRITICAL SUCCESS FACTORS
In every industry, there’s variation in performance. Some firms outperform others in their
industry year after year. In most industries, in addition to hard-to-imitate elements that
are firm specific, there are also a small number of critical factors that
Strategic Issue
tend to separate the winners from the also-rans. These few factors are
In most industries, there are a small that industry’s critical success factors, or CSFs for short. As the saying
number of critical factors that tend to
separate the winners from the also-rans.
goes in retailing, there are three such factors in that industry: location,
location, and location.
How might one’s CSFs be identified? There are two key questions to ask:
• Which few decisions or activities are the ones that, if gotten wrong, will almost always
have severely negative effects on company performance? In retailing, location is such
a factor. Good customer service, for example, while important, is not a CSF, since
there are many retailers whose customer service is nothing special—or downright
nonexistent—but whose performance in financial terms is quite good.
• Which decisions or activities, done right, will almost always deliver disproportionately
positive effects on performance? Again, in retailing, location qualifies. Certain high-traffic
locations can be licenses to print money, no matter how well or poorly the business is run.
Thus, to assess opportunities, one must identify the industry’s few CSFs, which gener-
ally do not include money, which in some industries may be table stakes—something you
must have, but which generally does not lead to competitive advantage (see Exhibit 4.15).
Then one must ask a simple question: Do we have on our team—or can we attract—the
competencies and capabilities necessary to deliver what’s called for by our industry’s
CSFs?31 If that’s not the case, the team itself may be a risk factor for the opportunity
under consideration. For some, that’s a risk they are willing to take, as Mark Zuckerberg
and many other entrepreneurs have done. For most entrepreneurs, however, a team that
has not shown the ability to deliver on the industry’s CSFs will have a more difficult time
raising capital, and is likely to raise it—if at all—on more onerous terms.

CONNECTEDNESS: IT’S WHO YOU KNOW, NOT WHAT YOU KNOW
The familiar saying holds true in assessing opportunities, as well as in other arenas, but for
a different reason. Despite the insights to be gleaned from the seven domains, reality dic-
tates that there will remain considerable uncertainty about just how attractive a particular

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Chapter 4 Understanding Market Opportunities 109

EXHIBIT 4.15 Is Cash a Critical Success Factor?
What about money, the reader may ask? Aren’t the finan- it before with the same CSFs, finding the money is not
cial resources needed to pursue the opportunity just as very difficult. The same holds true for prying money loose
important as the people? Most entrepreneurs and most from the corporate coffers in established organizations.
venture capital investors would argue that the money
is actually the easy part. If you have an opportunity to Source: John W. Mullins, The New Business Road Test: What En-
serve an attractive market, in an attractive industry, that’s trepreneurs and Executives Should Do Before Writing a Business
consistent with the kinds of things the people involved Plan (London: Prentice Hall/FT, 2010). For more on John Mullins
want to do, and with a team that can show they’ve done and his books, see http://faculty.london.edu/jmullins/.

opportunity really is. Can we really deliver what we promise? Will customers really buy?
Will macro trends change course, for better or worse? Will the structural characteristics of
the industry change, favorably or otherwise? Will an unanticipated competitor arrive on
our doorstep, or will a new market suddenly open up?
Any or all of these things can happen, and the people who are the best connected—up
the value chain, to insightful suppliers with a broad view of what’s happening in their
customer markets; down the value chain, to customers who can tell you
Strategic Issue about their changing needs; and across the value chain, among fellow
Having a well-connected team in place players in your own industry who face the same challenges you do—
enhances the attractiveness of the are the ones who will first see the winds of change shifting direction.
opportunity itself because the team is more
likely to be able to ride out the inevitable In turn, they’ll be the ones who are best placed to change strategy be-
winds of change. fore others know the winds have changed. Put simply, networks count!
Having a well-connected team in place enhances the attractiveness of
the opportunity itself because the team is more likely to be able to ride out the inevitable
winds of change. Because experienced investors understand this dynamic, they are more
likely to fund entrepreneurs who are well connected in particularly valuable ways: a rolo-
dex of prospective customers, key supplier relationships, and so on.
A recent study found that connections are important in emerging markets like China,
too. A survey of 241 Chinese firms found that business relationships and political relation-
ships both have a positive effect on performance, with business relationships more benefi-
cial in a rapidly changing environment and political relationships more beneficial when the
environment is stable.32

PUTTING THE SEVEN DOMAINS TO WORK
In the words of noted investor Warren Buffett, “When a management with a reputation
for brilliance takes on a business with a reputation for bad economics, it’s the reputation
of the business that remains intact.”33 If you or your company choose unattractive op-
portunities to pursue, you’ll face tough sledding, no matter what you learn from the rest
of this book. Thus, it’s worth keeping the lessons of this chapter in mind as you learn
about the rest of the task of developing compelling marketing strategies in succeeding
chapters.
It’s also worth noting that the seven domains are not additive. A simple checklist on
which you score each domain and sum the scores won’t do, for an opportunity’s strength
on some domains—especially at the micro level—can outweigh weaknesses on others.
Starbucks has done quite nicely in what was a boring and stagnant coffee market when it
got started.

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110 Section Two Opportunity Analysis

Finally, it’s worth noting that opportunities don’t just sit there; they change and may be
further developed. Damaging flaws found in the opportunity assessment process are there
to be mitigated or remedied by various means.34 Thus, the seven domains provide a useful
and integrative lens through which to examine the fundamental health of a business and
the opportunities it has chosen to pursue at any stage in its products’ life cycles, a topic
to which we devote considerable attention in Chapters 8, 9, and 10, where we explore the
various strategies that are best suited to different stages in the development of markets.
To close this chapter, we wrap up with a brief look at a tool for coping with the real-
ity of the changing world around us, and we consider the perils of swimming against the
changing tide.

ANTICIPATING AND RESPONDING TO ENVIRONMENTAL CHANGE
Critical changes in macroenvironmental conditions often call for changes in the firm’s
strategy. Such changes can be proactive or reactive, or both. To the extent that a firm
identifies and effectively deals with key trends before its competitors do, it is more likely
to win and retain competitive advantage. In any case, management needs systems to help
identify, evaluate, and respond to environmental events that may affect the firm’s longer-
term profitability and position. One such approach uses an opportunity/threat matrix to
better assess the impact and the timing of an event, followed by the development of an
appropriate response strategy. This approach is discussed as follows.

Impact and Timing of Event
In any given period, many environmental events that could have an impact on the firm—
either positively or negatively—may be detected. Somehow, management must determine
the probability of their occurrence and the degree of impact (on profitability and/or market
share) of each event. One relatively simple way to accomplish these tasks is to use a 2 × 2
dimensional opportunity/threat matrix such as that shown in Exhibit 4.16. This example
contains four potential environmental events that the high-speed access division of a large
European telecommunications company might have identified as worthy of concern in
2012. The probability of each occurring by the year 2017 was rated, as was the impact on
the company in terms of profitability or market share. The event likely both to occur by
2017 and to have the greatest impact appears in the upper left-hand box. At the very least,
such an event should be examined closely, including estimating with as much precision as
possible its impact on profitability and market share.

EXHIBIT 4.16 Opportunity/Threat Matrix for a European Telecommunications Company in 2012

Probability of Occurrence (2017)
Level of Impact on
High Low
Company*
High 4 1
Low 2 3

1. Wireless communications technology will make networks based on fiber and copper wires redundant.

2. Cloud technology will provide for the storage and accessing of vast quantities of data at affordable costs.

3. Consumers will move most of their TV viewing from televisions to personal computers.

4. Voice-over-internet Protocol (VoIP) will become the dominant force in the telecommunications industry.

*Profits or market share or both

wal28949_ch04_085-113.indd 110 14/12/12 12:50 PM

Marketing For the market offering on which your marketing plan or consulting project is based. favorable moves can be reinforced through effective market- like them or not. trends will always other trends. The graying of the world population is a demographic one. Like mosquitoes or cooling breezes on a humid summer evening. Those with a low probability of occurrence and low impact. We deal with the challenges in gathering such information through marketing research and its use in forecasting in the next chapter. Thus. the influence of macro trends like these can be pervasive and powerful. of course. You should also identify. the few critical success factors that apply in your industry. such as number 3 in the exhibit. Trade associations and/or trade magazines should typically be among the citations. Gov- Like mosquitoes or cooling breezes on a ernments concerned about global warming mandated this change. as well as qualitative data regarding the five forces.indd 111 14/12/12 12:50 PM . Gaining such an understanding requires information. All these trends influence the fortunes of some companies. In general. • Your macro-trend analysis should cover any of the six macro-environmental categories that are relevant and should prioritize their importance to your business. use internet and other available secondary resources to conduct macro-level market and industry analyses. Chapter 4 Understanding Market Opportunities 111 The opportunity/threat matrix enables the examination of a large number of events in such a way that management can focus on the most important ones. Similarly. But doing managers can do about them. at least for the mo- ment. life is better swimming downstream. running counter to such trends. with a reference list at the end. The question is what ing. accompanied by favorable trends. The question is what managers can do about them. For some trends. events such as number 4 in the exhibit with a high probability of occurring and having a high im- pact should be closely monitored. Such decisions cannot be made in a vacuum. • Your evidence of market size and growth rate should. such as the shift toward or away from casual dress in the be present. The seven domains framework introduced in this chapter sets the market and competi- tive context—the 4 Cs—for the marketing decisions to be addressed in the remainder of this book. Global warming and increased attention to sustainability are trends related to our natural envi- ronment. As we have seen. for without a deep understanding of the context in which one goes to market. than up- stream. but not others. aggregate revenue of the market. ideally. Your Plan Exercise analyses should include a macro trend analysis encompassing all relevant macro-trend categories and should uncover quantitative data that provides evidence of the size and growth rate of the overall market. and aggregate units of the good or service consumed by the market. indicate market size using multiple measures. marketers and other managers can do little but react and adapt. sometimes. trends will always be present. For humid summer evening. manufacturers of products sold in spray containers were Strategic Issue required to find new propellants less harmful to the ozone layer. Your analyses should meet the following tests: • The source for each item of data or each trend should be cited. In the 1990s. whether marketing managers workplace. SWIMMING UPSTREAM OR DOWNSTREAM: AN IMPORTANT STRATEGIC CHOICE Fitness is a social trend. whether marketing managers like them or not. should probably be dropped. wal28949_ch04_085-113. one simply cannot develop effective strategies that take into account the market and competitive realities. unfavorable ones can be mitigated. these things requires that important trends be noticed and understood. if you can. Events with a low probability/high impact (number 1) should be reexamined less frequently to determine whether the impact rating remains sound. such as number of potential customers.

"China Unicom’s Smart Call on Cheap Phones.mhhe. Andrew Parker and Paul Taylor. 4. 2012. You are an entrepreneur who has developed a packaging technology that instantly chills single- serving containers of cold beverages such as beer. . would be beverage-makers." Bloomberg Businessweek. What problems and opportunities does this present for what consumer and industrial goods? 3. “Banishing the Negative: How Kodak Is Developing Its Blueprint for a Digital Trans- formation.” Financial Times. 1. May 25.” Financial Times. therefore. Norma Cohen and Clive Cookson.” Financial Times. 18. Mello Jr.” International Herald Tribune. The cus- Questions tomers of such packaging. pp.” The Wall Street Journal Sunday. June 19. “Mobile Businesses Send out Differing Signal.” Financial Times.” BusinessWeek International Edition. FTIT Review. 2000. “Not Just Talk. . Edmond Lococo. p. http://www. 109. June 7. February 15. “Basking in 3G’s Rays. The president of a large manufacturer of household appliances (such as dishwashing machines. 19. 2010. January 26. 5. 65–66. January 20. Amy Yee. what do you think lies ahead for the worldwide automotive industry? 4. assess this opportunity and describe any strategic decisions you could make to maximize the opportunity’s attractiveness. and Europe has asked you to develop a system for monitoring and evaluating the impact of major environmental trends on the company’s strategies and programs. “The Race to Rule Mobile.” Financial Times. and evaluate the impact of each issue. p.” Financial Times. 2006. H8. January 19. “Asia Gets Hooked on Wireless. • Critical success factors should be just a few and might be inferred from trade magazine articles for the industry in question. 2000." Gartner. p. Reuters Helsinki. 2005. 2010. “Online Overseas. 2005.indd 112 14/12/12 12:50 PM . 1999.” Financial Times. 2012. identify important environmental issues. • You should draw summary conclusions about the attractiveness of the overall market and the industry at the macro level. You are not certain whether your technology is patentable. p.com/printable/ article/id. September 19. “Darling to Dog to .. refrigerators. February 14. pp. p. November 14. 18. January 29. O’Brien. 2. and fruit juices. 34–40. p. 2004. p. January 30. 15. 2004.” New York Times. 15. "Nokia Defends Ground Plans for a Turnaround. 1. June 18. Briefly describe your proposed system in terms of how you would organize your scanning activities. May 16. 13. 13.255692/printable. Taking into account the five competitive forces. 18.” Financial Times. December 6. “Smart Phones. Mexico. “Cell Phones for the People. Steve Frank. “The Lex Col- umn.” BusinessWeek. the Fight Is for Second Place. “The Ageing Business: Companies and Marketers Wrestle with Adapting Their Products to Older Consumers’ Demands.” BusinessWeek International Edition. February 21.” The Economist. “AT&T’s iMess. Japan. 2. 112 Section Two Opportunity Analysis • Your five forces analysis should draw evidence-based conclusions as to the favorability of each of the five forces and of the overall attractiveness of your industry. Bea Hunt. “For Cellphone Makers. “The Planet Is Ever Greyer: But as Longevity Rises Faster Than Forecast. 2010. 2000. 2011. February 15. wal28949_ch04_085-113. p. Francesco Guerrera and Jonathan Birchall. Using the seven domains framework. 65. February 13. 2007. p. May 4. Discussion 1." The Economic Times Hyderabad. Additional self-diagnostic questions to test your ability to apply the analytical tools and concepts in this chapter to strategic decision making may be found at the book’s website at www. Information on the cellular telephone business in the 21st century comes from the following Endnotes sources: Moon Ihlwan.. Stephen Baker. “Boom Time. 2012. 3. Drinking water pollution (contamination) has become a serious problem in many countries.html. 13. John P. carbonated drinks. the Elderly Are Also Becoming Healthier. p. and dryers) that are manufactured and sold in the United States.” BusinessWeek. 2008. Kevin J.” Bloomberg Businessweek. p. pp. "Mobile Phone Sales Sink for First Time in Three Years.pcworld. Andy Reinhardt. October 18. 2012. “A Tough Call. Stephen Baker. Dan Roberts. washers.com/ walker8e. Roben Farzad. 24–25. 2000. p. p. Joe Leahy.

For the classic articles on competencies and capabilities. ibid. 1–16.co. and C. 41–44. “A Club in Need of a New Vision. February 14. 36–41. "East or Famine.254_157720." February 27. The Economist. p. 35. “The Capabili- ties of Market-Driven Organizations. “How to Avoid the Value Trap.com. 11. “Airlines and the Canine Features of Unprofitable Industries. pp." May 31.” Journal of Marketing 75 (November 2011). 25. June 4. 1–15. Namwoon Kim. 13. 2009. Time.” Financial Times. pp. Michael Porter." p. see George S. 2005.” Journal of Marketing 75 (January 2011).” Bloomberg. 77–78. pp. 24. The New Business Road Test. Dave Gram. 2012. "UN Aids World AIDS Day Report 2011. Martin Wolf. Competitive Strategy (New York: Free Press. and Prosperity: Five Trends that Promise to Transform the World’s Population within 50 Years. “People.” Journal of Marketing 58 (October 1994). Justin Fox.bloomberg. Plagues. The New Business Road Test.unaids. 2004). John Parker. p. pp. 2010. The Economist.. 37–52.com/2009/02/25/the-re-regulation-of-the-american-financial-system/ 19. 26. “Burgeoning Bourgeoisie. http://metronews. The Economist.” Journal of Marketing 65 (January 2001).org. Rajkumar Venkatesan. “Is Market Orientation a Source of Sustainable Competitive Advantage or Simply the Cost of Competing?” Journal of Marketing 75 (January 2011). 13 (London: Prentice Hall/FT. For an example of such a checklist. pp.” Fortune. pp. 2004. “Social Effects on Customer Retention." February 25. Eli Jones. 17. 2012. or Two-Edged Sword for Incumbents? Unraveling the Paradox from a Contingency Perspective. chap. May 26. 76–78. Day. p. April 21. 15. wal28949_ch04_085-113. 34. "The Third Industrial Revolution. MA: Harvard Business School Press. Irit Nitzan and Barak Libai. K. "Following the Footprints. 79–91. April 2. “Chemical Reaction. “GM: Live Green or Die. 32.” April 29.unaids. pp. pp. 30. pp. “The Effects of Business and Political Ties on Firm Performance: Evidence from China. The Economist. The New Business Road Test. 10.ca/news/ world/244957/fair-trade-movement-faces-crossroad/. 9.” The Economist.indd 113 14/12/12 12:50 PM . 20. The Economist. 17. "Weaving the World Together. see Mullins. www. Patrick Barwise and Seán Meehan. pp. 2. 6. June 10. Liz Neporent and Michele Bibbey.html. Shibin Sheng. 7. The New Business Road Test. Steve Rothwell. p. 1980).” www. Prahalad and Gary Hamel. Jin K. 21. 2011. 2003.” Fortune European Edition. 2011. 31. 33. 18. and Robert P. "A Third Industrial Revolution." Special Report. February 27. p. see John W.on-fuel-slower-traffic-growth-html. and Hong-Bumm Kim. 2003. Kumar. Mullins. "Fair Trade Movement Faces Crossroad. 16–30. http://business. 13–15. 2009.uk/dietandfitness/getfit/cardio/articles/ 0.” Financial Times. 29. “Kraft Blends Ethics with Coffee Beans. 2012. 24–38. 23. 1–14. chap." Technology Quarterly. see Mullins.00. "The Re-regulation of the American Financial System. One-. p. 106. 2002. Simply Better: Winning and Keeping Customers by Deliver- ing What Matters Most (Cambridge. October 7. 2008." April 21. chap. "UN AIDS Day Special Report. 28.com/news/2011-05-23/23/ ryanair-expects-similar-profit-this-year. and Julie Juan Li. David Welch. “The Ten Tricks of Buying Home Exercise Equipment. For more detail on micro-market attractiveness. 2007. Chapter 4 Understanding Market Opportunities 113 6.” BusinessWeek European Edition. chap. For more on how crucial flaws may be mitigated or resolved. 13." 2011. “Ryanair’s First-Ever Capacity Reduction Marks End of Discount- Airline Boom.” Harvard Business Review 68 (May–June 1990). Sara Silver. 6.ivillage. Leone. Mullins. 9. “The Core Competence of the Corporation. 27. 2010). at http://www." November 19. V. pp.” Financial Times. “Entry Barriers: A Dull-. 14. pp.time. 16. 12. p. Han. Nicholas Varchaver. The Economist. 8. www. Quoted in Herb Greenburg. 5. 194. September 27. 5. 23. Kevin Zheng Zhou. 22.

Chapter Five Measuring Market Opportunities: Forecasting and Market Knowledge Intel’s Secret Weapon1 Genevieve Bell has a radical idea. interaction designers and How Do Anthropology human factors engineers is charged with setting and Ethnography Work? research directions.indd 114 14/12/12 2:22 PM . and a little bit of us- “Imagine. Bell has fun- Bell’s Charter at Intel damentally changed how the company envisions. 114 wal28949_ch05_114-138. what was motivating people.” she recalls. and driving consumer-centric prod. they knew they had the skills to size mar- Intel. “You cannot watch the end entation I gave. plans. every meeting of the cricket match because I am defragging my I attended was explaining what an anthropologist hard drive. and develops its product platforms. leading new product strategy and definition. or even the future of technology itself.” says Bell. Experience Group. but I think the on board the ways in which PCs don’t work and sense of what was missing was this notion about applied that to other technologies such as our re. what did they care frigerators or televisions. In Bell’s view. her charter at Intel is straightforward. Bell was given her became mass market. lective sense in Intel’s senior management that they ing technology that people don’t really want into didn’t know what was going to happen when PCs the market at an alarming pace. “I’m about and was there an opportunity if you under- terribly sorry. the only who as a very small girl used to kill things—frogs female among Intel’s roster of top technical talent and the like—growing up in an aboriginal commu- dubbed Intel Fellows. you cannot have that cold milk until stood the things to drive new uses of technology.” was.” Her team of social scientists. thinks the world would be a Why is there a role like Bell’s at Intel today? “I better place if we can better understand how peo.” we would all go insane. every class I taught. kets and how to survey people. wherever they can find users of technology— All this is everyday work for this wiry-haired woman people on holiday. a part of every pres- ers!” or your TV said. joined Intel in 1998.Bell. what was user cen- tered design and why it was going to be a useful tool at Intel. “There was a col- ple would like to use technology. and Director of Intel’s User nity in Australia’s outback. what ethnography was. “If we were willing to take ability work was going on even then. an event that may change research. “For many years thereafter.” I’ve rebooted myself and downloaded new driv. people in their workplace. “To provide insights and inspire innovation. They knew they had market own lab at Intel in 2010.” In her 13 years at Intel. rather than toss. Bell and her team spend their time hanging out uct innovation and thinking across the company. If your fridge said.

has become one One of the key tools in the modern anthropolo. I don’t know why to be subservient to the products we buy. Or if she fails in somehow different from their parents’ generation. rather we believe that because we were all 16 once.” Seeing the world as it really is and chips are not very relevant in some markets. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 115 people at home with their families in every corner television. we mostly don’t behave now as we did then. “Anthropology continues to be a In a study of early adopters of social networking really important way to bring voices into the tech- technology. It doesn’t demand so much when I have of the planet. Says Bell.” Let’s hope people like to happen. “At Intel. internet. investments in productive capacity. and stop when we are done. how does Can Bell’s Work Make a Difference? it frustrate you. “Genevieve and her team make us engineers think differently. These plans can take many forms. what do you hate about it. so Intel’s speedy but pricey Celeron badly designed. Perhaps if Bell has her way. an early anthropologist. means text on trical outlets are everywhere and furniture is really a cell phone. Benedict. It is much easier to go back to watching Benedict and Bell prevail! STRATEGIC CHALLENGES ADDRESSED IN CHAPTER 5 Entrepreneurs and managers in established firms like Intel need to develop knowledge about their market and industry and synthesize that knowledge into tangible plans that their organizations can act on. “We intend to use Bell’s expertise heavily as we focus on emerging growth markets. her quest. Once wal28949_ch05_114-138. and than masters of them. And the rest of us will continue will do for the rest of your life. and other consumer electronics says Bell. what Bell. The old takes of its own home—you realize that elec. ever-faster chips and market them everywhere.” says Stephen Paw- What is Bell Learning lowski.indd 115 14/12/12 2:22 PM . Apple will continue its inroads into the “I don’t think it’s as easy as we sometimes think. She has worked tire- now put digital cameras in the hands of our research lessly to get Intel chip designers to not simply build participants. who brings to her craft a doctorate in anthro- can’t you live without?” pology from Stanford University. marketing plans must be developed to win support and resources to permit the product’s launch. we try to start with people this other thing I’m trying to do!” first—we ask questions about who they are and what they care about. “We fall into the trap of assuming that markets with its legendary skills at doing what Bell what you are and what you do at 16 is what you hopes Intel can do. Ruth just had a baby and was no longer blogging as much. For new product managers in established firms.” One of the questions Bell and her team are some.” PC. “We can humanity and technology. had a great “Have you ever tried to breast-feed a baby and use line—“The role of the anthropologist is to make a laptop?” the woman asked. annual budgets are prepared to guide decision making for the coming year. “It’s just not going the world safe for people. these planning and budgeting activities begin with a sales forecast. These decisions determine staffing. levels of operating expense.” As Bell puts it. For entrepreneurs a business plan may be needed to raise the necessary capital to start the venture. of the world’s leading thinkers on the mash-up of gist’s toolkit is the digital camera. one day we’ll all be times asked is whether today’s Generation X—who using PCs that actually start when we ask them to seem to be digitally connected all the time—are start. Intel’s though other people’s eyes is what anthropologists cheaper and less power-hungry Atom chips are a do that traditional market researchers often miss. In organizations of all kinds. who leads Intel’s chip architecture research about Generation X? team. In al- most every case. Bell spoke to a young woman who had nology realm that really need to be there. There is nothing like the film a five-year. and so on. better way to go. we also ask questions about technology: What do you love about it. smartphone. in many parts of the world.

especially in today’s rapidly changing markets. Thus. and very briefly. Given the stakes and the risks entailed in being very wrong with a forecast. even modest ones done quickly—can be a risky proposition indeed. and we discuss their limita- We provide a menu of evidence-based tions. wal28949_ch05_114-138. and systems that organize and track information about client contact—that keep marketers in touch with what’s going on in the marketplace. marketing databases. the various activities and investments needed to support the planned sales level are budgeted. which we explore in more detail later in this chapter. Some forecasts are based on extensive and expensive research. each of which is diffuse into the market over time. So forecast we must. As we have seen. forecasting plays a central role in all kinds of planning and budgeting in all kinds of businesses and other organizations. We provide a menu of evidence-based forecasting methods. some too low. where data is gathered about a particular marketing challenge or situation. and still others on uninformed hunches. Thus we probe some of the common pitfalls that users of marketing research will encounter.indd 116 14/12/12 2:22 PM . Consumer wants and needs shift. buffeted by the winds of ever- changing macro trends. The future is inherently uncertain. we address several systematic sources of information—internal record systems. competitive intelligence systems. Forecasting is an inherently difficult task be- cause no one has a perfect crystal ball. who need to be well-informed about the market and competitive context that we’ve dealt with in the previ- ous chapters of this book. is almost always called for. and we identify some of the questions such users should ask. Competitors come and go. however. But how? A FORECASTER’S TOOL KIT: A TOOL FOR EVERY FORECASTING SETTING Before choosing a method to prepare a forecast. even if time and money are scarce. there’s the size of the potential market. Finally. instead of a wild guess. for both new and existing products or businesses. we assume the reader has already learned the basics of planning and conducting marketing research. one first must know what is to be esti- mated or forecasted. in Chapter 5. so that the output of that research delivers relevant qualitative and quantitative data as well as an evidence- based sales forecast that’s likely to pass muster. we touch on marketing research. but not others. but not others. First. we address the challenges in estimating market potential and forecasting sales. the likely de- mand from all actual and potential buyers of a product or product class. a source of insight into the particu- useful in some situations. 116 Section Two Opportunity Analysis a sales figure is agreed to. that is. In this part of the chapter. we suggest an approach for planning the marketing research that must underpin a marketing plan. each of which Strategic Issue is useful in some situations. Most forecasts turn out too high. some effort to prepare an evidence-based forecast. New technologies from Intel and others sweep away old ones. An estimate of market potential often serves as a starting point for preparing a sales forecast. In the Marketing Plan Exercise at the end of the chapter. others on small-scale inquiries. We also examine the process by which innovative new products forecasting methods. Designing such systems effectively is crucial for marketers. Making strategic marketing decisions based on hunches—instead of more carefully thought-out research inquiries. EVERY FORECAST IS WRONG! We know of no manager who has ever seen a forecast that came in exactly on the money. we deal with some key issues that enable managers and entrepre- neurs to bring life to their dreams. First. which we do not cover here. Next. larly difficult task of forecasting sales of innovative new products.

this approach would force them to think clearly about the drivers of demand for each market segment or product line and thus better understand the real potential of their business and its parts. measured perhaps in several ways: in numbers of telephone users.indd 117 14/12/12 2:22 PM . For starters. they would be forced to make explicit assumptions about the drivers of demand in each category. current sales trends. year sales. such an approach facilitated “what if” planning. But coming up with hard numbers for market potential and sales revenue was another story altogether. African Communications Group (ACG).1. common in decentralized firms. see Exhibit 5. They also knew that among the most critical elements of any business plan was the sales forecast. those who were actually using pay phones in Tanzania at the time of the forecast. There was also the size of the currently penetrated market. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 117 Such estimates are particularly crucial for aspiring entrepreneurs. perhaps using aggre- gate economic data. and the like. Second. a central person or persons take the responsibility for forecasting and prepare an overall forecast. each part of the Strategic Issue firm prepares its own sales forecast. voice-mail fees. They would also need a sales forecast. retailing divisions combine both methods to forecast next- forecast: top-down and bottom-up. How might Maddy and Laguë do these things? Established organizations employ two broad approaches for preparing a sales forecast: top-down and bottom-up. to obtain the financing they would need and to obtain the necessary licenses. An all-too-common wal28949_ch05_114-138. This market was composed of those consumers who were likely to have both the willingness and ability to buy and would use a phone card or one of ACG’s other services at one of ACG’s pay phones. could Maddy and Laguë choose from? There are numerous evidence-based methods for estimating market potential and forecasting sales and we examine their merits and limitations in the following sections. If the sales forecast was well supported and credible. Various combinations of market segments and/or product lines could be combined to build a business plan that looked viable. consumers. in Tanzania in the early 1990s. such as small retailers. in which they predicted sales revenues for ACG for five years or so. The bottom-up logic also applied to Maddy and Laguë’s task. The secondary data they gathered convinced them that the market and industry were sufficiently attractive. and in dollars or Tanzanian shillings. Maddy and Laguë believed the rest of the pieces would fall into place. Third. and so on. Investors would also want to know these figures—the size of the potential and penetrated markets for the market segments Maddy and Laguë intend to serve. Such was the case for two business school graduates who set out to build a pay telephone business. but they would serve as a key litmus test for prospective investors. pager fees. For an example of how managers broad approaches for preparing a sales at Gap Inc. before the wave of cell telephone development washed across sub-Saharan Africa. Using the bottom-up approach presented numerous advantages. and the parts are aggregated to cre- Established organizations employ two ate the forecast for the firm as a whole. they would have to prepare a cred- ible business plan. These pieces could be market segments. they knew that prospective investors would want to know how large the potential market for telephone services would be in the coming years. assumptions they could debate—and support with evidence gathered from their research—with prospective investors and which they could later verify as the busi- ness unfolds. in numbers and/or minutes of calls. What forecasting methods. their target market. Monique Maddy and Come Laguë knew that. or product lines. Under the bottom-up approach. where levels of risk and uncertainty are especially high. They could break their anticipated demand into pieces and sum the components to create the summary forecast. mobile businesspeople. or tools. Not only would the sales numbers serve as a starting point from which most of the other numbers in the plan would be developed. First. Under the top-down approach. or other methods we describe shortly. such as revenue from phone cards or individual pay phones.

see www. Old Navy finds that the different processes to- can achieve for the next year. not evidenced-based—the SWAG method (Silly Wild-@*# Guess)—is not con- doned here. knowledgeable input to the forecast as well as sub- erates a forecast of what level of sales his or her sequent commitment to “make the numbers. wants to forecast demand for the replacement automobile tire market in Asia for the next year. statistical methods have important limitations. curement and expense budgets is determined. switches.gap. faxes.” Most category—women’s knit tops.indd 118 14/12/12 2:22 PM . Consumers had to wait. to forecast the future based on an extrapolation of the past. especially because Michelin has years of experience with which to calibrate its statistical model. summing stores and groups of McClelland. though there is little else to support some forecasts! Statistical Methods Statistical methods use past history and various statistical techniques. the last few years’ demand. to get additional lines. forecasting sales for corporate growth objectives.2 This method is typically not useful for ACG or other entrepreneurs or new product managers charged with forecasting sales for a new product or new business.com. Group merchandise man. and so on— important. Most important of these is that statistical methods generally assume that the future will look very much like the past. When tire manufacturers produce automo- bile tires that last 80. ity failed to allow for rapidly increasing use of the internet. Simultaneously. Suddenly. the annual demand wal28949_ch05_114-138. Republic. Such a pro- cedure is likely to result in a more accurate forecast than other methods. Both top-down the effort to prepare such a forecast is considerable. and they were not happy about it! Similarly. for established products. July–August 2000. US WEST (now Strategic Issue CenturyLink). and other relevant factors to forecast market potential as well as Michelin’s own replacement tire sales for the coming year.000 miles instead of 30. Gap. gether with the ensuing discussion lead to substantially agers then provide their input and sum these numbers to better forecasts. broad involvement in the process helps to ensure both At Old Navy. and there was not enough physical plant—cable in the ground. the and bottom-up approaches are used. and Anna Sheen operations organization. using macroeconomic data. ran into trouble the future will look very much like the past. Ananth Raman. when its statistical models used to predict needs for telephone capac- Sometimes this is not the case. since there is no history in their venture on which to base a statistical forecast. and other factors. the tire manufacturer. Sometimes this is not the case. including how much merchan. such as multiple regression or time series analysis.1 Forecasting Next Year’s Sales at Gap At international retailer Gap Inc. The the next year for each of its key brands—Gap. “Rocket Science Retalling Is Almost Here: Are You stores. Banana three forecasts are then compared. sometimes for months. create a total forecast from a merchandising perspective. for example. statistical models used with- out adequate judgment may not keep pace. predictions of GDP for the region. the regional Bell telephone company serving the Rocky Statistical methods generally assume that Mountain and Northwest regions of the United States.. and Old Navy—is an important process that and a final figure on which to base merchandise pro- drives a host of decisions. method. the average number of lines per home skyrocketed. a top-down figure is prepared at Ready?” Harvard Business Review. Fisher. men’s jeans. each merchandiser gen. A second bottom-up forecast is generated by the store Source: Marshal L. When Michelin. statistical methods are extremely use- ful. For more on headquarters in California. and second lines for teenagers in American homes. 118 Section Two Opportunity Analysis EXHIBIT 5. As with all forecasting methods.000 to 50. In established firms. and so on—to accommodate the growing demand. if product or market characteristics change.000 miles. it can build a statistical model using such factors as the number and age of vehicles currently on the road in Asia. differences debated. Though dise to plan to buy for the coming year.

As part of their research in Dar es Salaam. are increasingly done online. what people fact.indd 119 14/12/12 2:22 PM . however. These methods can be done with various kinds of respondents. however. since the product often does not yet exist. and in today’s internet age. at the library. suppliers. Second. complet- ing a survey of salesforce opinion. or on the internet—data collection is both faster and cheaper than if a new study like the one Maddy and Laguë Strategic Issue conducted must be designed and carried out. For example. Consumers. bottom-up forecast of market potential. however. except actually do. Revenue for most pay phones fell into the US $100 to $150 range. 4 By combining these data with demographic data on the Tanzanian population. Maddy and Laguë conducted a study of pay phone use in Tanzania to find out how many minutes per day the typical pay phone was used.3 Like statistical methods. market segment by market segment. For new-to-the-world Observation-based forecasting is attractive products. trade association executives. Maddy and Laguë surveyed pay phone customers to find out more about them. are two ways to get real purchase data about new-to-the-world products. For one. If automobile manufacturers were to change the num- ber of wheels on the typical car from four. see Exhibit 5. 20 percent were students or teachers. the persons who are surveyed may not be knowledgeable. Experts of various kinds—members of the distribu- tion channel. which we discuss later in this section. Surveys and focus groups possess important limitations. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 119 for replacement tires is reduced. how often. Business customers spent an average of US$10 per week for 14 pay phone calls. Surveys or Focus Groups Another common way to forecast sales or estimate market potential is to conduct surveys or focus groups. Buyers can also be asked about their current buying behavior: what they currently buy. If behavioral or usage data can be found from existing second- ary sources—in company files. and secondary because it is based on what people data are not available. after being shown a state- ment of the product concept (a concept test) or a prototype or sample of the product. observation is typically not possible. For one common approach to doing so. Had there been no pay phones in Tanzania or a similar country. or how much they use. what people say is not always what people do. observation would not have been possible. A whopping 65 percent were using a pay phone because they lacked access to another working phone—good news for the ACG concept! Sixty-three percent were business customers. consultants. Maddy and Laguë now had what they needed to prepare an evidence-based. can be asked how likely they are to buy. the old statistical models would also be in trouble. but if asked wal28949_ch05_114-138. Strategic Issue For one. in concept form. many large-capacity pickup trucks sold in the United States feature six wheels. Salespeople can be asked how much they are likely to sell. and 17 percent were other nonbusiness customers. Consumer sur- Surveys and focus groups possess important veys of buyer intention are always heavily discounted to allow for this limitations. creating a survey of buyers’ intentions. and so on—can also be surveyed. and nonbusiness custom- ers spent US$6 per week for 12 calls. Market tests and concept tests. observation-based forecasting is attractive because it is based on what people actually do. say is not always what people do. Their study showed that an av- erage of 150 three-minute calls were made per day at the 60 working pay phones then provided by other companies in Dar es Salaam.2. Observation Another method for preparing an evidence-based forecast is to directly observe or gather existing data about what real consumers do in the product-market of interest.

” they will surely provide a response.5%.9% Might or might not buy 22% Count as zero Probably or definitely 8% Count as zero would not buy Totals 100% 21. Kasturi Rangan. Similar logic is useful in a variety of forecasting situations.3 43% ! . while survey methods (Are you likely to buy replacement tires this year? How often are you likely to use a pay phone?) are based on what people say. “A Survey of Buyers’ Intentions: What People Say Is Not What They Do” from Nestlé Refrigerated Foods: Contadina Pasta and Pizza. reduced the 70% figure by more than half.8 " 21.2 A Survey of Buyers’ Intentions: What People Say Is Not What They Do When Nestlé’s refrigerated foods division in the United States was considering whether to acquire Lam- bert’s Pasta and Cheese. Nestlé used a concept test in which consumers were asked. on what people have actually done or bought (e. for which product prototypes are often either not available or extremely expensive to produce. The results were as shown in the first two columns in the following table. Analogy An approach often used for new product forecasting where neither statistical methods nor observations are possible is to forecast the sales or market potential for a new prod- uct or product class by analogy. When Danone.indd 120 14/12/12 2:22 PM .9% " 34.” These adjustments. 9-595-035. how likely they were to try the fresh pasta product. 1995. statistical and observational methods.6% Probably would buy 43% Multiply by . to 34. see www. case no.6% # 12. Rather than conduct surveys to wal28949_ch05_114-138. If consumers are asked if they will buy an “old world pasta sauce with homemade flavor. the product is compared with simi- lar historical data that are available. shown in columns three and four. This method is also used for new-to-the-world high-technology products. at least in part.5% Even though 70% of consumers surveyed indicated they were likely to buy. for their opinion. Source: Marie Bell and V.. they will probably provide it! Third. what people imagine about a prod- uct concept in a survey may not be what is actually delivered once the product is launched. Reprinted by permission. are superior to survey methods of forecasting because such methods are based. the number of old cars actually on the road or the length of pay phone calls in Tanzania).3 " 12. plans to introduce a new flavor. Boston: Harvard Business School. 120 Section Two Opportunity Analysis EXHIBIT 5. its managers look at the sales history of ear- lier introductions to forecast the sales for the newest flavor. Copyright © 1995 by the President and Fellows of Harvard College. Under this method. Nestlé’s experience indicated that these “top two box” percentages should be cut sharply: “definitely” responses were reduced by 20%. To do so. it wanted to forecast the likely first-year sales volume if the acquisition were completed. Most consumer product manufacturers who employ concept tests use similar rules of thumb when interpreting purchase intent data for forecasting purposes because they have learned that what people say they will buy exceeds what they will actually buy. and “maybe” responses were considered as “no. where adequate data or settings are available in which to apply them. Whether they will actually like the taste and texture of the sauce that the lab develops is another story! In general. Rule of Thumb Reduction Percentage of Market Deemed Purchase Intent % Response for Forecasting Purposes Likely to Actually Buy Definitely would buy 27% Multiply by . among other things. while “probably” responses were reduced by 70%. the leading marketer of yogurt in Europe.g. a fresh pasta company.com.8 27% ! . a less reliable indicator of their future behavior.nestle.

there are limitations.indd 121 14/12/12 2:22 PM . Second. since capable and informed judgment is required for all methods. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 121 ask consumers about their likelihood to buy a product they can hardly imagine (What would someone have said in 1978 about his or her likelihood to buy a personal com- puter?). Use of test markets has declined over the competitors can engage in marketing tactics to mislead the company past few decades for two reasons. the free peer-to-peer music- sharing site. an international manufacturer and retailer of shoes and fashion accessories. can- not be discounted. which eventually convinced the courts that Napster was illegal). proving there was vibrant demand for a portable music player. competitors can buy the data collected through scanners at the checkout and learn the results Strategic Issue of the test market without bearing the expense. whether it is used solely and intuitively or in concert with evidence-based methods. Such conditions must be taken into account. I rely on my sense of color and texture. First. Nonetheless. Napster. it is often diffi- cult for them to defend their forecasts against those prepared by evidence-based methods when the two differ. “Trend forecasting is a visceral thing that cannot be trained.”6 Those with sufficient experience in a market they know well may be quite accurate in their intuitive forecasts. I just know.5 As always. or intuition. in today’s data-intensive environment. The use of analogs like these. the new product and its pricing are never exactly like that to which the analogy is drawn. Experiments and Market Tests Market tests of various kinds are the last of our six commonly used forecasting methods. More diabolically. Judgment While we hesitate to call this a forecasting method of its own. especially for consumer products sold through supermarkets and mass merchants. even effective ones. Used largely for new consumer products. First. . Downloaded music from Napster was free. sometimes forecasts are made solely on the basis of experienced judgment. . was all the rage with consumers (though not with the music publishing industry. had a number of available analogs with which to shed light on the likely demand for paid downloading of music from iTunes and for the demand for a user-friendly portable device—the iPod—on which to play it. Some decision makers. Use of live test markets has declined over the past few decades for two reasons. they are expensive to conduct because significant quantities of the new product must be produced and marketing activities of various kinds must be paid for. Apple. Indeed. forecasters consider related product introductions with which the new product may be compared. the Sony Walkman had sold more than 300 million units. but Apple planned to ask consumers to pay for their tunes. More im- portantly. What price should Apple charge. First. are intuitive in their decision processes and cannot always articulate the basis for their judg- ments. offering deep wal28949_ch05_114-138. the importance of experienced judgment in forecasting. . Said a footwear buyer at Nine West Group. market and competitive conditions may vary from when the analogous product was launched. Unfortunately. market tests such as experimental test markets may be done under controlled experimental conditions in research laboratories or in live test markets with real advertising and promotion and distribution in stores. but at times I cannot explain why I feel a certain way . and with free downloads available. conducting the test by increasing sampling programs. would customers be willing to pay anything at all? Sec- ond. in developing its now wildly successful music business. as well as anti- logs—previous examples one explicitly decides not to copy—is a useful approach for many entrepreneurs as they mold their initial ideas into more refined versions that will actually work.

have also been devel- oped. 9-595-035 (Boston: Harvard Business School Publishing. 12. as measured by marketing research data and the company’s planned marketing program.4). The market potential is then multiplied by various fractional factors that. “Chain Reaction Forecast: Trial of Fresh Pasta. households Similar chain ratio logic is useful in a variety of forecasting settings.3. see www. pre- dict the portion of the overall market potential that one firm or product can expect to obtain. the factors reflect the appeal of the product to consumers. and Pizza.5% 26.3. Other quantitative methods. Source: Marie Bell and V. Kasturi Rangan.8 million ! 70% 9. Experimental test markets. In Exhibit 5.2 product will try if aware Awareness adjustment: based on 48% will be aware 26.2). Copyright © 1995 by the President and Fellows of Harvard College. Offers to chat rooms.3 and Exhibit 5. taken together. or e-mail lists of cur- rent customers are among the common approaches.com wal28949_ch05_114-138. especially useful for new products.S.3 Chain Ratio Forecast: Trial of Fresh Pasta Once Nestlé’s research on fresh pasta had been completed (see Exhibit 5. Other Mathematical Approaches: Chain Ratios and Indices Two additional mathematically-driven approaches to forecasting are the chain ratio calculation or the use of indices.8 discussed in the next section. it used the chain ratio method to calculate the total number of households who would try their fresh pasta.7 million ! 48% 12. Reprinted by permission.indd 122 14/12/12 2:22 PM . are still commonly used.7 million households figure from Exhibit 5. These include conjoint analysis. 122 Section Two Opportunity Analysis discounts or buy-one-get-one-free promotions. Both approaches begin with an estimate of market potential (the number of households in the target market in Exhibit 5.4 for examples apply- ing these mathematical calculations to arrive at sales forecasts.4 million market Concept purchase intent: adjusted 34. The coming of the internet has made possible a new kind of market test: an offer di- rectly to consumers on the web. given the introductory reaching 70% of trade promotion plan U. or otherwise distorting normal purchas- ing patterns in the category. the national market potential for a product category in Exhibit 5.0 million will try the likely extent of distribution in tain distribution product supermarkets. case no. interest groups.5% will try the 77. on the other hand.4 million ! 34.8 million households planned advertising level of the product will try if they find product at their store Distribution adjustment: based on The product will ob. 1995). We explore these and other internet marketing strategies in greater detail in Chapter 11. The chain ratio calculation went like this Data from Chain Ratio Research Results for: Research Calculation Result Number of households in target 77. See Exhibit 5.” from Nestlé Refriger- ated Foods: Contadina Pasta. For more on Nestlé. Use of such techniques has increased due to companies’ ability to carry out such tests quickly and at low cost.nestle. EXHIBIT 5. and methods to mathematically model the diffusion of innovation process for consumer durables.7 a method to forecast the impact on consumer de- mand of different combinations of attributes that might be included in a new product. which shows the more detailed of the two approaches.

The time dimension is a function of the rate at which people in the target group (those ultimately adopting) move through the five stages in the adoption process. Lack of awareness and limited predicting the likely adoption rate for new distribution typically limit early adoption. Although the curve tends to have the same shape regardless of the product in- volved.indd 123 14/12/12 2:22 PM . come data (weight " .4 Estimating Market Potential Using Indices In many countries there are published indices of buy. indices. the percentage of people adopting a new product over time resembles an S curve. These region. If plotted on a cumulative basis.3). the faster will be the rate at which the in- novative new product’s sales ramp up. They are. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 123 EXHIBIT 5. Ratios greater than 1. service. the product is adopted by additional consumers.2). If this calculation comes to 3. various indices are useful for estimating market potential egory (toys. As we noted in the preceding section. (2) the relative advantage over other products. however. plus the percent.0 for a particular geo- ing behavior. Diffusion of innovation theory Strategic Issue seeks to explain the adoption of an innovative product or service over Diffusion theory is useful to managers in time among a group of potential buyers.5% of sales in a given cat. Generally. some late. Brand weighted sum of a geographical area’s percentage of development indices (BDIs) compare sales for a given national buying power for the area. plus the percentage of national Companies that use BDI indices typically calculate them retail sales for the area (weight " . for example. Not all in- dividuals respond alike. brand (for example. including the “Annual Survey of Buying graphic area (perhaps. in that they do not consider differences in con- Category development indices (CDIs) are similar sumer behavior from region to region. or whatever) to come from that in defined geographic areas. (3) the relative simplicity of the new product. restaurant sales) to population in far higher than in balmy Texas. it has also led to various modeling approaches for predicting the sales of consumer durables. and some never. wal28949_ch05_114-138. power tools. The faster the adoption rate. the length of time required differs among products—often substantially. (4) its compatibility with previously adopted ideas. they want to know how rapidly the innovation is likely to be adopted by the target market. metropolitan Chicago) indicate Power” published by Sales and Marketing Management that the area does more business than average (com- in the United States. Pizza Hut restaurants) to population. numbers. or idea until they adopt it. some tend to adopt early. As positive word about the and innovative goods or services. Trade associations or trade to rectify this imbalance by increasing the snowmobile magazines relevant to the category typically publish such advertising budget in Texas would be difficult! RATE OF DIFFUSION OF INNOVATIONS: ANOTHER PERSPECTIVE ON FORECASTING Before entrepreneurs or established marketers invest in the development and introduction of an innovation. Attempting a defined geographical area. The Buying Power Index (BPI) is a pared to the country as a whole) in that category. The CDI or BDI for indices that report the ratio of consumption in a certain snowmobiles in Minnesota (with its freezing winters) is category (for instance. product spreads. one might expect 3.9 The Adoption Process and Rate of Adoption The adoption process involves the attitudinal changes experienced by individuals from the time they first hear about a new product. based on census in.5). compared to its category overall. for their own use.50 for a given state or ing. the speed of the adoption process depends heavily on the following factors: (1) the risk (cost of product failure or dissatisfaction). crude geographical area. Dif- fusion theory is useful to managers in predicting the likely adoption rate for new and innovative goods or services. The ratio of the BDI to the CDI for age of national population located in the area (weight " a given area is an indicator of how well a brand is do- . in that area.

due to their earlier exposure to an innovation. Implications of Diffusion of Innovation Theory for Forecasting Sales of New Products and New Firms Optimistic entrepreneurs or new product managers sometimes Strategic Issue wax euphoric about the prospects for the innovations they plan to Optimistic entrepreneurs or new product bring to market. particularly at the individual level. early adopters. these adopter groups can be considered market segments.5 for an illustration and Exhibit 5. and when they allocate substantial sums to R&D (to improve performance) and marketing (to build awareness). For a discussion of the challenges in transition- ing marketing efforts from group to group.5% 34% 34% 16% Innovators Laggards wal28949_ch05_114-138.13 Because each category comprises individuals who have similar characteristics and because individuals differ substantially across categories. (5) the extent to which its trial can be accomplished on a small-scale basis. early majority. while others take years. Thus. They naively forecast that their innovations will managers sometimes naively forecast that capture 10 or 20 percent of the market in its first year. The rate at which an innovative new product category passes through the adoption pro- cess is also a function of the actions taken by the product’s marketers. see Exhibit 5. late majority.5 Diffusion of Innovation Curve Early Majority Early Adopters Late 13. while less important. including the growing influence of social media. even a compellingly 20 percent of the market in its first year.indd 124 14/12/12 2:22 PM . People who are better connected in so- cial networks tend to adopt earlier.12 Some new products move quickly through the adoption process (a new breakfast cereal). are also at work. when they have favorable reputations. five major groups can be distinguished: innovators.6 for the approximate size and characteristics of each group. See Exhibit 5. Early cell telephones scored high on most of the key adoption factors.11 Strategic Issue Thought should also be given to the legitimacy of the new product in Some new products move quickly through the eyes of its stakeholders.5% Majority 2. If we use time of adoption as a basis for classify- ing individuals. and laggards. the diffusion process may be faster when there is strong competition among competitors. Adopter Categories Early adopters differ from later adopters.10 Other factors. Legitimacy may come from associations with the adoption process (a new breakfast established firms.7. the success of historical product launches or hiring a cereal). one would use a different set of strategies to market a new product to the early adopter group than to market it to the late majority group. Thus. will win all of the innovators plus most of the early EXHIBIT 5. attractive one. People who serve as hubs in social networks may even provide clues to the future success of innovations. well-known name in the field. How likely their innovations will capture 10 or is it that a truly innovative new product. and (6) the ease with which the central idea of the new product can be communicated. 124 Section Two Opportunity Analysis and behavior. while others take years.

5 percent of those who. in the early majority group. Moore. they are the most “local. more likely to new product will prove successful before they adopt it.6 Size and Characteristics of Individual Adopter Group • Innovators represent the first 2. in.” They organizations than do later adopters. They participate in community activities who adopt. as shown in Exhibit 5. which reduces the risk of a loss arising from an Frequently. These individuals display less leadership than some cases. be receptive to new ideas.” as he calls it. They are more a part of the local scene. whose benefits are clearly defined. and tend to have high in. Early majority lenges of crossing the “chasm. their adoption of a product is so late it has early adopters. novators and early adopters have quite different Taking a product from the first group of buyers to the needs from early majority customers. trying new products before others do. will ulti- mately adopt! A good way to estimate how quickly an innovation is likely to move through the dif- fusion process is to construct a chart that rates the adoption on the six key factors in- fluencing adoption speed. They are to take unnecessary risks. these individuals adopt a new product be- early adoption. introduced in the early 1980s with great fanfare.indd 125 14/12/12 2:22 PM . regardless of the attractiveness of the market. first-year penetration levels include some but not all of the innovators. do not like viduals who ultimately adopt a new product. and want to be sure that a more venturesome than later adopters. (thereby gaining respect from their peers). Crossing the Chasm (New York: in the product’s perhaps still-unclear potential. Their HarperCollins. and participate more in community Of all the adopters. Their own techni. More typically. For many high-tech products.8. in the buyers.7 Crossing the Chasm: A Difficult Transition in the Diffusion Process In Geoffrey Moore’s classic book on the marketing of self-perception as an innovator gives them comfort in high-technology products. 1991). on the other hand.5 percent of all indi. Thus. less than the previous groups and only rarely assume a are often opinion leaders. social proximity). adopters in its first year on the market? History suggests that such penetration levels are rare at the outset. leadership role. typically require easier-to- diffusion process between the early adopters and use products. comes. cause they are forced to do so for either economic or • Early adopters represent the next 13 to 14 percent social reasons. for which there is proof that the product will perform. well under 2. has little competitive advantage. participate less in community matters than members • The early majority includes 34 percent of those who of the other groups and stubbornly resist change. EXHIBIT 5. one that is compounded willing to adopt a revolutionary new product that is by the fact that buyers in the innovator and early adop- not yet very user-friendly or whose product features ter groups are not likely to associate or talk with buyers have not yet been fully developed. An innovation that is risky for the prospective user to try or buy. is complex or incom- patible with current user behavior. is likely to be an unpleasant experience! wal28949_ch05_114-138. Moore explores the chal. introducing a new product that delivers no real benefits or lacks competitive advantage into any market. serve as vital links to mem. regardless of its high-tech profile. were such an innovation. Personal robots. and the early majority. cal skill enables them to adapt such a product to their needs and resolve some of the uncertainties inherent Sources: Geoffrey A. In adopt. bers of the early majority group (because of their • Laggards comprise the last 16 percent of adopters. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 125 EXHIBIT 5. • The late majority represents another 34 percent. it is hoped. They are often second is a difficult challenge. tend to be active in community affairs already been replaced by another new product. and for which it is difficult or expensive to try or to understand its benefits is likely to face tough sledding.

the effectiveness of all of the forecasting methods we’ve just re- viewed is often undermined by excessive optimism on the forecaster’s part. Forecasters often fall prey to what Dan Lovallo and Daniel Kahneman call the planning fallacy. 126 Section Two Opportunity Analysis EXHIBIT 5. based on the systematic use of multiple analogs. Relative simplicity # Early cell phones were easy to use. A restaurant chain that is able to turn its tables 2.15 Second. is discussed in Exhibit 5. especially in new product or new venture settings. forecasters are subject to anchoring bias. must still do local market research to ascertain how much volume a new restaurant will really generate. thus not of benefits easy to understand. Someone plan- ning to open a car wash that can process one car every seven minutes would probably be amiss in assuming sufficient demand to actually run at that rate all the time. $ Early PCs were inordinately complex to use. for better or worse. may result in vastly different sales levels. Put- ting similar 80-table restaurants in two trade areas with different population makeup and density. Common Sources of Error in Forecasting Several sources of potential error in forecasts should be recognized. trial but couldn’t understand the “bits.14 A solution they espouse.indd 126 14/12/12 2:22 PM . and RAM. First.8 Comparison of Rate of Adoption of Cellular Phones and Early Personal Computers for Home Use Adoption Factor Cell Phones Home Computers Risk #/$ Moderate risk: Cell phones were $ An expensive investment wasted. who agreed to one year’s usage. if given away to attract early adopters it turned out not to be useful.9. what the anywhere—in the car or at the advantages of a PC were in the beach! home. wal28949_ch05_114-138. behavior phone call at home or office. whether intentionally or otherwise. capacity constraints are sometimes misinterpreted as forecasts.” Ease of communication # “Make or receive calls anywhere” is $ Benefits were not clear. Compatibility with current # Just like making or receiving a $ Lots of learning required to use. Another source of error in forecasting is incentive pay. Key: # Favorable for rapid adoption $ Unfavorable for rapid adoption CAUTIONS AND CAVEATS IN FORECASTING Psychological Biases in Forecasting To a varying degree. communicable. Bonus plans can cause man- agers to artificially inflate or deflate forecasts. Ease of small-scale trial #/$ Easy to demonstrate. with different levels of competition. even though market conditions have markedly changed. in the early days and receive phone calls from of personal computing. a tendency to make decisions based on delu- sional optimism rather than on a rational weighting of possible gains and losses and the probabilities thereof. Relative advantage # Enabled people to make $ It was not clear.5 times each night. bytes. but contracts #/$ One could visit a store for hands-on required. where forecasts are perhaps inappropriately “anchored” in recent historical figures. on average.

But there are so many methods. if there is debate or doubt about There are two important keys to improve the forecast. set in New York’s Harlem in on the project itself. The first of these is to make explicit the assumptions on Strategic Issue which the forecast is based.5 percent of those surveyed (after adjustments. de- pending on the nature of the planned marketing program for the product. Finally. the assumptions can be debated. unstated but implicit assumptions can overstate a well-intentioned forecast. rosy view can be mitigated by sys.18 The second key to effective forecasting is to use multiple methods. should be applied to such a forecast. Is your concept well defined or your prototype ready to show? Conduct a survey of buyer wal28949_ch05_114-138. there are only 36 literary plots: Leonard it bypasses the cognitive and organizational biases that Bernstein’s West Side Story is an adaptation of Shake. ects from best to worst. today’s forecasting culture—based on a command-and-control mind set. and a predict and comply approach—has simply gone wrong (See Exhibit 5. not some illusory set of certainties that are. “Sandbagging”—setting the forecast or target at an easily achievable figure in order to earn bonuses when that figure is beaten—is common. In today’s fast-changing world that is becoming harder and harder to predict.10). and then positioning the current “Delusions of Success.” Harvard Business Review. such as fresh pasta. How should one choose? Do you have historical data? Use one or more statistical methods. or ventures have undoubtedly preceded yours. Steve Morlidge and Steve Player argue that. and data to support the the credibility and accuracy of forecasts of assumptions can be obtained.17 There are two im- portant keys to improve the credibility and accuracy of a set of forecasts of sales and mar- ket potential. 2009. This “outside view. Boston: Harvard out the distribution of actual outcomes of those proj.16 Keys to Good Forecasting A key goal of good forecasting is to identify the full range of possibilities about the future.3). This way. and Dan Lovallo and Daniel Kahneman. not certain at all. an annual budget-driver schedule. the combination of observational and survey forecasting methods enabled Maddy and Laguë to articulate the assumptions on which their revenue forecasts were based and to support those assumptions with data. useful than stating mere opinions about whether the forecast is too high or too low.9 Managing the View through Your Rose-Colored Glasses Even in new product and new venture settings. in many companies.5 million in start-up capital to get their venture off the ground. In their new book. Their evidence-based forecast was instrumental in their obtaining US$3. Assumptions of awareness and distribution coverage at levels less than 100 percent. using the chain ratio method (see Exhibit 5. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 127 EXHIBIT 5. Are there similar prod- ucts in the market already? Find some customers to observe as they use or buy them. While 34. How to Master Business Forecast- ing. July 2003. for such a forecast to pan out requires that consumers actually are made aware of the new product when it is introduced and that the product can actually be found on supermarket shelves. Business Press.” as they call it. The resulting forecast will be ally nothing is completely new. For ACG. virtu. No such data? Find some suitable analogies. Getting to Plan B: tematically assembling a class of similar projects. project in that distribution. The resulting conversation is far more sales and market potential. Dan Lovallo and Daniel Kahneman argue that the overoptimistic. Many similar products far more accurate. tend to hype the more typical “inside view” that’s based speare’s Romeo and Juliet. laying Breaking Through to a Better Business Model. in fact. these common sources of error in forecasting are only the beginning of the challenge that fore- casters must address. as shown in Exhibit 5. Future Ready. Even in is much more likely to yield realistic estimates because the theatre.indd 127 14/12/12 2:22 PM . Sources: John Mullins and Randy Komisar.2) may indicate their willingness to buy a new grocery product. the 1950s.

the best way to forecast. is to employ multiple methods. you’ll be well-placed to ask yourself some probing questions about the assumptions on which the various fore- casts are based and why the forecasts from different approaches differ. and so far we’ve provided little discus- sion of exactly how one might best find the necessary data. Similarly. Future Ready: How to Master Business Forecasting (Chichester.indd 128 14/12/12 2:22 PM . each of which requires that data be collected. Ultimately. see Exhibit 5. As should be clear to the reader by now. however. The world is too complex and too dynamic to do so with any confidence.html. If the results of two or more forecasting methods converge on similar results. without adequate market knowledge.9. and update them based accounting department’s on the rate of change of the variables that drive your timetable decisions Models Stop relying on a single approach Start using different types of models and approaches in combination Measurement Stop measuring the quality of your Start routinely measuring forecast error to find biases. West Sussex. Ltd. at least on a trial basis? Try an experimental market test of one kind or another. market- ing decisions are likely to be misguided. And so on. as we saw in Exhibit 5. any forecast is almost certainly wrong.co. WHY DATA? WHY MARKETING RESEARCH? In the first portion of this chapter. For an example of how Starbucks uses qualitative marketing research to systematically tap into its customers’ ideas and sugges- tions. that will build your and others’ confidence in what the forecasts say. So what is a forecaster to do? Morlidge and Player offer six pragmatic suggestions about what to do and how to do it. Products for which there is little demand may wal28949_ch05_114-138. Do you have early adoption data? Model the diffusion process.11. we provided several approaches to forecasting.uk/ About_Me. Issue What to Stop Doing What to Start Doing Purpose Stop using the budget process and Start recognizing the distinction between targets (what accounting structure to drive you hope will happen) and forecasts (what you think your forecasts will happen) and the gap between them Time Stop producing forecasts on the Start producing rolling forecasts.satoripartners. If not.19 Obtaining market knowledge also requires data. market knowledge is generally incomplete and often ill-informed. perhaps using the approach suggested in Exhibit 5. based perhaps on hunches or intuition that may or may not be correct. intentions. see http://www. 128 Section Two Opportunity Analysis EXHIBIT 5. UK: John Wiley and Sons. as shown in the table below. Without relevant and timely data. Can you produce some product or deliver the service.10 Mastering Forecasting Let’s face it. It is nigh on impossible to predict the future. 2010).1. For more on Steve Morlidge. the first four chapters of this book pro- vided frameworks for gaining a better understanding of market and competitive conditions and of what buyers in a given market want and need—what we call market knowledge. Contingency plans should be developed to cope with the reality that ultimately unfolds. forecasts informally rather than focusing on accuracy Risk Stop forecasting single-point Start assessing alternative potential outcomes outcomes Process Stop treating forecasting as an Start building forecasting into the fabric of your manage- optional exercise rial processes Source: Steve Morlidge and Steve Player. Thus.

rather than raw market- ing muscle. “It’s like a live focus group that BusinessWeek European Edition. Pricing may be too high. rather than raw marketing programs). wal28949_ch05_114-138. Advertising and promotion monies may be poorly spent. Most often. the practice of marketing research and leading to a bet- sult? Starbucks’ new reusable “splash stick” does just that. It quickly became clear that “open up a dialogue with customers and build up this Starbucks customers weren’t reticent. April 28. in an effort to reinvigorate cially trained “idea partners” who host the online dis- the company following a string of disappointing perfor.com. see www. Chris Bruzzo. reducing sales. Effective use of CRM is likely to result in happier.com. For more on never closes.com.com is of them wanted something to plug the hole in the lid on but one manifestation of how online tools are reshaping their take-out coffee that would prevent spilling. More than 10. They also act as advocates for mance figures. One of the first things Schultz did was to customers’ ideas so they get a fair hearing inside the launch an online listening post. Thoughtfully designed. in company. Taken together. and CEO. 2008. they result from ill-formed or underinformed marketing decisions. these systems lie at the heart of the systematic practice of customer relationship management (CRM).” MyStarbucksIdea. Products may be marketed to the wrong target market. competitive intelligence marketing muscle. as Schultz put it. MyStarbucksIdea. and systems to organize client contact. “Splash Sticks” Are the Result In January 2008. New markets may be entered. Salesforce’s chairman Starbucks. wins the race for systems. or too low. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 129 EXHIBIT 5. including the development of systems to track pertinent market information inside and outside the firm. There are four commonly used market knowledge systems on which companies rely to keep pace Strategic Issue with daily developments: internal records regarding marketing per- formance (in terms of sales and the effectiveness and efficiency of Marketing is rapidly becoming a game where information. Few of these systems that made modern CRM possible existed in their current form until developments in data processing and telecommunications made them cost-effective. Starbucks founder Howard Schultz re. competently executed marketing research can mitigate the chances of such unpleasant outcomes. CUSTOMER RELATIONSHIP MANAGEMENT: CHARTING A PATH TOWARD COMPETITIVE ADVANTAGE Marketing is rapidly becoming a game where information. Thus. as well as the design and implementation of more targeted studies intended to collect information about a particular marketing problem. be introduced. are powered by new “Ideas” software Source: Jeff Jarvis. such as Dell’s IdeaStorm.” says Marc Benioff. “The Buzz from Starbucks Customers.000 muscle inside our company.” from Salesforce. we address some of the challenges of obtain- ing market knowledge to support strategic decision making. more loyal customers. These outcomes are all too common. cussions that ensue. The Starbucks system and others like it. Second-best distribution channels may be chosen. and we show how such systems can improve the timeliness and quality of marketing decisions.com was to culture” into the company. ter understanding of what customers want.indd 129 14/12/12 2:22 PM . Starbucks’ chief technology of- order. marketing databases.starbucks. to instill what he calls “a seeing ficer. higher-volume. only to subsequently fail. We begin by discussing the principal kinds of market knowledge systems used in companies large and small. wins the race for competitive advantage. says the purpose of MyStarbucksIdea. despite market or industry conditions that make success unlikely. Attractive product-markets may be over- looked.com. leaving money on the table.11 Starbucks Listens. The Starbucks website is backed by 48 spe- turned to his former CEO role. competitive advantage. when consumers in an- other market segment would like the product better. in the remainder of this chapter. The re.

what’s ing responsibility in any company. area. Typically. A similar report provides infor- mation about all other styles currently in Nine West’s stores. when. too. 130 Section Two Opportunity Analysis Internal Records Systems Every Monday morning. Additional reports aggregate sales information by style and color. CRM has proved to be very successful in managing marketing campaigns and in serving customers more effectively and more efficiently. wal28949_ch05_114-138. to which customers. and so on. each retail director at the headquarters of Nine West Retail Stores. Nine West retail directors need to know which styles and colors are selling. how fast. Strategic Issue Providing input on the design of such systems so that the right data Every marketer. Walmart believes its key suppliers need to know its store-by-store item and category sales data. Every marketer.” a tabu- lation of detailed sales and inventory information about the fastest-selling items in Nine West stores from the prior week.indd 130 14/12/12 2:22 PM .20 By style and color. marketers need internal records systems to track what is sell- ing. dress or casual). we provide. The salesforce. by merchandise category (e.” Unfortunately.g. at what times of day. and for various time periods. each director learns which items in his or her stores are selling fast and need to be reordered. in which locations. and so on. but also which salespeople are selling how much. Thus. accounting systems keting information varies from company to company and industry generally do not collect such data. Companies selling their wares to industrial markets through outside salesforces need to know not only which products are selling to which customers. a leading operator of shoe specialty stores. For those charged with developing or updating internal record systems in their compa- nies. accounting systems generally do not collect such data. a series of questions to help marketing decision makers specify what internally generated sales data are needed. at what rate. not just retailers. so it provides password-protected online access to such data to some suppliers.12. Marketing Databases Make CRM Possible In the technology boom of the late 1990s. such systems just track dollars of revenue. for whom. needs infor- mation about status of current orders. by store. not just retailers. The answers to these questions should drive the design of such systems as well as the design and formatting of their output. or region. with no information about which goods or ser- vices were sold. receives the “Godzilla Report. The information provided by these reports constitutes the backbone of Nine West’s decision making about which shoes to offer in which of its stores..” Unfortunately. Marketers of kitchen gadgets through infomercials on late-night television need to know which ads on which stations in which cities are per- forming. customer purchasing history. and for which products. in Exhibit 5. so that slow sellers can be marked down or transferred to stores where those styles are in higher demand. and to whom. at what margins and expense rates. in what sequence. to industry. several companies launched extensive and expensive projects to help them better manage customer relationships through enhanced use of customer data. in order to place media spending where it will be most productive. Imagine how much more difficult the retail director’s job would be without today’s point-of-sale systems to collect and report such data! Imagine the potential advantage Nine West has over shoe retailers who lack such information. needs are provided to the right people at the right time is a critical market- information about “what’s hot. what’s not. But what constitutes critical mar- not. needs information about “what’s hot. and at what level of aggregation. Although many large-scale CRM projects have failed to show an adequate return on investment. Telemarketers need to know which callers are producing sales. in which stores.

which to buy less of or get programs. items purchased. need to know before Need to know daily. • Instances of customer contact: Whether sales calls. to beat them to reorder ads. in order Sequence of report: hot stations at what level of of inventory turnover and programs first. often in conjunction with call centers where many customer contacts occur. for prior night’s know for competitive competitors. CRM.21 • Transactions: Complete transaction detail. over the web. by mail. when implemented successfully. in which stores and markets to sell infomercials for which gadgets them What data are critical to Inventory turnover and gross margin Contribution margin (gross margin less managing profitability? media cost) per gadget sold Who needs to know? Buyers and managers of merchandise Media buyers. For dogs. at what rate with what they want? What regular marketing Decide which shoes and shoe categories to Decide on which specific TV stations.12 Designing an Internal Records System for Marketing Decision Makers Implications for an Infomercial Questions to Ask Implications for a Chain Footwear Retailer Marketer of Kitchen Gadgets What information is key to Need to know which shoes sell. product managers categories When do they need to For hottest sellers. in order of aggregation should data Aggregation: by style and color for buyers. need to know weekly. decisions are critical to buy more of. to mark them down. in so doing. and. in providing our customers stores and markets. Did the customer respond to an e-mail? A direct mail shot? A face-to-face sales call? wal28949_ch05_114-138. to reallocate media dollars advantage? market. • Customer responses: A CRM system should capture linkages between marketing activi- ties and customer action. The goal of most CRM efforts is to profitably win a growing share of key customers’ business while finding lower-cost but effective ways of serving less valuable customers.indd 131 14/12/12 2:22 PM . In what sequence and Sequence of report: hot sellers first. whether by telephone. and prices paid. in which Need to know which gadgets sell. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 131 EXHIBIT 5. A key element in such efforts is the use of marketing databases. call center inquiries. including dates. at what rate what markets. to increase profitability and shareholder value. or in person. service re- quests. is a cross-functional process that requires co- ordination and broad-based strategic thinking. • Customer demographics: Relevant descriptive data to facilitate market segmentation and target marketing are crucial. and times of day to place our profitability? rid of. Databases created for CRM purposes typically capture information about most or all of the following for each customer. contribution margin per gadget sold be reported? by category for merchandise managers Aggregation: By stations/programs for media buyers. by gadget for product managers The purpose of CRM is to develop a unified and cohesive view of the customer from every touch point within the company. or whatever. a CRM system should capture the detail of each and every cus- tomer contact with the company.

tailoring product portfolios to individual stores. always costs money. in addition to their purchasing histories.2 billion multina. airlines. Aimia will need many of Aimia. a $2.22 The use of sophisticated loyalty cards by large retailers has now gone global (see Exhibit 5. Suhel Seth. India’s the reward cards that retailers.1. 85.13). Aimia. know who are their best customers and what categories they tend to buy. managing coupon campaigns.” says Rupert Duchesne. Designing marketing databases that take effective advantage of Strategic Issue customer data that companies are in a position to collect requires that Designing marketing databases that take several major issues be considered: the cost of collecting the data. Nectar cardholders earn points on their plots. a marketing observer in India. the program junkies that many consumers are in the West? United Kingdom’s largest loyalty program with 18 mil. and what kind of car they drive. largest family-run conglomerate. wal28949_ch05_114-138. Catalog marketers such as Lands’ End and L. the CEO volume is done by chain retailers.” electronic signatures placed at a customer’s personal computer. and other mer. Doing so is more difficult than it sounds.13 Loyalty Cards Go Global Many of us have wallets full of so-called loyalty cards. whether they play tennis. Tesco uses its analysis in deciding product placement on shelves. including the Nectar card. many people are unwilling to spend much time filling out forms that ask nosy questions about educa- tion. as discussed in Ethical Perspective 5. based in the United States. the ability of the company companies are in a position to collect to keep the data current in today’s mobile society. runs multimerchant programs across Eu. Supermarket chain Tesco in the United Kingdom uses its loyalty cards to track and analyze customer buying patterns and to offer customers coupons and incentives tai- lored to their buying behavior. “[t]he real dustry. Aimia enables them to offer targeted discounts and other pro. p. motions to their customers. a Canadian firm. so they not only keep track of what each customer has bought. Airlines track members of their frequent flyer programs and target some with special promotions. and much more.” The Economist. and the rapid ad- requires that several major issues be vances in technology that permit the data to be used to maximum considered. effective advantage of customer data that the economic benefits of using the data.indd 132 14/12/12 2:22 PM . next challenge. Online mar- keters such as Amazon use “cookies. but also recognize the customer when he or she logs on to their site. Many skeptical Indians consider such programs to be lion subscribers. Will Indian consumers soon become the loyalty- rope and the Middle East. While loyalty solutions for India’s highly fragmented retail in- keeping us coming back is one important goal.” says supermarket shopping (from Sainsbury. Collecting information. and much more. the United King. member merchants to take part. on their airline thinks that the trust Indians have in the Tata brand will tickets (from Expedia and easyJet). “To make them buy things they don’t want. it must obtain demographic and life- style data about them. give Tata and Aimia a good chance to succeed. Aimia is now taking on its 2011. 132 Section Two Opportunity Analysis Many companies have become quite sophisticated about using marketing databases. income. What will be done with the information once it is in hand? Marketers planning to build their own databases need also to consider several increasingly important ethical issues. November 5. to offer Nectarlike chants give us to keep us coming back for more. In an industry where less than 7 percent of retail value-added is the data. then storing and maintaining it. The cost of collecting such information must be weighed against its value. But even Seth dom’s number two supermarket retailer). L. Bean. EXHIBIT 5. teaming up with the Tata Group. If a company wants to know more about the demographics and lifestyles of its best cus- tomers. By mining the data for its member merchants. Source: “Spies in Your Wallet. advantage. tional company.

uk. But Are They Reliable?” The Wall Street Journal. Robert Adler. June 19. 1994). Similar orga- are exposed to a sales solicitation disguised as a mar. in a Chrysler study showing that people tivities in such a way that they are harmed economi.S. the Marketing Research Association.” in The Marketing Information Revolution. nizations have developed localized guidelines in other keting research study or issuing from data obtained countries. Next?” The Wall Street Journal. and the Council of American Survey Research Organi- search findings and the obligation to strive to provide zations. More studies are being sponsored by Crossen. the way the sampling universe is defined can bias the leading them to be excluded from or included in ac.org. 5. pp.indd 133 14/12/12 2:22 PM . ple sizes are being reduced to the point that. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 133 E Ethical Perspective Ethical Issues in Database Marketing. For and ethics have been developed.1 Internet Marketing. Building or accessing marketing databases is but a small part of any effective CRM ef- fort. For the United States instance. subjective on target lists for direct mail and telemarketing. The sampling procedures are often used. p. and the general public. Thus. respondents should not be pressured to par. B1. November companies or groups with a financial interest in the 14. but What Comes tions are asked. • Forming a cross-functional CRM team with membership from all functions that have customer contact. 2000. in large to those of the client. Blattberg. cal issues involved with. Reach Truce on Net Privacy. (Bos- the business of research has become pervaded by bias ton: Harvard Business School Press. eds. a sample of only cally. and ethi. and the improper disclosure of a person’s credit rating. Client issues involve the confidentiality of the re. and Marketing Research New technologies relating to the gathering and use Because of shortages in time and money. 1991. These new technologies have the of error becomes unacceptable—assuming a prob- potential to harm individuals when such information ability sample was used.S. “Europe results. marketing research studies. “Identifying the Legal and Ethical Risks and Costs of Using that many studies “are little more than ve- New Information Technologies to Support Marketing Pro- hicles for pitching a product or opinion. clients. should have the right to remain anonymous. A1 and A8. several codes of conduct and respondents. Bloom. Rashi Glazer.” Examples include 100 respondents was used in each of two tests. none owned a foreign car. and a person’s being placed In addition to the preceding problems. and intentions raise a host of legal and groups are further broken into subgroups. cars. however. Cynthia and distortion. The public is very much involved when they all members are required to adhere to. Robert nation of hundreds of recent studies indicated that C. these include published codes by the American Mar- ticipate. data analysis may depth of privacy concerns varies from country to be flawed. website at www. “Studies Galore Support Products and Positions. and John D. countries. the respondents may denying medical insurance to an individual based on well have been biased in favor of U. keting Association. or only the best conclusions are reported. subject area being researched are known to be similar Ethical issues in marketing research stem. Little. p. Opinion Research. C. In an attempt to regulate the part. a Wall Street Journal article noted Sources: Paul N. from the interaction between the researcher marketing research industry. results. confidential information. when interests. psychologically. a critical issue for internet marketers. In addition to sample size.” An exami. Thus. given Frequently researchers are hired whose views on the their global reach. or physically. “is used without their knowledge and/or consent. and U. 294. the American Association for Public and should not be deceived by fake sponsorship. sam- of information about consumers and their behavior. see the British Market Research Association In discussing the reliability of.bmra. and George R. For one such listing of organizations in other from “volunteer surveys” using write-ins or call-ins. In the United Kingdom. Society has developed an ethical Code of Conduct that tations. preferred Chrysler’s cars to Toyota’s. the Market Research unbiased and honest results regardless of client expec. grams. This too often leads to a bias in the way ques. the margin ethical questions. country. and Thomas E. Implementing such an effort requires four key steps:23 • Gaining broad-based organizational support for creating and adopting a CRM strategy. Weber. wal28949_ch05_114-138. Milne.

One study found that single-variable models or simple heuristics were as effective as more complex models. But complex algorithms are not always beneficial. These programs wal28949_ch05_114-138. the cus- tomer relationship the company sought to build. and in what pattern over time. Nevertheless. nonreferred customers.salesforce. rather than by more traditional means. All of us have experienced infuriating occasions where wading through endless levels of telephone prompts and poorly trained or soulless cus- tomer service representatives has damaged or destroyed. and found them to be at least 16 percent higher than comparable. in Google’s case. and those who pay. Several low-cost software applications that run on PCs are available. it requires both historical purchasing data and forecasting of future customer purchases which. Customer lifetime value (CLV) refers to the margins that a customer generates over a lifetime less the cost of serving the customer. Such software helps companies disseminate real-time product information to salespeople to enable them to be more pro- ductive and more able to satisfy customer needs. research conducted by Deloitte Consult- ing found that companies that use CLV metrics are 60 percent more profitable than firms that do not. Calculating CLV is not a trivial task.25 The rapid rise in so-called two-sided markets—in which one set of customers who pay little or nothing (Google search users.26 Well-educated marketing graduates with an affinity for web analytics are well placed to make meaningful contributions to their employers or to start new kinds of businesses themselves to address complex issues like these. and even transfer it to other salespeople in the event of a salesperson leaving the company.27 Why CRM Efforts Fail Unfortunately.com for a free trial) offers a web-based product. the advertisers. One of the things that some CRM efforts make possible is segmenting markets accord- ing to the lifetime value of customers.24 Other research has focused on the long-run value of customers that have been acquired through referral programs. Marketing academicians and marketers themselves are beginning to address this and simi- lar kinds of problems. Research by Bain & Co. for example) are essential to attract a completely different and more lucrative set of customers (advertisers who buy ads that are delivered in response to Google searches)—has led to an even more vexing challenge than the calcula- tion of customer lifetime value in a conventional sense. Client Contact Systems One good starting point for developing CRM capabilities in companies having limited resources is to put in place salesforce automation software. and Salesforce. • Failure to prioritize which customer relationships are most worth investing in.indd 134 14/12/12 2:22 PM . Sage ACT and GoldMine are two of the best-known programs in this arena. • Putting CRM in place without changing organizational structure and/or processes. • Developing a CRM strategy to guide implementation. as we’ve seen. there have been many instances of CRM installations that were unsuccess- ful. sometimes dramatically so. is always somewhat tenuous. 134 Section Two Opportunity Analysis • Conducting a needs analysis that identifies both customer and business needs. Such software also allows companies to effectively capture customer intelligence from salespeople. • Assuming that more CRM is better. when. using sophisticated models that help marketers decide on which set of customers to spend marketing dollars. This challenge is to figure out the value of both kinds of customers: those who search (and are not asked to pay). rather than enhanced. keep track of it for use on later sales calls.com (see www. suggests that there are four major pitfalls to watch out for:28 • Implementing CRM without first developing a strategy.

and assessing the likelihood that consumers will buy proposed new products. the website of the Peppers and Rogers group. Another is www. Competitive intelligence (CI) is a systematic and ethical approach for gathering and analyzing information about competitors’ activities and related business trends. The most important sources of CI information include companies’ an- nual and other financial reports. the marketing research process is fraught with numerous opportunities for error. com. as well as the popular and business press. trade organizations. government documents. keeping up with competitors and the changing mac- roenvironment is no easy task. One is www. Competitive Intelligence Systems29 In today’s fast-paced business climate. As this exhibit shows. CRM is a topic about which whole chapters—even entire books—have been writ- ten. online databases. and reporting of research intended to gather data pertinent to a particular marketing chal- lenge or situation. wal28949_ch05_114-138. Research carried out without carefully thought-out Research carried out without carefully thought-out objectives usually means time objectives usually means time and money down the tubes! Some mar- and money down the tubes! keting problems commonly addressed through marketing research in- clude tracking customer satisfaction from unit to unit or year to year (tracking studies). analysis.indd 135 14/12/12 2:22 PM . addresses. the use of full-time CI staff is growing. so they can use it. There are a couple of good websites for those interested in learning more about CRM. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 135 keep track of clients’ names. and so on—along with all kinds of personal tidbits.crmdaily. speeches by company executives. The chal- lenge is to find the relevant knowledge.com. such as prices or proposed advertising campaigns. The steps in the marketing research process are shown in Exhibit 5. testing consumer responses to elements of marketing programs.14. such as their spouse’s and children’s names and the kind of wine the client likes to drink—and they also provide an organized way to make notes about each contact with the customer. a leading consultancy in this arena. phone and fax numbers.1to1 . The critical questions that managers setting up a CI system should ask are: • How rapidly does the competitive climate in our industry change? How important is it that we keep abreast of such changes? • What are the objectives for CI in our company? • Who are the best internal clients for CI? To whom should the CI effort report? • What budget should be allocated to CI? Will it be staffed full. and share it with the decision makers in the organization. It is based on the idea that more than 80 percent of all information is public knowledge. That’s why it’s so important that all who play influential roles in setting strategy for their firms or who use marketing research results for decision making be well-informed and critical users of the information that results from market research studies.or part-time? In companies that operate in industries with dynamic competitive contexts. collection. analyze it. so we’ve just scratched the surface with our treatment here. Marketing Strategic Issue research is intended to address carefully defined marketing problems or opportunities. which provides daily updates on the latest happenings in the CRM field. The word particular is very important. MARKETING RESEARCH: A FOUNDATION FOR MARKETING DECISION MAKING We now turn very briefly to the marketing research task: the design.

Collector bias: hearing what you want to hear.14 make clear where many of the potential stumbling blocks are in designing and conducting marketing research. Design research: type of study. based on the proposed research. 5. is on target? 3. 4. sample. WHAT USERS OF MARKETING RESEARCH SHOULD ASK The steps identified in Exhibit 5. For those wishing to read more on this topic. The informed and critical user of marketing research should ask the following questions. In the remaining chapters in this book. 6. Are the planned analyses appropriate? They should be specified before the research is conducted. 136 Section Two Opportunity Analysis EXHIBIT 5. we shall return from time to time to the market- ing research topic and show how marketing research informs not only market and com- petitive analysis and customer understanding. Some users do not really want objective information—they want to prove what they already believe to be true. faster secondary data used where possible? Is qualitative research planned to ensure that quantitative research. Quantitative data are collected without first collecting approaches (qualitative or quantitative) qualitative data. 1. but also the design and implementation of marketing programs. Report results to the decision maker. ideally before implementing the research or if necessary subsequent to its completion. to instruct the reader in how to design marketing research studies. required. Tabulation errors or incorrect use or interpretation of statistical procedures may mislead the user. collection approach. What are the objectives of the research? Will the data to be collected meet those objectives? 2. to ensure that the research is unbi- ased and the results are trustworthy. 3. etc. if any. no decision to be made research objectives. Determine data sources (primary or Primary data are collected when cheaper and faster secondary data secondary) and types of data and research will do. wal28949_ch05_114-138. Identify managerial problem and establish Management identifies no clear objective. Analyze data. 2. Are the data sources appropriate? Is cheaper.indd 136 14/12/12 2:22 PM . Is the research designed well? Will questionnaire scales permit the measurement neces- sary to meet the research objectives? Are the questions on a survey or in an interview or focus group unbiased? (“Isn’t this a great new product? Do you like it?”) Do the contact method and sampling plan entail any known bias? Is the sample size large enough to meet the research objectives? 5. data These are technical issues best managed by skilled practitioners. Are the planned qualitative and/or quantitative research approaches suited to the objec- tives of the research? Qualitative research is generally better for deep insights into con- sumer behavior.14 Steps in the Marketing Research Process: What Can Go Wrong? Steps What Frequently Goes Wrong? 1. however. It is beyond the scope of this book. 4. Collect data. Doing these steps poorly can generate misleading or incorrect results. numerous text- books and websites on marketing research are available. while quantitative research is better for measurement of a population’s attitudes and likely responses to products or marketing programs.

Use the diffusion of innovation theory discussed in the text to explain why trash compactors have achieved such poor market penetration. http://www. Given that absolute market potential almost always exceeds actual industry sales.” Fortune European Edition. September 27. Suppose you are the product manager responsible for General Electric’s line of trash compactors. http://www. your sample. 2. Prepare drafts of questionnaires.gartner. 2010. 16–17. pp. What variables would you include in a multi- factor index for measuring relative potential? Explain your rationale for including each variable. using what you learned in previous coursework or any supplementary readings necessary. African Communications Group (Condensed) (Boston: Harvard Business School Publishing. http://www. 3. “Intel’s Cultural Anthropologist. plans for how you will conduct observational research. “Mobile Etiquette Mishaps Are Running Rampant. The research plan needs to do three things: Plan Exercise • Precisely spell out the research objectives the research is intended to meet.com/hardware-opinion/50438- genevieve-bell-intel. 2. 2011. and appropriate qualitative and/or quantitative research should be competently designed. why do market- ers bother to make potential estimates? Discuss four decisions that a marketer of industrial grind- Questions ing machinery might make based on such potential estimates. Kenneth D. the product has yet to gain acceptance by many consumers. and any statistics (means.” April 23. March 17. and so forth. Your research design should clearly identify and satisfy your research objectives. Endnotes 1. and Sheila M. 1999). Intel. To more effectively allocate promotion expenditures and sales efforts. Identify your methods.com/ walker8e. Precisely spell out the mathematics that will do this. and the Intel website at http:// www.com/displaydoument?id1358720. “Intel’s Genevieve Bell Drank Water out of Frogs.com/pressroom/kist/bios/gbell. Discussion 1. African Communications Group (Condensed). Lawrence. Lawrence. 2009). Where might you find up-to-date information about each of the variables in your index? 3.mhhe.com/4hots_nshw. Fundamentals of Forecasting Using Excel (New York: Industrial Press. etc.indd 137 14/12/12 2:22 PM . 4. McGahan. After many years. wal28949_ch05_114-138.htm. “Intel’s Genevieve Bell: An Anthropologist at the Cutting Edge of Technology and Society: A Gartner Fellows Interview. Ronald K. Michael V. McGahan.4hoteliers.intel. the marketing manager for a company marketing frozen food entrées would like to know the relative market potential for their products in every county in the United States. Anita M.techeye.net/chips/.php?mwi8403.” Hoteliers.) you will employ.” TechEye. Mike Magee. “Intel’s Secret Weapon. This material is drawn from Stephen Prentice. Klimberg. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 137 Marketing Prepare a detailed plan for conducting the primary research required to complete your project. 2010. Rob Enderle. http://www. • Design the research to get you there.tgdaily. connecting it to specific secondary data or specific answers to questions or observations from your primary data. Copeland.” TG Daily. • Describe how the combination of your secondary research and your planned primary research will lead to your estimate of target market size and your sales forecast for your marketing plan. What does this imply concerning the shape of the rest of the trash com- pactor’s life-cycle curve? What actions might you consider taking to increase the market penetra- tion for this product? Additional self-diagnostic questions to test your ability to apply the analytical tools and concepts in this chapter to strategic decision making may be found at the book’s website at www. guides for focus group sessions or in-depth interviews.

42–46. “The Impact of Market Knowledge Competence on New Product Advantage: Conceptualization and Empirical Examination. February 2002. 13. Applied Conjoint Analysis (New York: Springer Publishing. Kumar. Coxe. 17. Paul Saffo. 23.indd 138 14/12/12 2:22 PM . 2009). pp. pp. Krishnan. Welch and Raman. “The Fruits of Legitimacy: Why Some New Ventures Gain More from Innovation Than Others. see V.” Harvard Business Review. and Jae Weon Hong. NJ: John Wiley & Sons. Lehmann. 58–75. Jacob Goldenburg. Getting to Plan B: Breaking Through to a Better Business Model (Boston: Harvard Business Press. “Impact of a Late Entrant on the Diffusion of a New Product/Service. November 8. Donald R. Dale O. pp. Diffusion of Innovations (New York: Free Press. pp.” Harvard Business Review. pp. Rajesh K. 89–105. Sudhir Kale. Bernd Skiera. wal28949_ch05_114-138. Russell S. For more on this topic. November 2008. “Avoid the Four Perils of CRM. Raghunath Singh Rao.” Management Science. 1996). 1124–31. 24. For one such approach. pp. “Six Rules for Effective Forecasting.org.” Science 185 (1974). For more on analogs and antilogs and their use in developing evidence-based forecasts and business models. 1998). Sangman Han. 14. Amos Tversky and Daniel Kahneman. Prabhu. Philipp Schmitt. pp. Bass. 29. Ltd. Customer Relationship Manage- ment (Hoboken. Merchandising at Nine West Retail Stores (Boston: Harvard Business School Publishing. 102–109. 15. and Jaideep C. 26. see Vithala Rao. 9.” Journal of Marketing Research. 21. West Sussex. “Delusions of Success. see Sunil Gupta and Carl F.” Marketing Management 13 (April 2004).” Journal of Market- ing. 12. Diffusion of Innovations. 1–13. 2010). 8. Wangenheim. Calantone. and Phil Schafter. “Instant Customer Base Analysis: Managerial Heuristics Often ‘Get It Right’. Rogers. and Trichy V. “Judgment under Uncertainty. 82–93. Colin Welch and Ananth Raman. 10. July 2003.” Journal of Marketing 72 (July 2008). Bass. Future Ready: How to Master Business Forecasting (Chiches- ter. Chandy. 101–9. Winer. Information in this section comes from the Society of Competitive Intelligence Professionals website at www. and V. See Frank M. pp. Frederick F. Rigby. For more on conjoint analysis. 19. pp. Merchandising at Nine West Retail Stores. 269–78. 16. January 1969.” Journal of Marketing 75 (January 2011). October 1998. 138 Section Two Opportunity Analysis 5. 22. “A New Product Growth Model for Consumer Durables. pp. Ibid. Everett M.” California Manage- ment Review 43 (Summer 2001). Mela.scip. 13.” Harvard Business Review. 11. 7. 2006). July–August 2007. “A Framework for Customer Relationship Management.” Journal of Marketing 73 (March 2009). Dan Lovallo and Daniel Kahneman. Li and Calantone define market knowledge as “organized and structured information about the market. pp. 13–29. “Referral Programs and Customer Value. pp. “The Role of Hubs in the Adoption Process. 20. Darrell K. see John Mullins and Randy Komisar. 27.” Retail Week. UK: John Wiley and Sons. Kumar and Werner J.” See Tiger Li and Roger J. 25. and Christophe Van den Bulte. 2009). 2002. Steve Morlidge and Steve Player. African Communications Group (Boston: Harvard Business School Publishing. Markus Wubben and Florian V. 1983). “CRM Failure and the Seven Deadly Sins. 6. Rogers. 28. “Marketing—Clubbing Together. 215–27. 46–59. Frank M. May 2000. Reichfeld. “What Is a Free Customer Worth?” Harvard Business Review. Reinartz.” Journal of Marketing 72 (May 2008).

one China who are clearly middle class but don’t earn with discretionary spending power and a plethora $12 per day. Most of the time. Prahalad called attention to the immediate family. less than Italy’s—roughly between $12 and $50 even though the large economy size bottle sold in per person per day—the middle class population in the west was completely irrelevant. India’s middle class pop- for this new group is a heterogeneous one. Martin Ravallion of the World Bank of unmet needs that local and foreign marketers uses a range of $2 to $13 at 2005 purchasing- are just starting to serve. but they had plenty of money to amount of income that is discretionary—perhaps spend)—and everyone else. whose ulation rose from 147 million to 264 million from composition varies from country to country. above the accepted poverty oping world’s new middle class isn’t as simple as line in the developing world but below the Ameri- following the old division between rich and poor. Chapter Six Targeting Attractive Market Segments The Developing World’s Emerging Middle Class1 For many years. But such an approach developing world. By his definition. regard to local conditions or in relative terms. poor consumers could and would buy it. and shelter. Prahalad’s land. With the one-third. The Fortune at the Bottom of which goes to goods and services other than food the Pyramid. according to Diana Farrell of the Na- 2004 publication of C.4 bil- Who and How Large? lion to 2. emerging markets was about 250 million in 2000 Today. all very poor. oping world—the very rich (of which there were Central to the middle class notion is a reasonable not very many. in the eyes of Western marketers. wherein what’s “middle” is defined more locally. argues in Prahalad’s pyramid: in absolute terms without that the middle class is a category that is “more 139 wal28949_ch06_139-161. often defined as those earning ning a small business whose employees go beyond less than $2 per day. K. Rapid economic development omits very large numbers of people in India and has spawned a large and growing middle class. a new reality is emerging all over the and 400 million in 2005. new middle class. up from There are two common approaches to defining this one-third in 1990. there were only two market segments in the devel.indd 139 14/12/12 2:23 PM .6 billion. 1990 to 2005 and China’s from 174 million to 806 million. what a few companies had already figured out. But targeting the devel. can one. It now accounts for more than half of the developing world’s population. which sits just above the poor Shasi Thanoor. from 1. eyes were opened to the ag. this means holding gregate purchasing power of the world’s a steady job with salary and some benefits or run- poorest citizens. The middle class in emerging markets glob- The New Middle Class: ally nearly doubled over that period. an Indian commentator. If one defines middle class as those having in- that if you packed shampoo in single-portion sa. comes greater than Brazil’s average income and chets. power parity prices. tional Economic Council in the United States— mark book.

not just fitness studios that are growing in India. The dit. pay for it? Where should new stores be located? not to mention numerous other categories where Should she continue to target women. Targeting: One Ingredient come category. China. McKinsey believes that India’s middle class will By 2007. modern kitchens. In March 2011. each the product of a range Some observers argue that Asia. not just in emerging economies. Fitness aficiona- das may measure their progress by stepping on the scale. In banking. this phenomenon holds powerful implications in ICICI. The Chinese already nomic level should Vervatwala target? What level of buy more cars and more cell phones than Americans service do customers want. Hyderabad has grown rapidly in recent Dinaz’s. What socioeco. ICICI’s mobile phone chain of fitness studios in India’s fast-growing banking innovations and vigorous cost-cutting high-tech hot spot. Targeting attractive she expand her sights to include men (so far. added 4 million new market segmentation terms. reduced its transaction costs to levels far below oneered the aerobics industry in Hyderabad in those of its competitors. tomers she was eager and willing to serve. air conditioners. there are four Dinaz’s Fitness Studios earns more than half its profits from developing in Hyderabad (www.indd 140 14/12/12 2:23 PM . than 50 people in total. India had more cell phone users than reach 580 million people by 2025. even in Marketing Success a mindset. opening her first fitness studio to serve Market segmentation decisions are not con- upscale women in the posh Banjara Hills neigh. do. employing more countries. But it’s cles. China had twice as many. 140 Section Two Opportunity Analysis sociological than logical. an in. but the real benefits that Dinaz wal28949_ch06_139-161. both tangible and intangible. too.dinazs. These households spend proportionately less As Dinaz Vervatwala foresaw. Vikram Pan- years. motorcy. or should the same thing is happening.” CitiBank already As we write. For marketers. so they have money to growth has created a growing middle class of cus- spend on private education. But bricks and mortar weren’t Consider Dinaz Vervatwala. and India. customers in 2008. too. announced that CitiBank. planned to customers having a blend of Indian and Western become the world’s “largest emerging markets attitudes and aspirations. most of them previously un- banked and living in India’s second and third tier Targeting India’s New Middle Class cities. fined to small entrepreneurial companies like borhood. And new kinds of spending patterns. America. a large Indian bank. owner of a growing a part of the bank’s effort. in particular.” It is. and what price will they and will soon surpass them in computers. of course.com). but about the market good marketers. Vervatwala pi. CEO of CitiBank. not the market segments in these rapidly growing mar- case)? Each of these decisions required Vervatwala kets and developing marketing strategies that to think clearly about not just the growing market are tailored to serve the chosen segments is what that was readily apparent. of important marketing decisions. health care. and her business has grown with it. Hyderabad. where much of the growth in India’s middle class is taking place. of course. has reached a tipping point. financial services company. and more. 1993. whether entrepreneurs like Dinaz segments within it that she wanted to target. Hyderabad’s rapid on food and housing. CitiBank. Different groups of customers—different market segments—have different wants and needs. STRATEGIC CHALLENGES ADDRESSED IN CHAPTER 6 Targeting the most attractive market segments is an issue that arises for marketers every- where. but it’s also a set of attitudes. growth of high-tech industries in Hyderabad— attracted by the explosion in trade and capital from software to business process outsourcing flows within and into emerging market coun- and more—has created a new market of fitness tries like Brazil. where Vervatwala or bankers like those at ICICI and to find them and how best to serve them.

however. and attitude—are more difficult to quan- tify. She positioned her fitness studios as the ones that were focused on women only. and positioning—are closely linked and have strong interde- Are all these analyses and conscious pendence. Learning to apply these tools effectively. its resources are usually limited wal28949_ch06_139-161. along with the firm’s mission and capabili- ties to deliver what each segment wants. we encourage those working on marketing plans to use this chapter’s lessons to clearly identify the market segment(s) you will target. or a marketing manager in a multinational firm to decide which market segments should be targeted and provide insight into which investments should be made. growth rate. these tools provide the platform on which most effective marketing programs are built. and the key features of your goods or services that will deliver these benefits. competitive intensity. energy. if different segments can be clearly identified. the benefits you’ll offer to customers in that segment. however.2 Brand positioning entails designing product offerings and marketing programs that can establish an enduring competitive advantage in the target market by creating a unique brand image. customer loyalty and share of wallet. higher average customer profitability and return on sales is realized. a venture capital investor in Silicon Valley or Hyder- abad. These three decision processes—market segmentation. target mar- Strategic Issue keting. Why do market segmentation and target marketing make sense? Why not sell the same fitness services—or bank accounts. In the Marketing Plan Exercise at the end of this chapter. By focusing marketing effort on the most important customers. In virtually any market. She chose to target this segment because fitness training was growing in popularity and because she had particular knowledge and expertise she could bring to the party. or position. A recent cross-industry study demonstrated the importance of choosing one’s market seg- ments carefully. Dinaz Vervatwala founded her first fit- ness studio in part because she saw a market segment—women in Banjara Hills—whose needs were not being fully met. specific goods or services with specific marketing programs can be developed to meet the physical needs of the customer (pounds lost or kept at bay. in order to choose which segments it will serve. muscles finely toned. Together with differentiation and brand positioning. where important is defined by customer satisfaction. or whatever—to everyone? How can potentially attractive market segments be identified and defined? Finally. without any ogling males anywhere nearby. Chapter 6 Targeting Attractive Market Segments 141 Vervatwala offers—overall appearance. which we address in Chapter 7.indd 141 14/12/12 2:23 PM . All must be well considered and implemented if the firm is choices about which segments to serve to be successful in managing a given product-market relationship. endurance enhanced) as well as the emotional needs that consumers attach to their favorite pursuits (looking good in the clubs or at work). Target marketing requires evalu- ating the relative attractiveness of various segments in terms of market potential. DO MARKET SEGMENTATION AND TARGET MARKETING MAKE SENSE IN TODAY’S GLOBAL ECONOMY? Market segmentation is the process by which a market is divided into distinct subsets of customers with similar needs and characteristics that lead them to respond in similar ways to a particular product offering and marketing program. we draw on the foundation of market knowledge and customer understand- ing established in the first five chapters to introduce what are probably the most important and fundamental tools in the marketer’s tool kit: market segmentation and target market- ing. In Chapter 6. automobiles. requires addressing several important questions. and other factors. how can these segments be prioritized so that the most attractive ones are pursued? Answering these ques- tions should enable an entrepreneur. in the customer’s mind. No really necessary? matter how large the firm.

Thus. it’s had to adapt the design of its cell phones. wants. their attention turns to the developing world. Nokia has become the market leader. Nokia. Nokia de- veloped handsets with multiple address books. population growth in many developed countries has slowed. and appeal just to them on an emotional level.”5 The critical issue for marketers is to find an appropriate segmentation scheme that will facili- tate target marketing. positioning. For a discussion of how one company built itself into a multimillion-dollar business while serving a very small niche. where a majority of the population lives in rural areas.6 By developing products uniquely suited to the Indian market and various segments therein. and lifestyles than ever before. media habits. This has led to an outpouring of goods and services that compete with one another for the opportunity of satisfying some group of consumers. and desires. Even in the unusual case where a firm can afford to serve all market segments. First. see Exhibit 6. and price and promotion elasticities. higher edu- cational levels. which has enabled firms to mass-customize many products as diverse as wal28949_ch06_139-161. as they search for faster-growing markets. Third. and competitive structures further affect the differences and response rates.000 small distributors—many of whom use pushcarts and hand trucks—to reach local mom and pop retailers. 142 Section Two Opportunity Analysis compared with the number of alternative market segments available for pursuit.3 By tailoring its promotion and distribution methods by market and market segment. where the enormous diversity in demographic profiles and market conditions makes careful market segmenta- tion and targeting essential. their response rates to products and marketing programs differ. . Variation among market segments in product preferences. This sparks more intense competi- tion in existing markets as firms seek growth via gains in market share and encourages companies to find new markets they’ve not served previously. has targeted the fast-growing Indian mar- ket. such social and economic forces as expanding disposable incomes.4 But are all these analyses and conscious choices about which seg- ments to serve and how best to serve them really necessary? Most Markets Are Heterogeneous Because markets are rarely homogeneous in benefits wanted. As New York–based trend tracker Tom Vierhile notes. This trend has been accelerated in some industries by new technology such as computer- aided design. . Second.7 Whether Nokia can retain its lead in India as the smartphone revolution takes hold there remains to be seen. purchase rates. for example. markets are complex entities that can be defined (and segmented) in a variety of ways. In East Africa. for example. Thus. to reach rural villages. there is an increasingly important trend toward microsegmentation in which extremely small market segments are targeted.1. Coca-Cola relies on more than 13. Often.indd 142 14/12/12 2:23 PM . They want products that talk just to them. In doing so. Coke’s sales in Africa surpassed $550 million in 2009. and the formulation and implementation of successful marketing strategies and programs. a firm must make choices. and more awareness of the world have produced customers with more varied and sophisticated needs. tastes. Today’s Market Realities Often Make Segmentation Imperative Market segmentation has become increasingly important in the development of market- ing strategies for several reasons. size of and growth in demand. “what consumers really ap- pear to hunger for are products that fit their unique needs. When Nokia’s researchers discovered that many cell phones in India were used by more than one person. and more product-markets are maturing. it must determine the most appropriate allocation and deployment of its marketing effort across segments. . adding dust-proof keypads and eliminating other features to make its phones affordable to India’s low-income masses.

January 13.underarmour. Under Armour was marketed by word-of. Will Under Armour be able to withstand Under Armour.S. such as Time. The company got its Holmes. particularly in terms of purchase intention. p. radio sta- tions with formats targeted to different demographic groups. such as Wanderlust and Autocar. HOW ARE MARKET SEGMENTS BEST DEFINED? There are three important steps in the market segmentation process: • Identify a homogeneous segment that differs from other segments. An ad- vertiser can target specific regions.” BusinessWeek big break due to a product placement in the Oliver Stone European Edition.” Time.underarmour. Here’s Why. Kevin realized that there was not U. They’re What Everyone’s Wearing This mouth from happy.1 Can Under Armour Become Another Nike? Kevin Plank did not set out to create a cult around premiere boosted Under Armour sales to $1. and cable TV channels. willingness to pay. 2010. The underserved niche market segment that Kevin uation. Customized products have been shown to generate greater appeal for customers than products designed for specific segments. He 2006 and more than $850 million in 2009.” shirts for $12 apiece to the football team at Georgia Tech. or even selected income groups. made its first sale of 200 let them see me sweat.” Bloomberg Businessweek. since companies like these let everyone choose their own style. “Under Armour May Be Overstretched. Mass customization websites such as CaféPress and Zazzle in the United States and Spreadshirt in Europe now make it possible for consumers to order T-shirts and other custom-designed products in quanti- ties of one or one thousand. or postal codes. Ironically. For example. Buzz from the movie European Edition. No longer must everyone at the company picnic wear exactly the same T-shirt. football movie Any Given Sunday. “Under Armour’s Daring Half-Court Shot. pp. and The Economist and Hello in Britain.$55 million in 2002 and more than $400 million in a single product on the market that met his needs. p. satisfied customers and grew with Season.com.000. more broad-based magazines. Kevin ended his company’s first year with sales Source: Company website: www.35 million athletic underwear—he simply wanted a comfortable in 1999. In March 1996. Under Armour’s sales in 2001 drove triple-digit T-shirt to wear under his football pads that would wick growth in its category and led industry peers at Sporting moisture away from his skin and protect him from heat Goods Business to recognize the company as “Apparel exhaustion during practice. and jazz. many marketing organizations have made it easier to implement sharply fo- cused marketing programs by more sharply targeting their own services.com. For more on and a first-time ad in ESPN Magazine during the movie Under Armour. see www. such as classical music. in the United States. and Reebok.indd 143 14/12/12 2:23 PM . In the United King- dom. with almost instant delivery. country. 65. After hunting through all the Supplier of the Year. Also. and even the slogan. “Matt Townsend. these include special interest magazines.” Under Armour’s sales soared to sporting goods shops. such as Sky Sport and the Discovery Channel. just before grad. “Tight Skivvies. and positive at- titude towards the product. The process should identify one or more relatively homogeneous groups of prospective buyers with regard to their wants and needs and/or their likely responses to differences in the wal28949_ch06_139-161. Kevin had some T-shirts sewn up in Lycra and Plank discovered and his success have not gone unno- found that he had solved a common problem for all of ticed. and Stanley sales to athletic teams in colleges. November 1–7. rock.8 Finally. A1. set out to create one. Elaine of $17. April 30. not to mention chat shows of various kinds. 2003. Shannon. Chapter 6 Targeting Attractive Market Segments 143 EXHIBIT 6. many new media have sprung up to appeal to narrow interest groups. 2007. the company that was soon born in the competitive heat? Kevin Plank’s reaction? “I’ll never his grandmother’s basement. T-shirts and coffee mugs. 24–25. recent entrants to this segment are Nike his teammates. cities. and color. offer advertisers the opportunity to target specific groups of people within their subscription base. even designer jeans and cars. size.

older couples without dependent children. The segmentation criteria should measure or describe the segments clearly enough so that members can be readily identified and ac- cessed. the segmentation process should deter- mine the size and market potential of each segment for use in prioritizing which segments to pursue. newly married. based on where they are. some college. • Specify criteria that define the segment. 65 and over Sex Male. Hispanic.000. Some examples of demographic attributes used to segment consumer markets are as follows: • Age. or descriptors. older. • Determine segment size and potential. 25–34.2. graduations. single. graduated high school. student. etc. EXHIBIT 6. sporting events Race and ethnic origin African American. as shown in Exhibit 6. older couples retired.2 Some of the More Commonly Used Demographic Attributes* Demographic Descriptors Examples of Categories Age Under 2. clerical. 144 Section Two Opportunity Analysis Strategic Issue elements of the marketing mix—the 4 Ps (product. Scandinavian * Others include marital status. Since mobile phone penetration has reached saturation levels in most of Europe and the United Kingdom. national holidays. most other fitness clubs in India targeted men and women.999. youngest child under 6. wal28949_ch06_139-161. For Dinaz Vervatwala. anniversaries. older couples with dependent children. etc. whether of goods or services. The three approaches apply in both consumer and organizational markets. These segments’ high disposable incomes and their ability to devote time to new habits are seen as a lucrative market opportunity. unemployed Education Some high school.) are useful in segmenting organizational markets. price. Like most retailers. 18–24. 12–17. 35–49. 50–64. We examine each of these approaches as follows. blue collar. Italian.000–24. Occupation Professional. $15.999. some mobile service providers have focused their attention on the 55–65 and 65-plus segments to improve usage and penetration. manager. we usually think of demographics in terms of attributes of indi- vidual consumers. 6–11. Asian. Jewish. women were targeted even though market segmentation process. Given these objectives. promotion. what kinds of segmentation criteria. There are three important steps in the and place). Vervatwala targets well-defined trading areas in placing new studios. homemaker. Anglo-Saxon. Finally. home ownership. in order for the marketer to know whether a given prospective customer is or is not in the target market and in order to reach the prospective customer with advertising or other marketing communication messages. supervisor. 2–5. sales.000–74. single Income Under $15. graduated college Events Birthdays. female Household life cycle Young. and presence and age of children. size of firm. are most useful? Segmentation decisions are best made in one of three ways: based on who the cus- tomers are. a topic we address in more detail later in this chapter. Who They Are: Segmenting Demographically While firm demographics (age of firm. or based on how they behave relevant to the market in question.indd 144 14/12/12 2:23 PM . no children. youngest child 6 or over. detailed demographic data showing what kind of people live where is readily available. $25. In most developed countries. industry.

never LEGO’s market.” aimed at girls aged 5 and up. New York’s Organic Avenue and BluePrint Cleanse. a father girls will no longer be left out. either. Macy’s. for example. Higher-income households purchase a disproportionate number of ex- pensive cars and theater tickets.3 LEGOs for Girls? For more than 50 years. Understanding segments within the male popu- lation. LEGO undertook an extensive research effort in Germany. For more ter understand girls and their play.11 • Among women. There’s “nothing but danger associated with cleansing”. Nokia sold Vertu in order to focus its efforts on reviving its troubled core mobile phone business. focus groups. week European edition. The sales of certain kinds of products (e. wasn’t happy. car companies have found ways to cater to the needs of the multicultural segment.g. that the girls’ business will be bigger than the boys’ busi- In late 2011 and early 2012. see www. Using mostly cultural on LEGO. boys everywhere have been anthropology embedded in family settings.3). and the United States to bet. • Education. To develop Lego Friends. can bring out insights previously missed. offers an ultra-exclusive mobile telephone and services built around the phone.13 • Occupation. author of Boys tended to see their LEGO figures as third persons Cinderella Ate My Daughter. and more—with LEGOs. thinking about all men or all women as a single market segment is usually naive. But Knudstorp is satisfied that LEGO Group CEO Jørgen Vig Knudstorp.” she says. which was estimated to comprise 32 percent of the U. rather than developing their spatial and fine-motor skills by build. There is a strong positive correlation between the level of education and the purchase of travel. the American department store chain. with five new main characters something to offer. population in 2010. there was this little pink ghetto over in one Will LEGO’s new strategy to conquer the girls’ segment corner. wasn’t happy that LEGOs while girls tended to see them as avatars in their own simply didn’t appeal to girls. pp. • Sex.lego. In 2012. LEGO’s research team was able to discern ing things—from cars to police stations to spaceships some important differences between girls’ and boys’ play. “Lego Is for Girls. • Race and ethnic origin. “It is a practice to be condemned. The Danish toy maker LEGO has recently embarked on an ambitious effort to en- courage girls. too. Source: Brad Wieners. and special-interest magazines. ness. Gershon of Columbia University’s Department of Anatomy and Cell Biology is less than enthralled. The increase in the number of working women has created needs for specialized goods and services in- cluding financial services.com. Vertu. We get “a lot of mommies.” Bloomberg Business- Korea. A plethora of juice-based dietary cleansing brands targeting the urban get-thin- quick segment has emerged in recent years. Chapter 6 Targeting Attractive Market Segments 145 EXHIBIT 6.12 • Income. to build and play with LEGOs (see Exhibit 6. “The last time I was in a image. the United Kingdom. Michael D.. 2011. Lego Friends. But Peggy Orenstein.S. “I don’t have any illusions of two daughters and two sons. we have tious effort. and high-end photographic equipment. however. LEGO launched an ambi. sharply targeted segmentation schemes can often deliver attractive re- sults. 68–73.” reports BluePrint co-founder Erica Huss Jones. magazines. “Is this the best you can do?” work? It’s too early to tell. More and more companies are targeting ethnic segments via specialized marketing programs.10 As many marketers are discovering. targeting the same customers who buy luxury watches and custom-made cars. Girls loved role-play. work shoes. Los Angeles-based Cooler Cleanse and iZo Cleanze are among them. Nokia’s former subsidiary. convenience foods. he says. uni- forms. but at least for those who are looking for it. But Dr. automobiles. has developed a training program for minority suppliers to help it better serve its wal28949_ch06_139-161. business wardrobes. and other luxury items. December 19. LEGO store. automobiles.indd 145 14/12/12 2:23 PM . insurance. books. In the United States. and trade magazines) are tied closely to occupational type.

indd 146 14/12/12 2:23 PM . Treating the people of any developing country as a single market segment is not likely to bring success.”14 Demographic descriptors are also important in the segmentation of industrial markets. and Walmart. Thus. including Nescafé instant cof- fee.000 Brazilians who live in the Amazon River basin. which are typically segmented in two stages. “There are differences. and industry affiliation (SIC code in the United States). More and more advertisers are taking advantage of geographic media buys in order to efficiently reach the market segments they target. starting with countries. as well as purchase rates for a variety of goods. that is the beauty of diversity. groups customers by the characteristics of the individuals who influence the purchasing decision—for instance. a rapidly growing but perhaps relatively small middle class. Geodemographics also attempts to predict consumer behavior by making demographic. These reports are useful in assessing the size and market potential of a market segment defined by a particular trade area. African American. where customers are un- willing to travel very far to obtain the goods or services they require. a discounter. in order to reach the 800. cultures. International markets are often segmented in a similar hierarchical fashion. might tar- center location in the United States. get one demographic group within a given trade area. Maggi soups and seasonings. divides the market according to the characteristics of the buying organization using such attributes as age of firm. Macy’s senior vice president for diversity strategies.claritas. the upscale department store. The area included within such a geographically defined region is called a trade area. psychographic. growth rates. service needs. chartered a boat stocked with more than 300 of its brands. age. The second stage. Geodemographic Segmentation Marketers targeting emerging markets in the developing world must pay particular atten- tion to market segmentation within the geographic regions they target. more vans in the Northeast. “We’re going to pick up the customer where he is.”15 Geographic segmentation is used in both consumer and organizational markets and is particularly important in retailing and many services businesses. Thus. Where They Are: Segmenting Geographically Different locations or regions vary in their sales potential. macrosegmentation. Virtually every de- veloping country contains a small segment of extremely wealthy people. perhaps. Says Nestlé Brazil CEO Ivan Zurita. and more diesel-fueled cars in Europe. while many poor live either in rural areas or in urban slums. might target another. a two-mile or five-mile radius of their proposed of a particular street corner or shopping new store. more pickup trucks are sold in the Southwest United States. many segmentation Strategic Issue schemes involve both demographic and geographic factors. and Asian shoppers. Nestlé.com) and others offer low-cost reports based on census data that show the demographic profile of the population residing within any given radius of a particular street corner or shopping center location in the United States. customer needs. and competitive structures. In emerging and developed markets alike. For example. climates. The interna- tional counterpart of SIC is the trade-category code. The first. 146 Section Two Opportunity Analysis growing number of Hispanic. Neiman Marcus. Nestlé’s fortified powdered milk. and Leche Ideal. And let’s figure out as a retailer how to merchandise that. sex. Claritas (www. and large numbers of people who are poor by Western standards. firm size. microsegmentation. embraces the market segmentation challenge he faces. and position within the organization. one way to segment retail markets is by distance or driving time from a particular location. Bill Hawthorne. and wal28949_ch06_139-161. Let’s celebrate those. followed by groups of individuals or buying organizations. The first two of these demographic groups are most often found in the cities. Low-cost reports based on census data retailers usually want to know something about the people who live show the demographic profile of the population residing within any given radius within.

now part of Nielsen. though Gatorade still dominates the category. which often cuts across demographic categories or varies within them. In the end. Behavioral attributes can take many forms. Consumer Needs Customer needs are often expressed in benefits sought from a particular product or ser- vice. This onetime niche market has grown into a multibillion-dollar market in the United States alone. economy. and. spare parts availability. Claritas’s PRIZM service classifies all U.indd 147 14/12/12 2:23 PM . loyalty. in turn. households into 66 demographically and behaviorally distinct clusters. customers consider relevant benefits that include product performance in different use situations. quickness. each of which. on the structure of firms’ purchasing activities and the types of buying situ- ations they encounter. offers datasets for other countries as well. and research labs. based not on who the target consumers are or where they live. Europe’s easyJet airline originally targeted lei- Gatorade’s simple segmentation scheme created a whole new category of “sports sure travelers. Other con- siderations in the purchase of industrial products/services include on-time delivery. Marketers can define segments according to these different choice criteria in terms of the presence or absence of certain characteristics and the importance attached to each. In organizational markets. for example. Chapter 6 Targeting Attractive Market Segments 147 consumer information available at the block and zip code or postal code levels. on product usage patterns. such as Volvo’s safety versus Jaguar’s styling. including those based on consumer needs. including lifestyle.4. Different individual customers have different needs and thus attach different degrees of importance to the benefits offered by different products.” who needed to replenish water and salts lost through perspiration.16 Claritas. These examples all demonstrate the power of highly specific behavioral descriptors in defining sharply focused market segments. consumers often evaluate product alterna- tives on the basis of desired characteristics and how valuable each characteristic is to the con- sumer—choice criteria. universities. Mountain bike makers Specialized and Gary Fisher target bicyclists who wish to ride on single-track trails or Strategic Issue back-country terrain. They include product usage. high-powered arrays of disk storage and servers are bought because they meet the high-speed computational requirements of a small group of customers such as governments. see Exhibit 6.S. there are more general product-related attributes as well. credit