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

wal28949_fm_i-xvi.indd i 17/12/12 11:40 AM

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

iv

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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
v

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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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indd vii 17/12/12 11:40 AM . 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 viii 17/12/12 11:40 AM . or Position Defense. 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. or Strategic Withdrawal. Chapter 11 279 Maintenance Objectives 226 Does Every Company Need a Digital or Social Fortress. 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. 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 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. 24/7 Access.

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.indd ix 17/12/12 11:40 AM .

wal28949_fm_i-xvi.indd x 17/12/12 11:40 AM .

Our combined entrepreneurial. As the reader will see from the outset in Chapter 1. global perspectives offered by the authors of this book. the 4 Ps. • Your instructor wants to use the most current and web-savvy book available. 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. and other marketing fundamentals typically covered in earlier courses. • Your instructor appreciates and believes you will benefit from the real-world. Many also ask students to complete a term-long project of some kind. xi wal28949_fm_i-xvi. the reader—around the world many times over. Whether called Marketing Strategy. 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. Our goal—and probably that of your instructor. This text assumes student familiarity with—and thus does not repeat—the basics of buyer behav- ior. and we devote an entire chapter—Chapter 11—to the development of marketing strategies for the new econ- omy. 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. and distribution industries and has taken us—and thereby you. Strategic Brand Management. are assembled. 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. software. marketing decision making is a critical activity in every firm. We have written this text to serve exactly these kinds of case-based and project-based capstone and advanced elective courses. • Your instructor prefers a tightly written text whose strategic perspectives serve as a concise foundation around which a broader set of materials. 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. and consulting experience spans a broad variety of manufacturing. such as case studies or supplementary readings that fit the specific theme of the course.or new-economy companies. it is not just marketing managers who make marketing deci- sions. or something else. whether as an entrepreneur or in an established firm. In addition.indd xi 17/12/12 11:40 AM . such as the development of a marketing plan for a new or existing product or a new venture. service. case-writing. Further. such courses typically ask students to apply what they learn to decision making in case studies that bring alive real marketing situations. We inte- grate the latest new-economy developments into each chapter. 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. mar- keting management. Strategic Market Planning. including start-ups—not just in big companies with traditional mar- keting departments.

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. because in most advanced marketing management classes and executive courses. or decisions in a marketing simulation game. Facebook. not just what they know. This decision-focused approach is important to students and executives who are our readers. By combining this book with sup- plemental readings and/or cases. 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. in terms of the firm’s mis- sion and competencies. decisions in a course project. This book puts the tools in the toolbox to make this happen. in each chapter. 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. Accounting and consulting firms must find ways to differentiate their services from other providers so their customers have reasons to give them their business. instructors can design a rich and varied course in which students learn experientially. informed. 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. customers will not buy. and others from whom we have learned so much. Because the book is concise. and we thank our many students. without whom this book would not have been possible. students learn the key strategic principles quickly. the students or participants will be asked to make numerous decisions—decisions in case studies about what the protagonist in the case should do. as they focus on the various strategic decisions that define contemporary marketing theory and practice. colleagues. specific tools and frameworks for making marketing decisions that take best advantage of the conditions in which the firm finds itself—both internally. we want to say a bit more about each of the four distinctive benefits— bulleted previously—that this book offers its readers. and externally. and web-savvy perspective to an important question many students are asking: “Have the advent of Internet. Software engineers developing the next great internet or mobile ap- plication must understand how their technology can benefit the intended customer. 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. so they can devote most of their reading and prep time to the application of those principles to cases or a course project. for without such benefits. Our decision-focused approach is also important to employers. employers want to know what their new hires can do. for example—that draw on supplemental readings to com- plete the thematic picture. In this brief preface. xii Preface Stockbrokers must attract new customers. In the end. in terms of the market and competitive context in which it operates. such as those entailed in developing a marketing plan. while providing. 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. and wal28949_fm_i-xvi. Thus.indd xii 17/12/12 11:40 AM . WEB-SAVVY INSIGHTS Because this book has been written by authors from web-savvy institutions who work with web-savvy companies. We also point out the key changes in this edition compared to previous ones. it brings a realistic.

China.indd xiii 17/12/12 11:40 AM . 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. with the latter ranging from Scotland to South Africa. yes and no. and we have the battle scars to prove it. On the other hand. high-tech. more established firms. graduation—or later in their careers. keeps us in touch with the latest developments on the global business scene. Thus. The result of our collective and varied experience and expertise is a book marked by its real-world. GLOBAL PERSPECTIVE Theory is important because it enhances our understanding of business phenomena and helps managers think about what they should do. from Hyderabad to Hong Kong and more. and the latest mobile apps changed all the rules?” Our answer is “well. 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 practiced the marketing lessons we preach.” On one hand. wal28949_fm_i-xvi. 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. Both of us bring a rich variety of both domestic American and international consulting and executive education experience. Our decision focus is all about application. 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. important as that perspective is. and Russia on the global economic stage and the growing realization in companies everywhere that business today is a global game. In short. • The growing importance of emerging markets such as India. whether now—upon. WHAT’S NEW IN THIS EDITION? In this eighth edition of Marketing Strategy. and entrepreneurship arenas. Brazil. we integrate examples of young entrepreneurial companies. or even before. from London to Lagos. new products. marketing strategy. It is in the application of theory—to the world of marketing practice—where we believe this book excels. 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. • 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. we’ve gone to considerable lengths to address four key trends that are sweeping the world of marketing theory and practice. But we don’t just bring an academic perspective to the party. Both of us have contributed the fruits of our research to the growing body of knowledge in the marketing management. throughout the book. global perspective. John’s platform at Lon- don Business School. Preface xiii Twitter. as the many dot-com failures a few years ago attest. 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. one of the world’s most global institutions.

In addition to these more significant changes. and new material on some of the unique problems encountered in marketing across cultures. 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. We have worked especially hard to add examples from fast-growing emerging economies like India. To reflect the growing interest—some would say concern—about the measurement of marketing performance. We’ve addressed the first of these issues. A new chapter-opening vignette on opportunities in the “app economy” should prove to be of interest to our many entrepreneurially minded readers. Chapter 11 provides an underpinning to help students and faculty discuss why and how it’s all happening. However. xiv Preface • The changing nature of marketing research. established ones—are using the strategic tools and frameworks that this book brings to life. and the latest empirical evidence of what works and what doesn’t incorporated. As the author team knows from personal experience. and to draw meaningful managerial implications for both marketers and aspiring entrepreneurs. • The growing ubiquity of social networks—Facebook. the entrepreneurial path is a long and difficult—but always exciting—one. 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. every chapter has been refreshed. Twitter. we’ve completely updated and revamped Chapter 11. We have also added a new sec- tion on positioning decisions in global markets in Chapter 6. In this eighth edition. Recent editions of this book have been known for their global perspective.indd xiv 17/12/12 11:40 AM . 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. such as the discussion of stricter international bribery laws in Chapter 2. and this edi- tion is no exception. a way to disintermediate one’s distribu- tion channel and reach customers directly. and we’d like our readers who choose such a path to be well equipped for the journey. 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. 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. or for other reasons. however. and the like— which provide powerful new communications tools for marketers of all kinds. China. and Russia. which now focuses on the marketing impli- cations of today’s digitally and socially networked world. Though further innovations in this arena will no doubt have hit our readers’ cell phones. and iPads by the time the ink is dry on this edition. a means of conducting marketing research. students’ growing interest in all things entre- preneurial. 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. Perhaps nothing. 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. whether companies with goods to sell or political organizations out to change the world. the overall structure and flow of this eighth wal28949_fm_i-xvi. LinkedIn. laptops. two now essential arrows in every marketer’s quiver that didn’t even exist just a few editions ago. and by a growing recognition that understanding customer desires in today’s complex world requires more than an occasional cus- tomer survey. by adding more examples throughout the book of how entrepreneurial com- panies—not just large. its examples updated.

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

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

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

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Over time it morphed into a technically a major strategic shift essential for the unit’s survival. Yun initiated an ambitious new competitive brands. Yun argued. high-quality brand com- under the Samsung brand through discount chains manding a premium price.indd 3 14/12/12 12:26 PM . At about the same In order to implement its new competitive strategy. Finally. multi- function cell phones. but then several shocks in its and relatively upscale customers around the world. such as Dell. “the Chinese would slaughter us. 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. While Sony and other 3 wal28949_ch01_001-030. and other digital devices. “If we were to continue competing only on price. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. The objective was to such as Wal-Mart at very low prices.” chips and other components Samsung supplied for other electronics brands softened due to increased Technical Innovation and R&D competition and excess capacity. Business. 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. but because of the strumental in building the country’s economy over down-market image of the Samsung brand. its TVs the last half century. market and competitive environments forced a ma. sales of Samsung’s own branded products Samsung had to become a pioneer in developing were also declining. time. innovative company that was one of the pioneers in developing flat-screen displays. Hewlett-Packard. 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.” jor reevaluation. plasma TVs. 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. the unit competed primarily and Marketing Strategies by (a) producing technical components or low-cost manufactured products for firms with better-known Mr. But New Competitive until the mid-1990s. As Yun Jong-yong—a company new digital technologies. First. Samsung could build a TV that family-controlled conglomerates that have been in. the global market for memory Mr. the Asian financial crisis of 1997 made Sanyo label. was technically as good as a Sony.

sponsorships. Tokyo. the firm shifted substantial specialty stores and web retailers—such as Best resources into R&D focused on technologies such as Buy and Amazon. was to reorganize the firm’s distribution channels. 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. many of the company’s products tronics. Some of those benefits may be subjective— vides both financial and technical support for a va- attractive styling. One of his first moves creased another 20 percent in 2011. the brand’s value in- for Samsung Electronics. new riety of sporting and cultural events in every major product development at Samsung usually involves a region of the world. and the company’s market researchers run focus groups and user surveys in many markets around the world. the unit’s global revenues reached 165 trillion won Consistent with the strategic objective of establish. London.7 trillion won.9 billion)—about 6 percent of consolidated the firm’s roster of advertising agen- the unit’s total revenue—on R&D. can most valuable consumer electronics brand. According Revamping Samsung’s marketing efforts was also to studies by Interbrand (a brand consultancy). points that will recur as major themes throughout this book. and internet advertising ment of consumers will consider to be worth the to strengthen its brand. critical to the success of its new competitive strat. 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. display drivers and chip sets. overtaking Sony as the unless potential customers know they exist. team of designers who collaborate closely with the Asian Games. To ensure they stay in touch with consumer the Montreal Jazz Festival and the Chelsea Football tastes in different countries. And in acquire them easily. They wal28949_ch01_001-030. the firm’s 450 design.000 people— group—British-based WPP. and think they are worth the spite of the fact that Apple’s iPhone and iPad gate- money. Shanghai. and other international events. In the 2010 fiscal year it spent communications across world markets. premium price.1 trillion won ($7. and To ensure consistency in Samsung’s marketing mobile telephony. more than 200 percent over the first decade of cated and well-designed products are likely to fail the twenty-first century. Mr. Samsung pro- price. But cutting-edge technology does not guarantee The firm also makes extensive use of more market success. contemporary promotional tools such as product ucts that deliver benefits that at least some seg. placements. For instance. large-area LCDs. distributed through service-oriented electronics tions. manufacturing people. 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. it also supports regional and local events—such as keters. and ing Samsung as a high-quality brand worthy of a after-tax profits were 13. but firm’s engineers. 4 Section One Introduction to Strategy rivals had a substantial lead in consumer elec. Consequently. 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. Therefore. 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.com—instead. 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. the global value of Samsung’s brand increased by egy because even the most technically sophisti. Kim 9. It is a sponsor of the Olympics. As a result.indd 4 14/12/12 12:26 PM . One quarter of cies from 55 down to a single global advertising the company’s workforce—some 44. and San Francisco. and mar. (about $143 billion) in the 2011 fiscal year. Therefore. that lead was rooted in the analog world. or a cool image. were pulled out of low-priced discount chains and The digital world required new technical innova. It must be incorporated into prod.

Because a major part of the marketing manager’s job is to monitor and analyze the needs and desires of potential customers. Some firms’ strategies are driven more by technology. but also the retail outlets used to distribute them. and what prices to charge all reflect the marketing strategies for each of Samsung Electronics’ various product-market entries. Most firms. pursue a hierarchy of interdependent strategies. For example. are but one part of a hierarchy of strategies within the firm. envi- ronmental trends. While the need for a new competitive strategy at Samsung became obvious because of stagnating sales and declining profits. and functional levels? While marketing managers clearly bear the primary responsibility for developing strategic marketing plans for individual product offerings. they often play a crucial role in influencing strategies formulated at higher levels in the firm. their advertising appeals. Each strategy is formulated at different levels in the organization and deals with different sets of issues. which segments to target. and action plans for a specific product-market hierarchy. 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. and opportunities and threats related to trends in the external environment. 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. 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. not only the cool new digital products developed by Samsung. what products to offer each target segment. and its growth policies. or cost concerns. and other aspects of their marketing pro- grams were shaped by the unit’s competitive strategy of establishing Samsung as a stylish. however. promotional media. such as semiconductors. decisions about the content of those new strategies were influenced by information and analyses supplied by the firm’s marketing and sales personnel. 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. particularly larger corporations with multiple divisions or business units such as Samsung. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. On the other hand. emerging challenges posed by competitors. The constrained by—higher levels within the objectives. what channels to use to distribute those products. what promotional tools and appeals to employ. business. This level of strategy primarily addresses how a business will compete in its industry in order to attain a sustainable advantage over its rivals. Finally. strategies. and competitors’ actions in formulating successful strategies at every level. As we shall see later in this chapter. Each level of strategy must be consistent with—and therefore influenced and con- strained by—higher levels within the hierarchy. and do they have similar or different components at the corporate. For example.indd 5 14/12/12 12:26 PM . Such firms are market-oriented and follow a business phi- losophy commonly called the marketing concept. This level of strategy provides direction concerning the organization’s overall mission. What do strategies consist of. interrelated functional decisions about how to divide the market into segments. Some firms systematically incorporate such market and competitive analyses into their planning processes. They also coordinate their activities around the primary goal of sat- isfying unmet customer needs. 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. Strategic Issue Regardless of their participation or influence in formulating cor- Each level of strategy must be consistent porate and business-level strategies. and Marketing Strategies 5 also demonstrate the importance of timely and accurate insights into customer desires. the kinds of businesses it should be in. prices. high-quality brand commanding a premium price. what role do they play in wal28949_ch01_001-030. Business. production.

It spells out the objectives to be accomplished. competitors. it continues to be the subject of widely differing definitions and interpretations. product-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. however.2 Our definition suggests that a strategy should specify (1) what (objectives to be ac- complished). or return on investment—over specified time periods for each of those businesses and product-markets and for the organization as a whole. Formulating a strategy also involves deciding how those resources are to be obtained and allocated across businesses. captures the essence of the term: A strategy is a fundamental pattern of present and planned objectives. that strategy and its various elements need to be periodically summarized and communicated to other people and functional departments in the organization. and other environmental factors. Resource deployments. Each of the plan’s components will be examined in more detail in one or more future chapters. (2) where (on which industries and product-markets to focus). The marketing plan is an important tool for such communication. and the timing and locus of responsibility for each action. 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). and each of those chapters will conclude with a detailed marketing planning exercise. Decisions about an organization’s strategic scope should reflect management’s view of the firm’s purpose or mission. 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. Scope. Consequently. the last section of this chapter briefly outlines the components and organizational framework of a formal marketing plan. THREE LEVELS OF STRATEGY: SIMILAR COMPONENTS BUT DIFFERENT ISSUES What Is a Strategy? Although strategy first became a popular business buzzword during the 1960s. profit contribution. The scope of an organization refers to the breadth of its strategic domain—the num- ber and types of industries. and functional departments and ac- tivities within each business or product-market. Every organization has limited financial and human resources. 4. One important part of any strategy is a specification of how the organization will compete in each business and product- market within its domain. 2. Goals and objectives. why are some firms more market-oriented) than others. resource deployments.e. and market segments it competes in or plans to enter. product lines. Strategies also should detail desired levels of accomplishment on one or more dimensions of performance—such as volume growth. 3. 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.. or sets of issues: 1. The following defini- tion. How can it position itself to develop and sustain a differential wal28949_ch01_001-030. Identification of a sustainable competitive advantage. and interactions of an organization with markets.indd 6 14/12/12 12:26 PM . 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. The Components of Strategy A well-developed strategy contains five components.

each formulated at a different level of the firm. most organizations have a hierarchy of in- terrelated strategies. The Hierarchy of Strategies Explicitly or implicitly. 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. Synergy. The three major levels of strategy in most large. these five basic dimensions are part of all strategies. However. and (3) functional strategies focused on a particular prod- uct-market entry. In small EXHIBIT 1. managers must examine the market opportunities in each business and product-market and the company’s distinctive competencies or strengths relative to its competitors. multiproduct organizations are (1) corporate strategy. product-markets.1. resource deploy- ments.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. (2) business-level strategy. Synergy exists when the firm’s businesses. 5. These three levels of strategy are diagrammed in Exhibit 1.indd 7 14/12/12 12:26 PM . and Marketing Strategies 7 advantage over current and potential competitors? To answer such questions. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. and competencies complement and reinforce one another. Business. rather than a single comprehensive strategy.

but other functional departments—such as R&D and operations—also have strategies and plans for each of the firm’s product-markets.2 summarizes the specific focus and issues dealt with at each level of strategy. 8 Section One Introduction to Strategy single-product-line companies or entrepreneurial start-ups. synergy should be sought across product-markets and across functional departments within the business. managers must coordinate the activities of multiple business units and. even separate legal business entities. modern plants might adopt a low-cost competitive strategy. product or production technologies. 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. Finally. but because each strategy serves a different purpose within the organization. conflicts across functional areas. Exhibit 1. and seeking synergy among the firm’s various businesses. Throughout this book. therefore. each emphasizes a differ- ent set of issues. a common salesforce. Corporate Strategy At the corporate level.indd 8 14/12/12 12:26 PM . corporate and busi- ness-level strategic issues merge. and/or promotional themes. Our primary focus is on the development of marketing strategies and programs for individual product-market entries. we discuss them in the next sections. and vast numbers of cus- tomer service personnel—into the corporation’s service and software businesses to support the new strategic direction. Decisions about the organization’s scope and resource deployments across its divisions or businesses are the primary focus of corporate strategy. in the case of conglomerates. financial. Synergy can provide a major competitive advantage for firms where related businesses share R&D investments. and the mechanisms that firms use to resolve those conflicts.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. Strategies at all three levels contain the five components mentioned earlier. they shifted substantial corporate resources— including R&D expenditures. 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. and technological resources. we examine the interfunctional implications of product- market strategies. wal28949_ch01_001-030. a business with low-cost sources of supply and efficient. however. distribution chan- nels. 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.3 Business-Level Strategy How a business unit competes within its industry is the critical focus of business-level strategy. One with a strong marketing department and a competent salesforce may compete by offering supe- rior customer service. marketing and advertising budgets. designing effective organizational structures and processes. A major issue in a business strategy is that of sustainable competitive advan- tage. Attempts to develop and maintain distinctive competencies at the corporate level focus on generating superior human.

effective product financial or human business unit’s positioning.indd 9 14/12/12 12:26 PM . MIS) entry Sources of competitive • Primarily through • Primarily through • Primarily through advantage superior corporate competitive strategy. Business. Business. superiority resources. or (including favorable resources. competencies. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. 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. more competencies relative on one or more corporate R&D. 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. • Shared resources • Shared marketing technologies. and Marketing Strategies 9 EXHIBIT 1.2 Key Components of Corporate. 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.

Christian Homburg. distributors. 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. marketing managers are usually most familiar with conditions and trends in the market environment. A t-test was performed to compare column 2 (mean of relative influence of marketing) with columns 3 through 6 (relative influence of sales. price.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. and 234 German business units of firms in the electrical equipment.S. R&D. p. Workman Jr. Because they occupy positions at the boundary between the firm and its customers.5 The study examined perceptions of marketing managers’ influence relative to managers from sales. “Marketing’s Influence within the Firm. they not only are responsible for developing strate- gic plans for their own product-market entries. and promotion) tailored to the needs and wants of potential customers in that target market. but also are often primary participants and contributors to the planning process at the business and corporate levels as well. published by the American Marketing Association. where: * p < . mechanical machinery. using a constant-sum scale of 100. 9. operations. R&D.3 summarizes the results. EXHIBIT 1. firms seek competitive advantage and synergy through a well-integrated program of marketing mix elements (primarily the 4 Ps of product. and finance on a variety of strategic and tactical decisions within their businesses.05. Next. 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. John P. Source: Reprinted with permission from Journal of Marketing. and consumer package goods industries. 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. wal28949_ch01_001-030. Exhibit 1. The wide-ranging influence of marketing managers on higher-level strategic decisions is clearly shown in a survey of managers in 280 U.indd 10 14/12/12 12:26 PM .. and finance). place.” Journal of Marketing 63 (April 1999). ** p < . and Harley Krohmer. the critical issue concerning the scope of a marketing strategy is specifying the target market(s) for a particular product or product line. and competitors. Statistically significant dif- ferences with marketing are indicated by asterisks. Consequently.01. operations. Therefore.

Thus. pricing. marketers tend to have a greater influence on all levels of strategy in organizations that embrace a market-oriented philosophy of business. marketing is more influencial in firms that have strong “customer-connecting” capabilities. 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. such as advertising messages. such as cross-functional work teams? The study’s results suggest not. and Marketing Strategies 11 The study found that. 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. marketing managers also were perceived to wield significantly more influence than managers from other functional areas on cross-functional. managers in other functional areas of market-oriented firms incorporate more customer and competitor information into their decision-making processes as well. As one of the study’s authors points out. While the views of finance and operations executives carry more weight in approving major capital expenditures. More surprisingly. Not surprisingly.indd 11 14/12/12 12:26 PM . Similarly. For instance. As originally stated by General Electric six decades ago. 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. the influence of sales executives was perceived to be even greater than that of marketing managers on some of these decisions. the selection of strategic business partners. marketing managers may not play as pervasive a strategic role in other cultures as they do in the United States. 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. customer-oriented aspects central to marketing.”6 Other variables appear to impact marketing’s influence regardless of national culture. especially when marketing has responsibility for the sales force.8 More critically. marketing and sales managers exert more influence on decisions concerning the strategic direction of the business unit. For example. “Germany has tradition- ally stressed technology and operations more than the softer. They also are willing and able to quickly adapt products and wal28949_ch01_001-030.7 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. expansion into new geo- graphic markets. Might the relative influence of the different functions become more similar as firms adopt more integrative organizational forms. For one thing. distribution. Marketing’s influence was not significantly reduced in compa- nies that had instituted cross-functional structures and processes. though. Variations in Marketing’s Strategic Influence Although marketing managers often have substantial influence on strategy formation at the corporate and business unit levels. customer service and support. marketing and sales executives exerted significantly more influence than managers from other functions on strategic decisions concerning tra- ditional marketing activities. Business. Market-oriented organizations tend to operate according to the business philosophy known as the marketing concept. business-level strategic decisions. Interest- ingly. and measurement and improvement of customer satisfaction. and new product development. the strength of that influence varies across organiza- tions. on average.3 found that marketers’ influence on both tactical and strategic issues was significantly lower in German firms.

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. 7. As Akio Morita. and McDonald’s McLean low-fat hamburger. 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. market researchers. New Coke. once said: Our plan is to lead the public with new products rather than ask them what kind of products they want. 9. but we do. Such firms pay a great deal of at- tention to customer research before products are designed and produced. 8. such as Ford’s Edsel. 1 (1994). These and other actions recom- mended to make an organization more market-driven and responsive to environmental changes are summarized in Exhibit 1. 5. The public does not know what is possible. not sales volume. decentral- izing strategic decisions. 12 Section One Introduction to Strategy EXHIBIT 1. marketers.indd 12 14/12/12 12:26 PM . 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. 11. 13. They argue that customers cannot always articulate their needs and wants. 12. Manage culture along with strategy and structure. some famous duds. Grow with partners and alliances. real-time information systems. Webster Jr. Commit to continuous improvement and innovation. the late visionary CEO of Sony. in part because they do not know what kinds of products or services are technically possible.4 Guidelines for Market-Oriented Management 1. 10. Market-oriented firms also adopt a variety of organizational procedures and structures to improve the responsiveness of their decision-making. On the other hand. Target customers precisely. including using more detailed environmental scanning and continuous. seeking frequent feedback from and coordinating plans with key customers and major suppliers. They embrace the concept of market segmentation by adapting product offerings and marketing programs to the special needs of different target markets. 15. published by the American Marketing Association. Define marketing as market intelligence. 4. Let the customer define quality. were developed with a great deal of cus- tomer input.” Marketing Management 3. 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. 14. So instead of doing a lot of marketing research.10 Others have pointed out that some very successful new products. p. and using interfunctional management teams to analyze issues and initiate strategic actions outside the formal planning process. 10. Manage for profitability. functional programs to fit changes in that environment. encouraging entrepreneurial thinking among lower-level manag- ers.4. designers. Build customer relationships and loyalty. “Executing the New Marketing Concept. Frederick E. Samsung uses cross-functional teams of engineers. were developed with little or no market research. such as the Chrysler minivan and Compaq’s pioneering PC network server.. Define the business as a service business. 2. Destroy marketing bureaucracy. Listen to the customer. Create customer focus throughout the business.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. Source: Reprinted with permission from Marketing Management. 6. Make customer value the guiding star. Define and nurture your distinctive competence. Measure and manage customer expectations.9 For instance. 3.

Business. While innovative product design is LEGO’s primary More critically. the Swedish toy company.5. wal28949_ch01_001-030.5 How LEGO Revived Its Brand Not many toy companies in the world have as much firm’s ultimate consumers. they usually don’t— and probably shouldn’t—play a role in influencing how firms allocate their basic re- search dollars. developed with their cooperation (perhaps in the form of an alliance or partnership). As a result. ence or special expertise. Most consumers have little knowledge of scientific advancements and emerging technologies. Jay Greene. “Children are . and refined at customer beta sites. aged by teams involving marketing managers familiar One reason for the decline was a loss of strategic fo. As designers happily embraced their new freedom and de. and profitability problems involved reducing the creative But despite its widely known and respected brand. Mads Nipper. namely that the products being de- native creations for kids to build with LEGO bricks. what benefits it will offer to customers. very demanding Unfortunately. they will go somewhere else. markets points out. and sales of the company’s brand recognition as LEGO. 2010. Therefore. the solution to LEGO’s product design tire cities. and other products in highly help control production and supply costs. uct prototypes. Top management had given signers function most successfully when placed under free reign to the firm’s designers to develop more imagi. with the Swedish company’s plastic bricks. freedom of the firm’s designers. around the world have built cars. To make matters worse. . described in Exhibit 1. those complex designs incorporated about what they want to buy.” interchangeable with those of other products in the line. and Marketing Strategies 13 extensions of products and services that already exist. LEGO’s vice president of products and veloped many increasingly complex and artistic designs. Paradoxically. 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. LEGO began foundering within its competitive strength. First there is basic research. “How LEGO Revised Its Brand. The signed appeal to the customers who will use them. However. If your offer does not thousands of new components. July 23.com. EXHIBIT 1. many of which were not stack up. manufacturing managers who could ures drawn from that series. even en. See also. LEGO launched a kid’s TV series. parts inventories exploded and supply costs Source: Jay Greene. Chapter One Market-Oriented Perspectives Underlie Successful Corporate.businessweekhttps://www.scribd.com/design. 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. Top executives decreed the firm’s profits declined dramatically in the early to that new product development projects should be man- mid-2000s. and purchase behaviors in dif- cus. as illustrated by the travails of LEGO. 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. some constraints. a set of action fig. a customer focus is critical to development. the new designs did not appeal to the kids who are the Design Is How It Works (New York: Portfolio/Penguin Group. Three generations of kids core products went downhill. the same is not true for industrial purchasers. many of .indd 13 14/12/12 12:26 PM . the company has found that de- core product line as well. preferences. 2010). as well as designers. Many high-tech industrial products are initiated at the urging of one or more major customers. . As for consumer markets. one way to resolve the conflict between the views of technologists and marketers is to consider the two components of R&D.” www went through the roof. About half of all manufactured goods in most countries are sold to other organizations rather than individual consumers. with tastes. ferent countries. and then there is development—the conversion of technical con- cepts into actual salable products or services. fire trucks. 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. and whether customers will value those benefits sufficiently to make the product a commercial success.

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

Broad. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. customer demand for the new product is likely to grow rapidly and outstrip available supply.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. and Marketing Strategies 15 Factors That Mediate a Firm’s Market Orientation Despite the evidence that a market orientation boosts performance. even though current market conditions are changing. They focus most of their attention and resources on such functions as product and process engineering. quality. focus on identifying improvement and cost cutting in the new opportunities and applying new production process. promotional tool. and market opportunities. primary focus on functional primary focus on customers’ needs performance and cost. Other functional differences between production-oriented and market-oriented firms are summarized in Exhibit 1. minimize Designed for customer convenience. and finance in order to acquire and manage the resources necessary to keep pace with growing demand. Company makes what it can sell. Businesses facing such market and competitive conditions are often product- oriented or production-oriented. minimize bad debt A customer service. Credit A necessary evil. are especially likely to be internally focused and not very market-oriented. suppliers. customers.6. EXHIBIT 1. The business is primarily concerned with producing more of what it wants to make. particu- larly industries based on new technologies. production. Research Technical research. and marketing generally plays a secondary role in formulating and implementing strategy. Promotion Emphasis on product features. 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. many companies around the world are not very focused on their customers or competitors. focus on product Market research. Pricing Based on production and distribution Based on perceived benefits provided. and production problems and resource constraints tend to represent more immediate threats to the survival of such new businesses. 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. distributors. ability to satisfy customers’ needs or solve problems. • Different levels of economic development across industries or countries may favor dif- ferent business philosophies. wal28949_ch01_001-030. • Firms can suffer from strategic inertia—the automatic continuation of strategies suc- cessful in the past. Early entrants into newly emerging industries. This is because there are likely to be relatively few strong competitors during the formative years of a new industry. a tool to attract losses. costs. technology to satisfy customer needs. or other organiza- tions in their market environment. Packaging Protection for the product. a costs. Product line Narrow.indd 15 14/12/12 12:26 PM . Emphasis on product benefits and and price.

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

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

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

and deal with customer problems.24 Roughly 80 percent of those sales were business-to-business transactions. improve cash flow. QXL on unsold airline tickets and other • Blogs praising/criticizing companies or goods and services. and selected service firms amounted to over $3. 42 percent examine third-party reviews. Marks & Spencer Consumer-to-Business (C2B) Consumer-to-Consumer (C2C) Example: Examples: Consumer • Sites that enable consumers to bid • Auction sites.8 Categories of E-Commerce Business Consumer Business-to-Business (B2B) Business-to-Consumer (B2C) Examples: Examples: Business • Purchasing sites of Ford.” The Economist.8 suggests. February 26. Business. such as 3M and Walmart • Websites of traditional retailers. Sofitel Hotels members.23 A second impact of information technology has been to open new channels for com- munications and transactions between suppliers and customers. 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. internet revenues of manufacturers. and Cisco Systems. Procter & Gamble and 3M have formed alliances with major retailers—such as Kroger and Walmart—to develop auto- matic restocking systems. Lands’ End. conduct all or a large portion of their purchasing activities over the web. Perhaps even more important. and 48 percent are tracking customer reviews and ratings. 11. Oracle. such as E*Trade. and financing arrangements to fit such segments. and Marketing Strategies 19 market feedback. such as Sears. minimize inventory levels. promotional appeals. Amazon. As Exhibit 1. wholesalers. prices. Sales information from the retailer’s checkout scanners is sent directly to the supplier’s computers. such as eBay. For example. such as those in the upper-left quadrant of Exhibit 1. though. Such paperless ex- changes reduce mistakes and billbacks. one simple way of categorizing these new channels is based on whether the suppliers and customers involved are organizations or individual consumers. such as Priceline brands Source: Adapted from “A Survey of E-Commerce: Shopping Around the web. Cisco • E-tailers. and increase customer satisfaction and loyalty. Many high-tech firms such as Oracle Corp. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. And many firms rely on their websites to communicate product information to potential customers. 26 percent said they are currently tracking blogs. and worldwide volume of about $8 trillion seems a reasonable guess for 2012. retailers.4 trillion in the United States in 2009 (the most recent census data available at the time of this writing). producers and distribution channel Ryanair. new information and communications technolo- gies are enabling firms to forge more cooperative and efficient relationships with their suppliers and distribution channel partners. such as Dell. Global sales over the internet are growing so fast that solid estimates of their volume www are hard to come by.22 Thus.8) accounted for only about 8 percent of retail sales in the United states in EXHIBIT 1. p. iTunes • Supply chain networks linking • Producers’ direct sales sites.indd 19 14/12/12 12:26 PM . internet sales from businesses to consumers (the upper-right quadrant in Exhibit 1. In contrast. which figure out automatically when to replenish each product and schedule deliveries direct to each of the retailer’s stores. wal28949_ch01_001-030.8. 2000. and even some more traditional companies such as Ford. However. make sales.

20 Section One Introduction to Strategy 2011—roughly $188 billion. Therefore. and others will become a key strategic competence for firms in the future—and that is what marketing is all about. In many firms. and other partners to perform activities—including marketing and sales tasks—that fall outside those areas of competence. In the United States for in- stance. and to increase the lifetime value of its customers.indd 20 14/12/12 12:26 PM . 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. industries will have to be market-oriented. if not all. In turn. web-based information is affecting consumer purchase patterns even when the purchases are made in traditional retail outlets. service. more firms are trying to develop and nurture long-term relationships and alliances. consumers with internet ac- cess. online retail sales are forecast to exceed $270 billion by 2015. it is apparent that firms in most. however. All of this suggests that the ability to create. Instead of engaging in a discrete series of arm’s-length. 25 to 34 year olds already make more than a quarter of their purchases online. and satisfy- ing customers’ needs—will become even more critical for the successful formulation and implementation of strategies at all organizational levels. 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. and highly adaptive to succeed and prosper in the future. channel members. that such marketing activities may not always be car- ried out by marketing managers located in separate functional departments. consumer purchases over the internet continue to grow rapidly worldwide. and sustain exchange relationships with customers. The Future Role of Marketing In light of such changes.25 Also. this suggests that the effective performance of marketing activities—particularly those associated with tracking. and suppliers on the open market. as organizations become more focused and specialized in developing unique core competencies. such as the one between 3M and Walmart.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. Consequently. and 28 percent said they relied on their friends for news about hot new products or brands. vendors. adversarial exchanges with customers. particularly among younger buyers. they will rely more heavily on suppliers. to gain greater ben- efits at lower costs from its exchanges. tightly focused on customer needs and desires. Among U. we will devote all of Chapter 11 to marketing strategies for e-commerce and discuss specific examples and their implications in every chapter. It is important to note. Such cooperative relationships are thought to improve each partner’s ability to adapt quickly to environmental changes or threats. 78 percent report gathering information online before making a purchase. and YouTube also impact people’s decisions. About 30 percent of the respondents in a recent study said they used social media to help avoid brands their friends did not like. analyzing. wal28949_ch01_001-030.28 As more firms embrace the use of multifunctional teams or network structures. But social media like Facebook. the boundaries be- tween functions are likely to blur and the performance of marketing tasks will become everybody’s business. dis- tributors. and satisfy customers. manage.26 Clearly. Similarly. 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. Twitter.S. and new technologies—such as 4G phones and geolocation apps—will spur further growth. or by visiting a manufac- turer’s website (24 percent). Most start their online search with a search engine like Google (58 percent). distributors. attract. However. dealers.

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

22 Section One Introduction to Strategy EXHIBIT 1.indd 22 14/12/12 12:26 PM . a new product. In other achievable with the company’s available words. 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. 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. Thus. 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. segmentation. 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. the roles marketers and other functional managers play in shaping the strategic direction of their organizations and business units.

an insight that is easily (and often) overlooked. in start-up settings—typically carry out this responsibility. In turn. the manager must decide how to position the product or service offering and its brand within a target segment. and obtain the product from different distribution channels. 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. customers who do purchase the same product may be motivated by different needs. and so forth. Market Segmentation. 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. wal28949_ch01_001-030. In Chapter 5. Issues and analytical techniques involved in brand positioning decisions are discussed in Chapter 7. that is. Understanding Market Opportunities Understanding the nature and attractiveness of any opportunity requires conducting an examination of the external environment. 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. Chapter 6 discusses some of the considerations in selecting a target segment. and Positioning Decisions Not all customers with similar needs seek the same products or services to satisfy those needs. Business. 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. the manager must decide which segments represent attractive and viable opportunities for the company. and we examine the factors that drive the pace at which innovations are adopted over time. especially those of the new-to-the-world variety. 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. on which segments to focus a strategic marketing program. Their purchase decisions may be influenced by individual preferences.indd 23 14/12/12 12:26 PM . social circumstances. that is. Thus. On the other hand. we outline several approaches to evidence- based forecasting. and Marketing Strategies 23 line—is to undertake an analysis of the 4Cs. seek different benefits from the product. Targeting. including the markets served and the industry of which the firm is a part. 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. circumstances. rely on different sources of information about products. personal characteristics. one of the manager’s most cru- cial tasks is to divide customers into market segments—distinct subsets of people with similar needs. 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. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. as well as specific aspects of the target customers and their needs and of the particular firm and what it brings to the party. 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. Measuring Market Opportunities Understanding the overall attractiveness of a market opportunity is one thing. 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. so that the nature and attractiveness of the market opportunity is well understood. Finally.

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

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

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

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

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

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

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

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

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

For instance.1 Corporate Strategy Components and Issues Strategy Components Key Issues Scope. competencies. Exhibit 2. and (6) the search for syn- ergy via the sharing of corporate resources. and intent • What business(es) should the firm be in? • What customer needs. In view of the interactions and interdependences between corporate-level strategy deci- sions and strategic marketing programs for individual product-market entries. (4) a development strategy for future growth. R&D. 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 programs across businesses or product lines. salesforce) might the firm’s businesses share to increase their efficiency? wal28949_ch02_031-057.1 summarizes some of the crucial questions that need to be addressed by each of these six components. and customer-based intangibles (e. 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. 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. reputation) might be developed and shared across the firm’s businesses? • What operational resources. which will produce the greatest returns for the dollars invested? Sources of synergy • What competencies. plants.. or functions (e. 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. this chapter examines the components of a well-defined corporate strategy in more detail: (1) the over- all scope and mission of the organization..g. (5) the allocation of corporate resources across the firm’s various businesses. market segments.indd 33 14/12/12 12:30 PM . knowledge. 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. the firm’s competitive strategy of offering the lowest fares of any airline operating in Europe obviously constrains managers’ pricing decisions. facilities. brand recognition. 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. (3) a source of competitive advantage. (2) company goals and objectives. mission.g. On the other hand. technical.

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

joint displays and sales promotions. For example. if Penn Central had defined its mission as satisfying the transportation needs of its customers rather than simply being a railroad.3 Products and technologies change over time. 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. Thus. low-density products.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. sales.2 suggests.indd 35 14/12/12 12:30 PM . low-density products Physical Based on existing Railroad business Long-haul. 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. instead of seeing itself as being in the railroad business or as satisfying the transportation needs of all potential customers. and distribution competencies. 1st edition. though. Theodore Levitt argues that Penn Central’s view of its mission as being “the railroad business” helped cause the firm’s failure. Thus. Nor did it respond to consumers’ growing willing- ness to pay higher prices for the increased speed and convenience of air travel. For EXHIBIT 2. (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. should it have diversified into the trucking business? Started an airline? As the upper-right quadrant of Exhibit 2. by C. focusing on products or services or the technology used. the most useful mission statements focus on the customer need to be satisfied and the functions that must be performed to satisfy that need. wal28949_ch02_031-057. coal-carrying railroad products or technology Source: Adapted from Strategy Formulation: Analytical Concepts. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 35 goods marketing. such as the rapid growth of air travel and the increased efficiency of long-haul trucking. Schendel. 1978. 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. whereas others simply seek to manage their businesses according to the princi- ples of sustainability—meeting humanity’s needs without harming future generations. such as coal and grain. and they are specific as to the customer groups and the products or technologies on which to concentrate. If Penn Central had defined itself as a transporta- tion company. cross-couponing. Many firms spec- ify their domain in physical terms. Burlington Northern Santa Fe Railroad’s mission is to provide long-distance transportation for large-volume produc- ers of low-value. The problem is that such statements can lead to slow reactions to technological or customer- demand changes. Penn Central did not respond to major changes in transportation technology. One problem with Levitt’s advice. 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. Thomson Learning. 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. Hofer and D. W. it might have been more willing to expand its domain to incorporate newer technologies. and the like.

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

in 2009 American courts fined KBR. For a large firm like Pfizer.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. it is not always easy to decide what a firm’s ethical policies and standards should be. its former parent. for example. and thereby reduce future sales revenues. We have already seen that customers’ perceptions of unethical behav- ior can damage their positive attitudes and loyalty toward the firm. the negative publicity surrounding the ex- posure of unethical practices can raise doubts about future sales revenues and cash flows. 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. Consequently. and the German authorities also fined Siemens a similar amount. A study of regulatory exposure of deceptive marketing practices in the pharmaceutical industry.11 Even when the fines imposed are not large. 19 percent in the Western Balkans and Turkey. 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. 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. 5 percent in the European Union and North America. but employees receive zero tolerance and face tough penalties for any infractions. For example. not all customers or competing suppliers adhere to the same ethical standards. found that the average capitalization loss following a Food and Drug Administration citation was about 1 percent. and Halliburton. There are multiple philosophical traditions or frameworks that managers might use to evaluate the ethics of a given action. in a recent survey of over 90. 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. As a result. The firm puts all of its employees through online anticor- ruption training. different firms or managers can pursue somewhat different ethical standards. fines and penalties can increase the costs dramatically. Exhibit 2. that would mean a wealth loss of nearly $1 billion. where more than half of respondents had paid at least one. thereby making investors more reluctant to commit funds and reducing the firm’s mar- ket capitalization. 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. For example. Its executives also promote an open-door policy and a hot line for report- ing bribe requests and suggesting ways around sticky situations. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 37 Unfortunately.indd 37 14/12/12 12:30 PM . a German conglomerate. for instance. For example.000 business people in 68 different countries. and less than 1 percent in Denmark and Norway.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.3 displays a comparison (across three geographic regions) of the proportion of company ethical statements that address a set of specific issues. And they hit Siemens. particularly across national cultures. But when employees are caught engaging in unlawful behavior— particularly bribery—by government regulators. $579 million for paying bribes to obtain contracts in Nigeria. compared to 23 percent in Latin America. with an $800 million fine.13 Unfortunately. marketers sometimes feel pressure to engage in actions that are inconsistent with what they believe to be right. and consequently to unethical—and possibly illegal—behavior. a construction firm. 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. Bribes were most common in sub- Saharan Africa. more than one-quarter of respondents reported paying a bribe in the past year.

nothing is relevant. 38 Section One Introduction to Strategy EXHIBIT 2. Reprinted by permission.S. wal28949_ch02_031-057. corporate objectives must be specific and measurable. Cana- dian firms are more likely to have explicit guidelines concerning environmental respon- sibility. To be useful as decision criteria and evaluative benchmarks. Those same objectives provide the bench- marks against which actual performance can be evaluated.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. and European companies more frequently have standards focused on workplace safety.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. Since many ethical issues in marketing are open to interpretation and debate. companies are more concerned about proprietary information. • A measure or index for evaluating progress. U. Berenbeim. CORPORATE OBJECTIVES Confucius said. 1992). Therefore. Comparing firms across regions. each objective contains four components: • A performance dimension or attribute sought. Corporate Ethics Practices (New York: The Conference Board. “For one who has no objective. we will examine such issues and their implications individually as they arise throughout the remainder of this book. of their purchasing practices than those of their marketing activities. • A time frame within which the target is to be accomplished. • A target or hurdle level to be achieved.

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).indd 39 14/12/12 12:30 PM . attainable. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 39 EXHIBIT 2. two additional dimensions become im- portant: their relevance to higher-level strategies and goals and their attainability. Business-Unit. we find it useful to follow the SMART acronym when specifying objectives at all levels: specific. and time-bound. 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. When specifying short-term business-level and marketing objectives.4 Common Performance Criteria and Measures That Specify Corporate. such as the costs of corporate staff or R&D. benefits Personnel development. measurable.4 lists some common performance dimensions and measures used in specifying corporate as well as business-unit and marketing objectives. 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. Exhibit 2. wal28949_ch02_031-057. promotions Employment stability. It can be difficult to allocate those costs to specific strategic business units (SBUs) or products. Consequently. Thus. however. relevant.

are not always reliably linked to the true value of a company’s stock. 40 Section One Introduction to Strategy Enhancing Shareholder Value: The Ultimate Objective In recent years. acquisitions. suppliers. debtholders. The firm’s continued existence depends on a financial relationship with each of these parties. and therefore its ability to attain equity financing.18 Strategic Issue In the long term. Given this rationale. Shareholders. 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. the market value of its shares. 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. 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. a firm can long as it satisfies and retains its customers. 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. standard accounting measures. a In the long term. and business strategies that will pro- duce sufficient future cash flows to return positive value to shareholders. as residual claimants. Customers want high quality at a competitive price. including employees.15 Unfortunately. shows how much wealth the company has created. and stockholders. if positive. or earnings per share. though. Similarly. 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. it ceases to be viable. Thus. such broad shareholder-value objectives do not always provide adequate guidance for a firm’s lower-level managers or benchmarks for evaluating performance. some executives have begun expressing such corporate objectives in terms of economic value added or market value added (MVA). 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. wal28949_ch02_031-057. 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. quality. Employees want competitive wages.17 Finally. tools are available to evaluate the future impact of alternative strategic actions on shareholder value. management’s primary objective should be to pursue capital investments. customer value and shareholder value converge. but also it could make the organization more vulnerable to a take- over by outsiders who promise to increase its value to shareholders. many firms set explicit objectives targeted at increasing share- holder value. 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. These are usually stated in terms of a target return on shareholder equity. If a company does not satisfy its constituents’ financial claims. there is a danger that a narrow focus on short-term financial. increase in the stock price. For one thing. 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. depends on investors’ ex- pectations of the firm’s future cash-generating abilities. Suppliers and debtholders have financial claims that must be satisfied with cash when they fall due. 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.14 To do so management must balance the interests of various corporate constitu- encies. customers. weaken service. Thus. The result. Recently. such as earnings per share or return on in- vestment. and lower customer value and satisfaction.indd 40 14/12/12 12:30 PM .16 As we shall see later in this chapter.

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

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

affinity groups. even though the expense of such activities postponed the firm’s ability to become profitable. Amazon. In addition to its promotional efforts. use more of the product or service. Even when a firm holds a commanding share of an existing product-market.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. This typically requires actions such as making product or service improvements. and Amazon was ranked as the world’s best customer service or- ganization in the annual J. additional growth may be possible by encouraging current customers to become more loyal and con- centrate their purchases. such as cookies and desserts. For example. D.com pursued a combination of all these actions—as well as forming alliances with web portals. use it more often.indd 43 14/12/12 12:30 PM . Arm & Hammer successfully introduced a laundry wal28949_ch02_031-057. the vast majority of the firm’s revenues around the world comes from repeat purchases.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. Amazon. or use it in new ways. As a result. proprietary software. cutting costs and prices as Ryanair has done.com spent hundreds of millions of dollars early in its development on warehouses. 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. investments that helped earn the loyalty of its customers. Power-Business Week survey in 2009. and the like—to expand its share of web shoppers. or outspending competitors on advertising or promotions. and other order fulfillment and customer service activities. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 43 EXHIBIT 2.

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. the large Ger- man specialty chemicals manufacturer. many traditional retailers from Macy’s to Marks and Spencer to Walmart are pursuing growth by trying to attract more online customers. 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. Nevertheless.26 Although developing nations represent attractive growth markets for basic industrial and infrastructure goods and services.com web site in order to expand the range of products its customers can purchase with one click. growing personal incomes and falling trade barri- ers are making them attractive potential markets for many consumer goods and services as well. This may involve the creation of marketing programs aimed at nonuser or occasional-user segments of existing markets. internet sales are projected to grow 50 percent between 2012 and 2015.28 Backward integration occurs when a firm moves upstream by acquiring a supplier. For instance. theaters. For instance.27 Expansion by Diversifying Firms also seek growth by diversifying their operations. 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. as when a manufacturer integrates by acquiring or launching a wholesale distributor or retail outlet. For example. Similarly. 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. the strategic plan of Degussa. is also a primary growth strategy for many firms. Vertical integration is one way for companies to diversify. Even developed nations can represent growth opportunities for products or services based on newly emerging technologies or business models. Zegna now earns 40 percent of its revenue from China. Amazon has added a number of independent retail partners to the Amazon . calls for greatly increased resources and marketing efforts to be directed toward China over the next few years. This is typically riskier than the various expansion strategies because it often involves learning new operations and deal- ing with unfamiliar customer groups. Forward vertical inte- gration occurs when a firm moves downstream in terms of the product flow. 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. Indeed. and a carpet cleaner. orchestras. an oven cleaner. such as China. particularly new countries.indd 44 14/12/12 12:30 PM . 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. Thus. 44 Section One Introduction to Strategy detergent. the majority of large global firms are diversified to one degree or another. Therefore. For example. As Utz-Hellmuth Felcht—the chairman of the firm’s management board—points out. Each capitalized on baking soda’s image as an effective deodorizer and on a high level of recognition of the Arm & Hammer brand. Expansion into new geographic markets. 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.

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

It is computed by dividing the business’s absolute market share in dollars or units by that of the leading competitor in the industry.” Copyright 1977. The vertical axis indicates the industry’s growth rate. 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. a business’s relative market share is a proxy for its competitive strength within its industry. 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. The growth-share matrix assumes that a firm must generate cash from businesses with strong competitive positions in mature markets. value-based planning. and the horizontal axis shows the business’s relative market share. in Exhibit 2. the market growth rate on the vertical axis is a proxy measure for the maturity and attractiveness of an industry. Thus. 9–15. It analyzes the impact of investing resources in different businesses on the corporation’s future earnings and cash flows.6 a EXHIBIT 2. Volume 10. Similarly. 46 Section One Introduction to Strategy resources across the firm’s various businesses and product-markets. with permission from Elsevier. “Strategy and the Business Portfolio. Thus. pp. Then it can fund investments and expendi- tures in industries that represent attractive future opportunities.1 Relative market share Source: Reprinted from Long Range Planning. 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.6. as shown in Exhibit 2. Barry Hedley.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. Each busi- ness is positioned within a matrix. and models that measure customer equity to estimate the value of alternative marketing actions. Three sets of ana- lytical tools have proven useful in making such decisions: portfolio models. This model represents businesses in rapidly growing industries as more attractive investment opportunities for future growth and profitability. wal28949_ch02_031-057.indd 46 14/12/12 12:30 PM .

7).indd 47 14/12/12 12:30 PM . Finally. although stars are critically important. 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. the size of the circle representing each business is proportional to that unit’s sales volume. they move into the bottom-left quadrant and become cash cows. As their industries mature. Businesses in high-growth industries with low relative market shares (those in the upper-right quadrant of Exhibit 2. But if man- agers fail. whereas business 11 is the smallest. it eventually turns into a dog as the industry matures and the market growth rate slows. a relative share of 1. in the exhibit. • Cash cows. not only for expansion to keep up with the rapidly growing market.. Such businesses do not require much additional capital investment. A star is the market leader in a high-growth industry. Such businesses require large amounts of cash. Thus.e. businesses 7 and 9 are the largest-volume businesses in this hypothetical company.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. 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 2.7) are called question marks or prob- lem children. it becomes a star. Paradoxically.7. If management can suc- cessfully increase the share of a question mark business. Their markets are stable. or larger than. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 47 business is in a strong competitive position if its share is equal to.0 or larger). • Stars. 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. Stars are critical to the continued success of the firm. and their share leadership position usually means they enjoy economies of scale EXHIBIT 2. 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. The implications of each are discussed below and summarized in Exhibit 2. but also for marketing activities (or reduced margins) to build market share and catch the industry leader. that of the next leading competitor (i. • Question marks.

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

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. Next. Thus. they evaluate strategies based on the likelihood that the investments required by a strategy will deliver returns greater than the cost of capital. They are also more useful for evaluating potential new product-markets. for instance.indd 49 14/12/12 12:30 PM . such as return on investment. the operating profit mar- gin. In this model. rather than relying on distorted accounting measures. 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. and the market value of the debt assigned to the business. The future cash flows generated by the strategy are. The duration of value growth represents management’s estimate of the number of years wal28949_ch02_031-057. or should be. 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. fixed capital investment required by the strategy. especially when managers must evaluate different industries on the same set of factors. the multifactor measures in these models can be subjective and ambiguous. Finally. customer loyalty. investment in working capital. 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. the conclusions drawn from these models still depend on the way industries and product-markets are defined. They then rate each business and its industry on the two sets of factors. as Exhibit 2. Corporate managers must first select factors appropriate for their firm—such as industry size. but all share three ba- sic features. the income tax rate. Also. in turn. 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. and differ- ent business units typically face different risks and therefore have different costs of capital. the business’s cost of capital (which is used to discount fu- ture cash flows back to their present value). 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. 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. they assess the economic value a strategy is likely to produce by exam- ining the cash flows it will generate. shareholder value created by a strategy is determined by the cash flow it generates. competitive intensity. and the like—and weight them according to their relative importance. R&D spending.36 First. 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. but the sixth requires some elaboration. and the duration of value growth. pursuing. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 49 on making the analysis more future-oriented.8 indicates. The first five value drivers are self-explanatory.37 Second. Inc.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. Portfolio analysis provides little guidance. or EVA.35 Value-Based Planning As mentioned. 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. However. they combine the weighted evaluations into summary measures used to place each business within one of the cells in the growth-share matrix.

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

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

and the number and decision-making authority of contacts within the customer firm—can also impact cus- tomer equity and value over time. 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. 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. knowledge. In part. commitment. such as brand advertising. and personality projected by an organization. it is then possible to estimate the financial return for any similar marketing initiative in the near future. 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. its functional wal28949_ch02_031-057. market segments. or customer- related intangibles—such as brand-name recognition and reputation—from other units within the firm. such as trust. Once a manager calculates the implementation costs and capital requirements involved. and strong brand fran- chises that can be shared across businesses. For instance. increasing the number of contacts called upon within customer organizations experiencing relatively high employee turnover tends to increase the financial returns from those companies.42 Therefore. When dealing with organizational customers. for example. the company is more likely to develop core competencies. an additional set of variables— characteristics of the interfirm relationship. It is shaped by the firm’s mission and values. However. The performance of one business can be enhanced by the transfer of competencies. A centralized corporate R&D department. 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. the firm’s organizational structure and allocation of resources also may enhance knowledge-based synergy. 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. when the firm is competing in global markets. and the like. impressions. customer knowledge.indd 52 14/12/12 12:30 PM . Corporate identity flows from the communications. alternative customer relationship management policies should be evaluated along with the other marketing “value drivers” when designing marketing strategies for organizational markets. loyalty programs. SOURCES OF SYNERGY A final strategic concern at the corporate level is to increase synergy across the firm’s various businesses and product-markets. or technologies. As mentioned. Similarly. Knowledge-Based Synergies Some potential synergies at the corporate level are knowledge-based. For example. quality or service improvements. 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. 52 Section One Introduction to Strategy financial impact of alternative marketing “value drivers” of customer equity.

its marketing communica- tions. Microsoft Word. Cisco Systems. This is the strategy pursued by Procter and Gamble. Unilever. advertising. this question has not been subjected to much empirical research. Disney has created an identity that helps stimulate customer demand across a wide range of product offerings—from movies to TV programs to licensed merchandise to theme parks and cruise ships. the 3M Company features the 3M logo prominently on virtually all of its 60. The firm might adopt a dual branding strategy where each offering carries both a corporate identifier and an individual product brand. crite- ria. For instance. packaging. Microsoft Windows.com) companies. By focusing on a common core of corporate values and competencies. those customers must be aware of which specific product or service offerings are sponsored by the company. the quality and design of its goods and services.45 How- ever. This is where the firm’s corporate branding strategy enters the picture.43 In order to project a positive.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 other factors.g. wal28949_ch02_031-057. 3. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 53 competencies. 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. some of the conditions favoring a dominant corporate brand are rather obvious. British Airways. every impression generated by each product’s design. by consis- tently focusing on values and competencies associated with providing high-quality fam- ily entertainment. Thus. the actions of its personnel. shareholders. as is the case with many high-tech (e. and guidelines to help ensure that all the messages and sensory images they com- municate reflect their unique values. and promotional materials can help reinforce and strengthen the impact of all the other impressions the firm communicates to its customers. IBM) and service (e.g. employees. a firm might pursue one of three options concerning the corporate brand:44 1. and The Body Shop have established formal policies. Surprisingly. For example. Amazon. and many other consumer package goods firms. strong. and competencies. 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. 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. the image generated by various corporate activities. and consistent identity. Siemens. Essentially. 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. 2. firms as diverse as Caterpillar.. Finally. and other audiences and thereby generate a bigger bang for its limited marketing bucks. etc. Walt Disney. Examples include Microsoft software products (e..g. 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. 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.) and Volkswagen automobiles.. personality.indd 53 14/12/12 12:30 PM .

is whether a firm’s decision-making structure influences brand strategy. This is due. in part. Cathay Pacific. they were reluctant to take time from their salty-snack products to push the new cookies. 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. facilities. Plan Exercise based on your still very preliminary thinking. We will explore such organization design issues and their marketing strategy impli- cations in more detail later in Chapter 12. 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. 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. employee training and reward programs. Set the objectives that your plan or project is intended to accomplish. For example. The resulting lack of a strong sales effort contributed to Grandma’s failure to achieve a sustainable market share. the company relied on its 10. it can improve the efficiency of each of the businesses involved. quality control systems.000 salty-snack route salespeople to distribute the new line to grocery stores. For instance.5 your plan will pursue. measured in terms of sales and/or market share and profit contribution. Marketing Write a draft mission statement for your company. when Frito-Lay attempted to enter the packaged cookie market with its Grandma’s line of soft cookies. of course. over a specified time frame. wal28949_ch02_031-057.47 For instance. 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. Such sharing can limit a business’s flexibility and reduce its ability to adapt quickly to changing market conditions and opportunities. and functions across business units. the sharing of op- erational facilities and functions may not produce positive synergies for all business units. Synergy from Shared Resources A second potential source of corporate synergy is inherent in sharing operational resources..) emphasize their corporate brands. Disney.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. Determine why that strategy does or does not make sense. But because those salespeople were paid a commission on their total sales revenue. two or more businesses might produce products in a common plant or use a single salesforce to contact common custom- ers. etc. and the like. Marriot. compared to the other alternatives. or vice versa. As we shall see in Chapter 3. 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. 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. Finally. The obvious question. Identify which (if any) of the growth strategies identified in Exhibit 2. such as its physical facilities.g. However. When such sharing helps increase economies of scale or experience-curve effects. many service organi- zations (e. The firm thought its huge and well- established snack salesforce would give its cookies a competitive advantage in gaining shelf space and retailer support. Thus.indd 54 14/12/12 12:30 PM .

fortune. March 3. “Lining Up for Profits. pp. Swan.ryanair.” Bloomberg Busi- nessweek. and Duane Stanford. 2. p. I. c. 76–77. 2006.” www.” Financial Times. December 12. 9. and Ryanair’s 2011 annual report available at www. 6. wal28949_ch02_031-057. 1988). They were sold in different types of packages and sizes to a wide variety of retail accounts.” BusinessWeek.” Harvard Business Review. 2008. Suzanne Kapner. p. b. Felix Gillette. see Daniel Franklin. Engardio.com. John E. 4. Maria Ermakova and Chris Spillane. July–August 1960. Cooke. 58–61. 7. p. “The Duke of Discomfort. pp.” www. Robert A. The Kelly Bottling Company. 25–26. April 22. 8. Critics argue that the BCG portfolio model sometimes provides misleading advice concerning how resources should be allocated across SBUs or product markets. “Good Grief. October 5.” Bloom- berg Businessweek. February 6. 2010. 2005. soda water. More People Paid Bribes. “PepsiCo’s New Formula. 2008. 64.” Journal of the Academy of Marketing Science 19 (Winter 1991).” Fortune.com/news. 55–66.cnn.bloomberg. 17–23. 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. January 29. 455–56. 68–72. “Doing Well by Doing Good. July 7. Byrne.businessweek.” www. December 10.” p. A packaged food company’s acquisition of a fast-food company that features hamburgers and french fries. A large retailer’s purchase of an interest in a company producing small appliances. “Marketing Myopia. Endnotes 1. 2000. 172–84. “Just Good Business. “The Pepsi Machine. pp. 2002. February 13.” A Special Report on Corporate Social Responsibility. 57. and Joseph Weber. A tobacco company’s acquisition of a beer company. 3. “Flying the Un- friendly Skies. Betsy Morris.” The Economist. 65–67. An oil company’s acquisition of an insurance company.” BusinessWeek.com. a Renewed Focus on Pepsi. April 8. “Beyond the Green Corporation. “PepsiCo’s Indra Nooyi: Niche Brands are the Future. 3. 2006. pp. 2000. 30. “The Pepsi Challenge: Can This Snack and Soda Giant Go Healthy?” Fortune. 5. Katrina Brooker. Mark Scott. 2010. “Beyond the Green Corporation. January 19. 66. February 6–February 12. 2012.com/globalbiz. pp. 2010. Fredrick Trawick. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 55 Discussion 1.” The Econo- mist. p. Gail W.” Fortune. June 6. “Doing Well by Doing Good. “Ryanair Faces Future Trouble. 1995. “Corruption Rises Over Three Years. 71–73. “Influence of Buyer Ethics and Salesperson Behavior on Intention to Choose a Supplier. 52. Beth Kowitt. “The Ryanair Advantage: Airport Charges and Maintenance. pro- duced and marketed a line of carbonated beverages consisting mainly of flavored soft drinks (not Questions including colas).mhhe.com/walker8e. Rink. 2007. located in a large metropolitan area of some 5 million people. Ethics in Business: A Perspective (Chicago: Arthur Andersen. For additional examples.” BusinessWeek. and David R. pp. 19. pp. pp. pp. November 12. September 6. This case example is based on material found in Andrea Felsted. “The New Ethics Enforcers.” p. pp. 2008.indd 55 14/12/12 12:30 PM . 10. and tonics. How might such a company expand its revenues by pursuing each of the different expansion strategies discussed in Exhibit 2. 2008. Pete Engardio. d. Theodore Levitt. Which diversification strategy is illustrated by each of the following acquisitions? What syner- gies or benefits might each purchase produce? a. SR3–SR22. April 10.5? 2. McGee. pp. “At Pepsi. John A.” The Economist.” The Economist.

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

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

Company. and Protection Services the leader in dozens of technical areas from Sector markets a wide variety of products rang- fluorochemistry to fiber optics. Division within the Industrial and Transporta- ucts for electronics and telecommunications tion Sector. nearly 5. Today it is • The Safety. Chapter Three Business Strategies and Their Marketing Implications Business Strategies and Marketing Programs at 3M1 The Minnesota Mining and Manufacturing materials for electronic displays. primarily on internal new product development. side the United States. and an automobile manufacturing. objectives in different ways. touch screens. which ing supplies to fire protection products. billion. however. such as Post-it Differences in customer needs and life-cycle brand repositionable notes and Scotch brand stages across industries. The company supports its growth • The Industrial and Transportation Sector makes strategy with a R&D budget of more than $1. As you might expect of a firm with so many emphasizing both improved products for existing products. abrasives. facturing sandpaper a century ago. Growth in this group results from extending leader in the sales of films and reflective 58 wal28949_ch03_058-084. 3M attained $19. The firm makes ing from respirators for worker safety to clean- more than 60. sales—66 percent of its total revenue—from out- • The Consumer and Office Sector offers prod. The company produced $6 billion in operating The corporation’s growth strategy has focused income. pharmaceutical. splicing. for example.5 percent of total revenue.000 different products. 3M is organized into a large number of customers and new products for new markets.6 billion in global sales in 2011. various business units to pursue their growth • The Electro and Communications Sector sup. better known as 3M. surgical. and specialty chemicals for industrial applica. Security. operates in an indus- markets. lead 3M’s tapes. commercial graphics. filters. 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. and dental countries. generated $29.6 billion in products and services. The company con. began manu. try where both the product technologies and the customer segments are relatively mature and sta- • The Display and Graphics Sector is a world ble.indd 58 14/12/12 4:22 PM . additional organizational sector is responsible for • The Health Care Sector markets a variety of coordinating the firm’s marketing efforts across medical. The company also pursues growth through the tions ranging from electronics to aerospace to aggressive development of foreign markets. and traffic control. The Industrial Tape plies connecting. strategic business units (SBUs).5 a variety of tapes. ucts for homes and offices. adhesives. and protective prod. In 2011.

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

First.indd 60 14/12/12 4:22 PM . including how business units should be designed. The company’s managers have done a good job of monitoring and adapt- ing their strategies to the market opportunities. are likely to give birth to new competitive strategies or make some old ones obsolete. As we saw in Chapter 2. and prof- strategic marketing programs of its various product or service offerings. We’ll pay particular attention to the ques- tion of how a business might choose to compete. 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. Thus. 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. market share. corporate strategy addresses such issues as the firm’s mission and scope and the directions it will pursue for future growth. single-business organizations and entrepreneurial start-ups as for large multi-SBU firms such as 3M and whether technological shifts. or strategic fit. 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. 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. 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. we briefly examine the strategic decisions that must be made at the business level. seeks high growth via aggressive new product and market development. 3M’s corporate growth strategy focuses primarily on developing new products and new applica- tions for emerging technologies. 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. technological advances. we examine the interrelationships between different business competitive strate- gies and elements of the strategic marketing programs for the various products within the business. 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 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. 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. Finally. Next. on the other hand. The drug delivery unit. those strategies are usually in- ternally compatible. such as the growth of e-commerce. How does—or should—a particular competitive strategy influence or constrain wal28949_ch03_058-084. the business itability than when the two levels of strategy are inconsistent with one will achieve better results. the business will business’s competitive strategy and the achieve better results in terms of sales growth. another. At the same time. The major strategic question addressed at the business-unit level is: How should we compete in this business? For instance. 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.2 Therefore. What generic competitive strategies might a business pursue. Thus. and competitive threats in the company’s external environment.

However. How Should Strategic Business Units Be Designed? Ideally.. wal28949_ch03_058-084. Why does that com- petitive strategy make sense given the capabilities and resources available? What does it imply for the marketing objectives. customers.indd 61 14/12/12 4:22 PM . marketing. The managers in each SBU must then make recommendations about (a) the unit’s objectives. such as a manufacturing plant or a salesforce. Thus. 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. 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. 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). Managers within each of these business units decide which objectives. such as production. and distribution. 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. • Responsibility for their own profitability. and competitive strategies to pursue. (c) which broad competi- tive strategy to pursue to build a competitive advantage in its product-markets. objectives. 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. Those managers are more familiar with a given SBU’s products. the firm avoids duplication of effort and maximizes economies of scale within its SBUs. and competitors and are respon- sible for successfully implementing the strategy. • A unique set of product-markets. and the allocation of resources across SBUs in its portfolio. with one or more other business units. strategic business units have the following characteristics: • A homogeneous set of markets to serve with a limited number of related technologies. The first step in developing business-level strategies is for the firm to decide how to divide itself into SBUs. But the SBU should determine how its share of the joint resource is used to effectively carry out its strategy. bear the primary responsibility for collecting and analyzing relevant in- formation and generating appropriate strategies for their businesses. more competitive pricing) that are not con- sistent with the aggressive product development strategy of the business unit. markets. 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. in the sense that no other SBU within the firm com- petes for the same customers with similar products. resources. SBU-level managers. 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. • Control over those factors necessary for successful performance.g. and (d) how resources should be allocated across its product-market entries and functional departments. This does not mean a SBU should not share resources. R&D and engineering. they may require marketing actions (e. What should 3M and the marketing manager responsible for inhalers do under such circumstances? Finally. particularly those in market- ing and sales. (b) the scope of its target customers and offerings.

Those subobjectives obvi- ously must reflect the SBU’s overall objectives. Frequently management defines SBUs by product-markets between technical/operational compatibility and customer homogeneity. 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. and employee skills. 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. such as the use of similar production facilities and engineering skills. Business-Unit Objectives Companies break down corporate objectives into subobjectives for each SBU. 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. In these firms. the choice is often between technical/operational Strategic Issue compatibility on the one hand and customer homogeneity on the When designing SBUs. are marketed to physicians and other health professionals. requiring similar technologies. Similarity in the customer needs or the product benefits sought by customers in the target markets. the choice is often other. because all address health needs.indd 62 14/12/12 4:22 PM . 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. For example. There are usually trade-offs between having many small homogeneous SBUs versus large but fewer SBUs that corporate executives can more easily supervise. 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. those subobjectives vary across SBUs according to the attractiveness of their indus- tries. Consequently. and resource al- location decisions by corporate management. They are grouped within the same business unit. 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. though. 3M’s medical products unit includes a wide range of products involving very different technologies and production processes. managers group product-market entries into SBUs based on similarities across customers or distribution systems. though. In some firms. At the same time. production facilities. 3M wanted to maximize Never Rust’s volume growth and market share even if the new line did not break even for several years. Technical compatibility. the firm’s top managers approved a major investment in a new plant and a substantial introductory advertising budget. Similarity in the personal characteristics or behavior patterns of customers in the target markets. however. 62 Section One Introduction to Strategy As you might expect. For example. For instance. 2. This minimizes the coordination problems involved in ad- ministering the unit and increases its ability to focus on one or a few critical competencies. the strength of their competitive positions within those industries. and can be sold through a common salesforce and distribution system. 3. particularly with respect to product technologies and opera- tional requirements. the marketing synergies gained from coordinating technically different products aimed at the same customer need or market segment outweigh opera- tional considerations. but once again. In practice. firms do not always meet all of these ideals when designing busi- ness units.

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. the essential strategic question at the SBU level is: How are we going to compete in this business? Thus. and (3) focus. Allocating Resources within the Business Unit Once a SBU’s objectives and budget have been approved at the corporate level. value-based planning is not a useful a tool for evaluating alternative resource allocations across product-market entries. many firms use similar economic value. some firms have adopted activity-based costing systems in an attempt to resolve such prob- lems. As we shall see in Chapter 13.3 but many difficulties remain. 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. Consequently. Of course.indd 63 14/12/12 4:22 PM . and marketing competencies and resources continue to outweigh those of its competitors. 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. Because this allocation process is quite similar to allocating corporate resources across SBUs. 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. 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. are probably more appropriate at the product-market level than at the business level. practice. determine the viability of any particular competitive strategy. (2) differentiation—building customer perceptions of superior product quality. design. for instance. the competitive position of their products within those markets. the unit’s core competencies and resources. will continue to work only if the firm’s R&D. or generic. its man- agers must decide how the available resources should be allocated across the unit’s vari- ous product-market entries. or portfolio analysis tools for both. Of course. Unfortunately. 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. The question is: What alternative strategies are available to a busi- ness unit? What are the basic. at the SBU level managers must determine the attractiveness of individual target markets.5 The 3M drug delivery unit’s strategy of gaining revenue growth via technological leadership and aggressive new product and mar- ket development. wal28949_ch03_058-084. business strategies are primarily concerned with allocating resources across functional activities and product-markets to give the unit a sustainable advantage over its competitors. as discussed in Chapter 2. value-based planning. as when multiple products are produced in the same plant or sold by the same salesforce. together with the customer and competitive characteristics of its industry. or service. engineering. attempts to model the impact of vari- ous marketing initiatives on customer equity. This is because the product-market entries within a business unit often share the benefits of common investments and the costs of functional activities. in which the business avoids direct con- frontation with its major competitors by concentrating on narrowly defined market niches.4 HOW DO BUSINESSES COMPETE? As mentioned. On the other hand. and performance in different businesses.

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

We view reactor and prospector business units as two homogeneous categories. rather than the eight that one might expect. for instance. a defender business unit could pursue a variety of competitive approaches to protect its market posi- tion. such as offering the lowest cost or differentiating itself on quality or service.2 to provide a more comprehensive overview of business strategies. reactors have no clear competitive strategy. Although this distinction is useful. however. 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.8 By definition. Most businesses compete in a reasonably con- sistent way across all of their product-markets. Evidence suggests that a substantial portion of businesses fall into the reactor category. we will largely ignore them during the rest of this discussion. Therefore.2 because the de- sire for rapid new product or market development is the overriding aspect of their strategy. Units primarily product-market strategy actively seeking concerned with opportunities maintaining a to expand into related product. found that 50 out of 232 businesses examined could be classified as reactors. One study. In other words. Units primarily actively seeking concerned with to expand into maintaining a Competitive strategy related product. 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.indd 65 14/12/12 4:22 PM . 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). 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. 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.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. Prospectors are also shown as a single strategic category in Exhibit 3.2 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. wal28949_ch03_058-084. Thus. neither is complete by itself. whether their domain is broad or narrow. 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. we have combined the two typologies in Exhibit 3.2 describes only six business strategies. Exhibit 3. For example. Exhibit 3.

and (3) generating promotional buzz via celebrity endorsements. 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. frozen dessert market is mature. for instance. Pinkberry’s competitive strategy. 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. In smaller single-business firms. too. and Nutrella spread in Russia. which is typically harder to change in the short term. Another difference applies to entrepreneurial start-ups. For instance. the same set of generic competitive strategies is just as appropriate for small firms as for business units within larger ones. in reality most of them—at least those that stand a reasonable chance of success—begin life as prospec- tors. 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. 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. friendly customer service. but that may make it less compatible with the overall competitive strategy of the business. the distinction between business-level competitive strategy and marketing strategy tends to blur. By adjusting their differentiated defender strategy from country to coun- try. 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. 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. still relevant to entrepreneurial firms. These and similar issues related to strategic change are examined in more detail later in this chapter. Therefore.indd 66 14/12/12 4:22 PM . 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 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. The entry’s marketing strategy should be ad- justed in response to such changes.9 However. and that portion is expected to grow in the future. while the taxonomy of competitive strategies is success—begin life as prospectors.S. and fast. even though the U. Just like a SBU in a major corporation such as 3M. competitors? Should the firm create two separate SBUs with different competitive strategies. For example. Therefore. date and pistachio toppings in Kuwait. the firm has been able to generate more than a quarter of its income from outside the United States. Pinkberry has been able to generate substantial global sales by adapt- ing their flavors and toppings to local cultures and tastes. even though that would mean compet- ing head to head with other. (2) offering more flavors and many more unique toppings than competitors. there is one important difference between single-business and multi-SBU organizations. wal28949_ch03_058-084. Impressively. and the two strategies blend into one. probably bigger. they offer green tea–flavored yogurt in Asian shops. They have successfully differentiated their stores by (1) hiring and training friendly enthusiastic store personnel. in reality most of them—at least those that stand a reasonable chance of to defend. By definition they do not have an established market position firms. Their strategy enabled them to expand to l20 shops in only five years. 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.

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

July 5. 2010. In other words. 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. Consequently. improves the functioning of the price mechanism. to more convenient routes for business travelers shuttling implement a very successful low-cost analyzer strategy. The A380’s operating costs heads Airbus’s Mideast subsidiary. 75–77. July for Emirates’s flights. line.3 billion in 2011. and thereby increases competition. 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. In order to compete more effectively in the developed markets of Europe and the Americas. and nearly two-thirds of those sales came from outside of China.indd 68 14/12/12 4:22 PM . Huawei had to expand its product line and develop new equipment with more innovative features and greater functionality. it had to compete more like a prospector in those markets. Aggressive expansion via the pur- Airbus in 1985. many other airlines fly between Asia and mist. and will be even lower in coming years. and the firm has also signed a distribution deal with IBM.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. For example. “Rulers of the New Silk Road. the Vierling Group serves as Huawei’s exclusive distributor in Germany. pp. it could be a successful airline. located in Shenzhen.14 One possible wal28949_ch03_058-084. and the Emirates Group’s 2011–12 the West. China. expanding its routes to “secondary” is simply the geographic location of Dubai. who now will be even more efficient. cuts transaction costs. Hua- wei’s revenues topped $32.13 Will the Internet Change Everything? Some analysts argue that the internet will change the way firms compete. 18–19. but at prices as much as 40 percent lower. 5. The rapid growth of many Asian economies in recent years has. It also developed marketing programs geared to generating brand awareness and trial among potential customers. the company to charge lower fares while still maintain- One important factor underlying Emirates’s success ing good service. www.” recalls Fekih. “Emirates Wins with Big Planes and Low Costs.com. The internet www makes it easier for buyers and sellers to compare prices. For the time being. Therefore. the firm greatly increased its R&D spending and product development efforts. In other words. between Europe or the United States and Asia. It has grown into the senger mile is lower than any other intercontinental air- world’s 10th largest airline.4 billion in revenues in 2001 selling internet switches and routers pat- terned after the equipment manufactured by Cisco Systems and Alcatel. pp. “It was the joke of are 12 percent lower than the newest 747. only 10 percent of those revenues came from outside China.” about 500 passengers. “Nobody believed Emirates order of 90 Airbus A380 superjumbo jets is delivered.theemiratesgroup.” Bloomberg Businessweek. generated increased demand and new customers Source: Steve Rothwell and Andrea Rothman. 2010. Emirates’ cost per pas- Emirates is a joke no longer. This allows its in 2011 on sales of nearly $16 billion. and it carries the day. earning $492 million in prof. 68 Section One Introduction to Strategy EXHIBIT 3.” The Econo- Of course. reduces the number of middle- men necessary between manufacturers and end users. was able to compete very effectively in its home market as a low-cost analyzer.. the year Dubai’s ruling fam. It provides airports like Manchester in the United Kingdom and Kol- a convenient hub that has enabled Emirates to offer kata in India. For instance. so Emirates has attempted to strengthen and Annual Report on the firm’s website. and still make money. in turn. However. Huawei Technologies Co. Huawei relies heavily on alliances with established distributors and value-added resellers to develop and implement marketing programs in developed markets. As a result of these strategic adjustments. And when its recent aboard two leased planes. The company earned $2.

it should still be able to differentiate its offering and command a premium price. wal28949_ch03_058-084. For in- their relationships with their customers. also are using the internet’s interactive capabilities to acquire and communicate information and build customer relationships. at least in the short term. 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. In addition.4 and discussed as follows. innovation is likely to continue—and probably accelerate—in the future. For one thing. Reorder rates for custom-clothing buyers are 35 percent higher than for buyers of Lands’ End’s standard items. Each strategy also involves some important differences on the other four dimensions— differences that are outlined in Exhibit 3. a basis for achieving a sustainable competitive advantage. But if a firm offers unique benefits that a segment of customers perceives as meaningful. the largest e-tailer as of early 2012. Although we agree that the internet has increased both efficiency and competitive- ness in many product-markets. For example. As customers gather more information from the internet and become better informed. All the business-level competitive strategies focused on differentiation will become less viable. we doubt that competition will focus exclusively on price. Although it facilitates the dissemination of information. at least until its competitors offer something similar. the internet has played a major role in developing logistical alliances among organizational buyers and their suppliers. Finally. 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. the goods and services themselves will continue to offer different features and benefits. And customers who customize are more loyal to the company. whereas firms pursuing low-cost strategies will be more successful. and even internet portals.indd 69 14/12/12 4:22 PM . Amazon. we said that all strategies consist of five components or underlying dimensions: scope (or breadth of strategic domain). and synergy. is generally not the lowest priced. stance. even though each customized gar- ment costs more and takes longer to arrive. goals and objectives. But the generic strategies summarized in Exhibit 3.15 HOW DO COMPETITIVE STRATEGIES DIFFER FROM ONE ANOTHER? In Chapter 1. Consumer goods and services firms. the internet will make it easier for firms to customize their Strategic Issue offerings and personalize their relationships with their customers. 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. over the past few years.2 are defined largely by their dif- ferences on only one dimension: the nature of the competitive advantage sought.com. to effectively implement a prospector strategy—should be successful regardless of whether they are the lowest-cost producers in their industries. 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. resource deployments. Thus. the internet is primarily a communications channel. 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. 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. including price information.

Mature/stable/well. Objectives.indd 70 14/12/12 4:22 PM . narrow. domains. Thus. whether low-cost or differentiated. and Synergy Low-Cost Differentiated Dimensions Defender Defender Prospector Analyzer • Scope Mature/stable/well. tend to operate in relatively well-defined. The scope of such businesses often undergoes periodic redefinition. defined domain. However. whether low-cost or differentiated. businesses pursuing this interme- diate strategy are often in industries that are still growing or experiencing technological wal28949_ch03_058-084. and often their domain is primarily focused on that business.4 How Business Strategies Differ in Scope. and stable domains where both the product technology and the customer segments are mature. Analyzer businesses. prospector businesses usually operate in broad and rapidly chang- ing domains where neither the technology nor customer segments are well established. 70 Section One Introduction to Strategy EXHIBIT 3. 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. 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. can affect the variables the corporation uses to define its various businesses. fall somewhere in between the two extremes. At the other extreme. This. 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. defender businesses. They usually have a well-established core business to defend. The latter is the approach taken by 3M’s drug delivery systems business. Broad/dynamic Mixture of defender defined domain. At one extreme. in turn. Resource Deployments.

indd 71 14/12/12 4:22 PM . and activities within each functional area. but to keep things simple. 2.17 Differences in Resource Deployment Businesses following different strategies also tend to allocate their financial resources differently across product-markets. analyzer—businesses devote a relatively large proportion of resources to the development of new product-markets. Differentiated defenders likely pro- duce higher returns than low-cost defenders. The outcomes of a business’s programs relative to the resources used in implementing them. The success of a business’s products and programs relative to those of its competitors in the market. Good performance on one dimension often means sacrificing performance on another. managers must review and adjust the domain of such businesses from time to time. both defender strategies should lead to better returns on investment. functional departments. both low-cost and differentiated analyzer strategies are likely to fall between the two extremes. Prospector—and to a lesser degree. of course. high operating costs. The business’s success in responding over time to changing conditions and opportunities in the environment. As a result. 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. Efficiency. Adaptability. This suggests that managers should choose a competitive strategy with a view toward maximizing performance on one or two dimensions.4 indicates. 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.16 For example. at least in the short term. regardless of its competitive strategy. the chosen strategy should promise discounted cash flows that exceed the business’s cost of capital and thereby increase shareholder value. Consequently. Because such product-markets usually require more cash to develop than they produce wal28949_ch03_058-084. Effectiveness is commonly measured by such items as sales growth relative to competitors or changes in market share. On the other hand. As Exhibit 3. we focus on only three performance dimensions of major importance to both business-unit and marketing managers: 1. Effectiveness. to simultaneously achieve outstanding performance on even this limited number of dimensions because they involve substantial trade-offs. they must pay attention to the emergence of new customer seg- ments and/or new product types. develop- ing successful new products or attaining share growth often involves large market- ing budgets. 3. SBU and product-market objectives might be specified on a variety of criteria. 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. substantial up-front investment. Once again. Over the longer term. 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. and a shaving of profit margins—all of which reduce ROI. Chapter 3 Business Strategies and Their Marketing Implications 71 changes. it is very difficult for any SBU. However. Common measures of efficiency are profitability as a percent of sales and return on investment. Adaptability can be measured in a variety of ways.

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

many potential of life cycle. distribution. not as strong as than at least some capabilities that some competitors’. marketing. or distribution. Competition Few established Large number of Small to moderate Small to moderate competitors. 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. enable it to be low- has either low-cost SBU’s outstanding cost producer. current life cycle. hold large shares in possible. process engineering marketing. sales. modifications and modifications or modifications or improvements—as improvements likely. single likely. or and quality control service capabilities service capabilities and/or in marketing. segments. segments may still be undeveloped. over time. few major stable. all major segments. process engineering and marketing capabilities. We next discuss the reasons each strategy fits best with a particular set of environmental conditions. maturity possible. product stable. wal28949_ch03_058-084. 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. demand. Business’s relative SBU (or parent) has SBU (or parent) has SBU has no SBU (or parent) has strengths strong R&D. product outstanding superior sources engineering and engineering. maturity major segments. but number of well. industry competitor holds structure still structure stable. customer services. position or strong strengths are in product engineering. or as some competitors. structure stable. number of well- structure still future shakeout established established emerging. improvements well as emergence likely. R&D. competitors’. one or though acquisitions though acquisitions of major market more competitors and consolidation and consolidation segments. of new competing technologies—still likely. industry competitors. product good R&D. sales.indd 73 14/12/12 4:22 PM . industry competitors. replacement replacement but some potential demand. many well developed but fully developed and fully developed and applications as yet still evolving. commanding share evolving. may not be as strong in one or more sales. Technology Newly emerging Basic technology Basic technology Basic technology technology. one offerings targeted at offerings targeted at customer segments or more product all major segments. Chapter 3 Business Strategies and Their Marketing Implications 73 EXHIBIT 3.5 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. few major undeveloped. but costs are higher and production capabilities. and strengths in R&D or of supply and/or marketing research marketing research product engineering. current cycle. targeted at major to repeat purchases/ to repeat purchases/ customer segments. technological. as yet unidentified offerings currently sales primarily due sales primarily due and/or undeveloped. over time.

rapidly changing environ- ments resulting from new technology. 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. and few businesses (or their parent companies) have such universal strengths relative to com- petitors. It is most appropriate for units with a profitable share of one or more major segments in a relatively mature. and other functional areas that identify new technology and convert it into innovative products and second. 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. including Toyota. and sales—functions necessary for the identification and develop- ment of new market opportunities. the firm was eventually forced to change its strat- egy and concentrate on manufacturing products under licenses from larger firms. marketing research. analyzers are often not as innovative in new product development as prospectors. 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. Automobile manufacturing is an example of such an industry.indd 74 14/12/12 4:22 PM . and many others. 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. 74 Section One Introduction to Strategy Appropriate Conditions for a Prospector Strategy A prospector strategy is particularly well suited to unstable. In some cases. auto manufacturers around the world. Few businesses have the resources and competencies needed to successfully defend an established core business while generating revolutionary new products at the same time. two broad areas of competence: first. as discussed in Exhibit 3. For example. Appropriate Conditions for a Defender Strategy A defender strategy makes sense only when a business has something worth defending. or both. However. 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. 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. such industries tend to be at an early stage in their life cycles and offer many opportunities for new product-market entries. At the same time. They may not be as profitable in defending their core businesses as defenders. the most successful prospectors are usually strong in. shifting customer needs. Appropriate Conditions for an Analyzer Strategy The analyzer strategy is a hybrid. product engineering. R&D. In either case. 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.6. Honda. however. and devote substantial resources to. it may lack the resources to maintain its early lead as product-markets grow and attract new competitors. even though a prospector business has strong product development and marketing skills. Because they emphasize the development of new products and/or new markets. Competitors are rela- tively few and well established. marketing. the market is relatively mature except in emerging econo- mies like China and India. Thus. Consistent with the “constant improvement” principles wal28949_ch03_058-084. are investing billions in a variety of different technologies to develop a new generation of cars. stable industry. The actions of Toyota and Honda illustrate one problem with an analyzer strategy. Therefore. On one hand. but technology continues to advance.

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. product improvements.indd 75 14/12/12 4:23 PM .” The Economist. $1 million to produce. To that end. But they devote relatively few resources to basic R&D or the development of in- novative new products. the installation of charging stations. Meanwhile. vehicles from China. But as those cars become more For the longer term. 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. 2011. and the firm has introduced a plug-in subsidies. But since every Clarity currently costs an estimated “China Charges into Electric Cars. including those that nology to improve the efficiency of their traditional gas carry the luxury Acura brand. process engineering. Toyota has created a special battery re. 73. Differentiated Defenders To effectively defend its position by differentiation. cost reductions via economies of pp. it was in the electric motors. “Japan’s New Green Car Push. can be recharged either by offerings and invest in R&D to further improve their ef. those key functional areas include production. Range-extenders. and perhaps product engineering wal28949_ch03_058-084. The unit generates substantial profits from well-established refrigerated dough products such as Pillsbury Crescent rolls and Grands biscuits. But while it has introduced a number of line extensions over the years. scale and experience will be critical for the car’s future. most successful defenders initiate process improvements. in its larger cars. 138–148. For instance. a business must be strong in those functional areas critical for maintaining its particular competitive advantages over time. www. 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. Pure strongest position to respond to the double whammy of electric cars. was to rapidly expand its hybrid Ampera in Europe in 2010). 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. and diesel-powered cars. p.” Fortune. Pillsbury’s prepared-dough products SBU— now part of the General Mills Company—has pursued a differentiated defender strategy for years. Honda is focusing on fuel cell efficient. country.com July 2.” The Economist. 89–90. a tank of hydrogen and boast better fuel efficiency than comparable gas or hybrid cars.000 of its Prius Many other auto companies are placing their bets on gas-electric hybrid cars annually by 2008. quality control. 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. the company is eyeing plug-in electric porting electric car technology more than any other cars. electric cars on “green” criteria will become smaller. pp. and ter. If a business’s differentiation is based on superior product quality. 2010. plugging into an outlet or by a small onboard gas en- ficiency. and “Revenge of the Petrolheads. and the like. Thus. 2008.businessweek. auto industry off guard that year. like the Nissan Leaf and the Mitsubishi rising gas prices and growing concerns over the impact i-MiEV. but it also offers new clean-diesel engines. which can go 280 miles on premium. most have been reconfigurations of the same basic dough-in-a-can technology. Chapter 3 Business Strategies and Their Marketing Implications 75 EXHIBIT 3.” technology ready for the mass market within 10 years. complete with more than 100 engineers for R&D. November 1. The Chinese government is sup- Longer term. Honda hopes to have the Source: Ian Rowley. such as Soft Breadsticks. or line extensions to help protect and strengthen their established positions. 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. Electric cars come in two varieties. at like the General Motors’ Volt (introduced as the least for the short term. version of the Prius. 2010. of total quality management. more fuel-efficient version of the Prius. Brian Dumaine. customer and technicians. New hybrid models—including one in the firm’s gine. “A Sparky New Motor. December 10. the relative superiority of the new hybrids and vehicles that run on liquid hydrogen and emit only wa. The firm’s strategy. Beijing has already pledged over $17 billion search division. October 9.6 Analyzer Strategies in the Auto Industry Given that Toyota was already selling 300.

A given entry’s marketing manager monitors and evaluates the product’s environmental situation and de- velops a marketing program suited to it.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. 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. Thus.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. such as customer call centers and human resources departments. However. 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. the business must establish the groundwork for such a strategy early in the growth stage of the industry. though.MetalSite.com. or flour or in industries producing low-technology components such as electric motors or valves. 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. 76 Section One Introduction to Strategy to develop product improvements. some firms—particularly those in more developed economies—have tried to reduce their costs by outsourcing production and a few other corporate functions. Thus. and programs with other business units is possible. the manager’s freedom to design such a program may be constrained by the business unit’s competitive strategy.18 Regardless of the basis for differentiation. 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. marketing is also important for the effec- tive implementation of a differentiated defender strategy. Although low-cost defenders emphasize efficiency and low price as the primary fo- www cus of their competitive strategy. At the same time. And because the efficiencies gained through outsourcing can be easily duplicated by competitors. 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. 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. This is because wal28949_ch03_058-084. The effort to develop and maintain a quality differentia- tion can be worthwhile. In recent years. outsourcing can lead to problems like reduced quality control and more complicated logistics that may raise the firm’s costs in other areas. such as www. it is not an effective way to build a sustainable low-cost advantage. Some of the most effective businesses are those that work simultaneously to lower costs and improve quality and service. HOW DIFFERENT BUSINESS STRATEGIES INFLUENCE MARKETING DECISIONS Business units typically incorporate a number of distinct product-markets. However.indd 76 14/12/12 4:23 PM . technologies. Low-Cost Defenders Successful implementation of a low-cost defender strategy requires the business to be more efficient than its competitors. 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. steel.

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

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. 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.indd 78 14/12/12 4:23 PM . or in addition to. though. Such service might take many forms. busi- nesses can distinguish themselves relative to competitors on the quality of service they offer. training of customer personnel. Minus sign (") # smaller than the average competitor.22 Instead of. competing on the basis of product characteristics. three-dimensional printing. including engineering and design services. process reengineering.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. Question mark (?) # uncertain relationship between strategy and marketing policy or program component. or maintenance and repair ser- vices. alterations.23 The appropriateness of an extensive service policy for low-cost defenders. is more questionable if higher operating and administrative costs offset customer satis- faction benefits. 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. however. Some of the efficiency problems associated with broader. more customized product lines may disappear. 78 Section One Introduction to Strategy EXHIBIT 3. 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. installation. Those higher costs may detract from the business’s ability to maintain wal28949_ch03_058-084. However. For another. film for individual signs was not economical. For one thing. broad. broad and sophisticated product lines are less consistent with the efficiency requirements of the low-cost defender strategy.

Thus. for instance. 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. however. This is particularly true for defenders who rely on good customer service to dif- ferentiate themselves from competitors. as well as to maintaining an extensive salesforce. The drug delivery SBU at 3M. such a policy is inconsistent with both differentiated defender and prospector strategies. may differ under the two strategies. However. as well as lowering ROI—at least in the short term. Distribution Policies Some observers argue that prospector businesses should show a greater degree of forward vertical integration than defender businesses. and other incentives to induce cooperation and support from their independent channel members. Chapter 3 Business Strategies and Their Marketing Implications 79 the low prices critical to its strategy.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. differentiated defenders and prospectors seldom adhere to a policy of low competitive prices. they are likely to devote a larger percentage of sales to trade promotions than are defender businesses. stimulate trial. Promotion Policies Extensive marketing communications also play an important role in the successful im- plementation of both prospector and differentiated defender strategies. Prospectors rely on trade promotion tools such as slotting allowances. these arguments seem inconsistent with the prospector’s need for flexibility in constructing new channels to distribute new products and reach new markets. 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.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. 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. and build primary demand for new and unfamiliar products.indd 79 14/12/12 4:23 PM . 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. Differentiation also provides customers with additional value for which higher prices can be charged. Similarly. The higher costs involved in differ- entiating a business’s products on either a quality or service basis require higher prices to maintain profitability. devotes substantial resources to ad- vertising in professional journals and distributing samples of new products. it seems more likely that a relatively high degree of forward vertical integration is found among defender businesses. This can best be accomplished through tight control of company-owned channels.26 Because prospectors focus on new products where success is uncertain and sales vol- umes are small in the short run. Thus. quantity discounts. Further. the costs and benefits of new product and market development by prospector businesses require and justify relatively high prices. particularly differentiated defenders. Because prospectors must constantly work to generate awareness. liberal credit terms. wal28949_ch03_058-084. However.

decision-making and coordination processes reward systems. a number of innovative products developed at 3M. well-supported. high ex- penditures on advertising. it can be very difficult for an entire SBU to make a successful tran- sition from one basic strategy to another. Consequently. 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.27 Therefore. however.28 For example. many of Emerson Electric’s SBUs historically were successful low-cost defenders. sales promotion. or the salesforce would detract from their basic strategy and might have a negative impact on their ROI. and even personnel. 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. wal28949_ch03_058-084. for instance. 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. as individual product-market entries gain successful positions in growing markets. low-cost defenders appeal to their customers primarily on price. 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. salesforce. the SBU might switch from a prospector to an analyzer strategy and ultimately to one of the defender strategies. the product’s target market is rapidly becoming more mature and competitive. such businesses are likely to make relatively low expenditures as a percentage of sales on those promotional activities. Because such internal structures and processes are hard to change quickly. they might form new prospector SBUs to pursue emerging technologies and industries rather than expecting established units to handle extensive new product development efforts. for example. For example. but also different organizational structures. such as Post-it repositionable notes. Initially. conflict.indd 80 14/12/12 4:23 PM . are primarily concerned with maintaining the loyalty of established customers by adapting to their needs and providing good service. some firms do not try to make major changes in the basic competitive strategies of their existing business units. As the product cate- gory matures. well-trained. this attempted shift in strategy resulted in some culture shock. Finally. and mixed perfor- mance outcomes within those units. These tasks can best be accomplished—particularly in industrial goods and services indus- tries—by an extensive. Thus. Similarly. 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. have enjoyed sufficient success that new divisions were formed to concentrate on defending them as their markets matured. In view of the implementation problems involved. 80 Section One Introduction to Strategy Differentiated defenders. differentiated defenders are likely to have higher salesforce expenditures than are competitors. on the other hand. Instead.

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

indd 82 14/12/12 4:23 PM . For example. 6. and Valarie Zeithaml. b. 5. “The Performance Implica- tions of Fit among Business Strategy.” Business Horizons 53 (2010). 96–103. wal28949_ch03_058-084. C. “At 3M. Sources of synergy. p.” Journal of Marketing 69 (July 2005). and Verena Vogel.businessweek. 469–79. 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. Thomas M. Marketing Organization Structure. 127–32. pp. Katherine N. Olson. and Terrence P. “Worried About Strategy Implementation? Don’t Overlook Marketing’s Role. pp. 2. pp. Lemon. June 2007. Tomas Hult. “Scotch Tape Plus Innovation Equals?” Fortune.” BusinessWeek-Indepth. K. “Measure Costs Right: Make the Right Decisions. September–October 1988. Slater and Eric M. and G. and G. in8–in14. pp. c. Will Daley. which objectives would you argue are most appropriate for your business unit in view of its strategy and its external environment? Why? 4. for First Time. Michael E. “Marketing’s Contribution to the Implementation of Busi- ness Strategy: An Empirical Analysis. pp. and B. 1980). and.” Fortune.” Journal of Marketing 68 (January 2004). Eric M. Jerry Useem. Eric M. pp. Heiner Evanschitzky.mhhe. d. and Strategic Behav- ior. 79–91. Porter.” Bloomberg Businessweek Online. Porter. 3. Slater.” Harvard Business Review. Olson. If you were the general manager of the 3M Industrial Tape SBU discussed in question 2. Pare. Ramaseshan. Endnotes 1. pp. A Struggle Between Efficiency and Creativity. www. “The Core Competence of the Corporation. 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. Prahalad and Gary Hamel. 1993. 1985). Stanley F. Slater. “3M Moves Most Capital Spending Outside U. “A New Tool for Managing Costs.” Harvard Business Review 68 (May–June 1990). 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. Hult.S.” Journal of Marketing 72 (November 2008). Scope. 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.com. 1055–67. June 14.” Strategic Management Journal 22 (November 2001). Objectives. see Robin Cooper and Robert S. Roland T.com.3m. 49–65. Competitive Strategy (New York: Free Press. “Return on Marketing: Using Customer Equity to Focus Marketing Strategy. and. Deployment of resources. Rust. 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. pp. “Customer Equity Drivers and Future Sales. Stanley F. Also see Michael E. 82 Section One Introduction to Strategy Discussion 1. Compare and contrast the prospector and low-cost defender business strategies discussed in this chapter on each of the following strategic dimensions: Questions a. Olson. Brian Hindo. pp. August 12. You are the marketing manager for a generic products division of a major pharmaceutical manu- facturer. 124. April 26. 2002. Kaplan. Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press. 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. 98–108. Stanley F. 4. 2011. 2.com/walker8e. 109–27.

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

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

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

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

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

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

the environmental context in which it operates. Chapter 4 Understanding Market Opportunities 89 STRATEGIC CHALLENGES ADDRESSED IN CHAPTER 4 As the examples of the cellular phone manufacturing and service industries show. like Nokia or Apple. the Marketing Plan Exercise outlines the secondary data you will need to gather in preparing a marketing plan. serving a growing market hardly guarantees smooth sailing. Distri- bution channels for these products include the supermarket industry. however.indd 89 14/12/12 12:50 PM . establish and sustain competitive advantage at least for a while. there are the salty-snack industry (makers of potato and corn chips and similar products). such decisions require a thorough examination of trends that are influencing mar- ket demand and are likely to do so in the future. and other easy-to-eat fruits). Equally or more important are industry conditions and the degree to which specific players in the industry can. oranges. Clearly. entrepreneurs. food service industry. We frame our discussion of opportunity assessment using the seven domains shown in Exhibit 4.1. As the seven domains framework suggests and the cellular telephony story shows. We provide a framework to help manag- ers. whether favorably or otherwise. 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. 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. we clarify the difference between two oft-confused terms: market and industry. the candy industry. 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. as are the company’s or entrepreneurial team’s resources—human. the fresh produce industry (growers of apples. the competition propose to serve? How attractive is the it faces. The attractiveness of the industry is also important. and so on. these industries differ and offer vary- ing bundles of benefits to hungry students. so that the market and competitive climate in which your product-market offering will compete is both well understood and properly docu- mented. 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. Similarly. and investors comprehensively assess the attractive- Strategic Issue ness of opportunities they encounter. in today’s rapidly changing and hotly competitive world it’s not enough to have a large and growing market. 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. Thus. wal28949_ch04_085-113. in this chapter. and others too numerous to mention. in terms of the company and its How attractive is the market we serve or people. and otherwise. 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. readers of your plan will be unable to fully understand and buy into the marketing decisions your plan articulates. Without your having established such a foundation of evidence. Thus. and the wants and needs of the customer it seeks to serve. they also must carefully examine a host of other issues. we address the 4 Cs that were identified in Chapter 1 as the analytical foundation of the marketing management process. What industries serve the student snack market? At the producer level. financial. bananas. Before digging more deeply into the framework.

90 Section Two Opportunity Analysis EXHIBIT 4. and across Value Chain Target Segment Benefits Sustainable Advantage and Attractiveness Source: John Mullins. wal28949_ch04_085-113. Should Kodak have been more concerned with Fuji. Execute Propensity on CSFs for Risk Team Domains Micro Connectedness up. Sony. and other longtime players in the film and photoprocessing industries. as we’ve seen in the cellular arena. often overlooked. markets are composed of buyers. not only did digital cameras make film and conventional cameras obsolete. The distinction is both markets and industries can vary substantially in their attractive- often overlooked. Agfa. Ability to Aspirations. 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.indd 90 14/12/12 12:50 PM . but the entry of smartphones that include cameras may soon make digital cam- eras obsolete. industries are composed of Markets are composed of buyers. or should it have worried about Hewlett-Packard. 2010). Further. 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. The distinction. Level down. industries sellers. Strategic Issue Thus. among others. The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan (London: FT/Prentice Hall. 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. is an important one because are composed of sellers.2. see Exhibit 4. ness. ASSESSING MARKET AND INDUSTRY ATTRACTIVENESS The seven domains framework enables marketers to answer two important questions.1 The Seven Domains of Attractive Opportunities Market Domains Industry Domains Market Attractiveness Industry Attractiveness Macro Level Mission.

respectively. but it fails to organize the and does so in a manner that addresses such questions output into answers to important strategic questions. Aging Exhibit 4.2 Why Not a SWOT? For many years. according to current projections. in developing any coherent marketing strategy. the effect of the AIDS plague on demography. rently four major global demographic trends that are likely to influ- ence the fortunes of many companies.3 shows the projected increase in the portion of the population aged over 60 in several of the world’s most developed countries. Doing so is useful. MACRO TREND ANALYSIS: A FRAMEWORK FOR ASSESSING MARKET ATTRACTIVENESS. 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. All kinds of things influence one marketer or another is without limit. demography is destiny. At the micro level. The seven domains framework by the firm in a particular market and industry setting. the analyses look not at the market or the industry overall but at individuals in that market or industry. that is. But what do these levels really mean? On both the market and industry sides.1 shows. and more. without regard to a particular company’s strategy. or its role in its industry. explicitly. The Demographic Environment As the saying goes. as a whole. life insurance. and other goods and services have taken note of the graying of the world’s population and are taking steps to develop marketing strategies to serve this fast-growing market. then we address the micro-level analyses. The chart shows that in Italy.indd 91 14/12/12 12:50 PM . 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. for example. organizes similar information as a SWOT. whether favorably or unfavorably. regulatory. technological. target market. and natural arenas. sociocultural. indeed. 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. for better or worse: the aging of the world’s population. vacation homes. opportunities. respectively. strategy textbooks have taught stu. Providers of health care. The macroenvironment can be divided into six major components: demographic. We develop and apply the relevant analytical frameworks for the macro-level analyses first. specific target customers and companies themselves. there are cur- are governed to a significant extent by demographic changes. Chapter 4 Understanding Market Opportunities 91 EXHIBIT 4. These external and often uncontrollable forces or conditions must be reckoned with in assessing and shaping any opportunity and. nearly half the population will be over 60 by the year 2040. of course. wal28949_ch04_085-113. weaknesses. markets and industries must be assessed at both the macro and micro levels of analysis. As Exhibit 4. While the number of specific demographic trends that might Demography is destiny. and threats faced competitive advantage. MACRO LEVEL Assessing market attractiveness requires that important macroenvironmental trends— or macro trends for short—be noticed and understood. the macro-level analyses are based on environmental conditions that affect the market or industry. a rapidly growing middle class in emerging a countries. economic. and increased levels of immigration.

Though the definition of what constitutes middle wal28949_ch04_085-113. One marketer dealing with this challenge is Ferrari. whose aver- age customer is nearing 50 and getting older with each passing year.indd 92 14/12/12 12:50 PM . “There is a lot of evidence that disability among old people is declining rapidly. and some who are getting older may not be very attracted to goods or services that remind them of their age.” Financial Times. But progress is being made: the rate of annual new HIV infec- tions has fallen 21 percent between 1997 and 2010. “The way the doors open on the Enzo. Many people do not wish to be pigeonholed as elderly.4 Further. however. “The profile of our customers means we have to pay attention to practicality and functionality without com- promising the sportiness.6 and the pandemic continues. professor of geriatric medicine at Manchester University in the United Kingdom.7 Across Africa. 2004. but one in which there is little ability to pay for the advanced drug therapies that offer hope to AIDS victims. isn’t always easy. 92 Section Two Opportunity Analysis EXHIBIT 4.” says Giuseppe Bonollo. grandparents are raising an entire generation of children. At the end of 2010. owing in part to a substantial increase in access to antiretroviral therapy in Africa and elsewhere. some 25 percent of the early buyers of Apple’s iPhones—a “cool.” cutting- edge product if there ever was one—were people over 50. Surpris- ingly. Pharmaceutical companies and world health organizations are struggling to develop strategies to deal with the AIDS challenge. especially in recent years. Doing so. for example. 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. a 17 percent increase since 2001.”3 The implications of the aging trend are not as clear-cut as they might appear. fears that health and other facilities will be swamped by hordes of ailing pensioners may be mis- placed. January 19. the hardest hit region.8 Growing Middle Class In the emerging economies of Asia and Latin America. since many par- ents have died. there is evidence that today’s elderly generation is both healthier and fitter than its predecessors. “New data demolish such concerns. perhaps.”5 Aids The death toll due to HIV/AIDS in Africa. allows part of the roof and part of the door undermolding to come away as well.” reports Raymond Tillis.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. 15. was some 8 million from 1995 to 2000. it was estimated that some 34 million people were living with HIV worldwide. one that presents a huge and rapidly growing market. Thus. “The Planet Is Ever Greyer: But as Longevity Rises Faster than Forecast. making it easier to enter the car. Ferrari’s strategic marketing director. p. the Elderly Are Also Becoming Healthier.

fears grew that some countries in the “old EU” would be swamped with immigrants from the accession countries in Eastern Europe.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.9 Asia is now home to 60 percent of the world’s middle class. and more—can Source: Jagdish N. governance. and in rural villages in India. of Marketing 75 (July 2011).” Journal shift toward a truly global mind-set. 166–82. Even in the crowded. to more than 50 percent of the world’s total population by 2006. Bangalore. While immigration from the developing to the developed world continues at a high rate. particularly tions and strategies are based. Brazil. The implications for marketers seeking to gain market share among Hispanic Americans are obvious.4). growing numbers are returning to their homelands. for melting pot countries such as the United States and the United Kingdom have for centuries welcomed immigrants to their shores. and governance. or Shanghai. Marketers. With the 2004 enlargement of the European Union from 15 to 25 countries. not living from hand to mouth. In one sense. exciting time to enter the marketing profession. though. “Impact of Emerging Markets on disrupt marketers’ accepted perspectives and require a Marketing: Rethinking Existing Perspectives and Practices. there are also emerging signs that. alongside huddling masses of the poor.indd 93 14/12/12 12:50 PM . such immigration is nothing new. unbranded competition. Chapter 4 Understanding Market Opportunities 93 class varies (for example.11 The recent economic turmoil in Europe may put an end to these fears. compared to just 20 percent in 1980. inadequate infrastructure. as high levels of unemployment in many parts of Europe make them lessattractive destinations than they once were. job to job. norms for socio-political how consumers in emerging markets think and behave. where faster economic growth is creating economic opportunities that were absent years earlier. Increased Immigration Not surprisingly. a chronic shortage of resources. EXHIBIT 4.12 Whether it is Asian doctors in Great Britain or engineers in California’s Silicon Valley. impoverished favelas of São Paolo. In the United States. or season to season—as the poor do—is one definition). and talent must be sourced and devel- teristics that differ from the traditional. and many now view Miami as the crossroads of Latin America. where there is little running water or electricity. pp. many are taking what they’ve learned there to start new businesses in Mumbai. mature markets oped on a global basis. where per capita GDP is far less than the EU 15 average. it is clear that no longer can we view emerging economies as consisting of a few rich people. the marketing function needs greater transparency emerging markets. These challenges make today an on which many of our established marketing assump. satellite dishes are popping up on tin roofs. These characteristics— for those who bring to their jobs a deep understanding of including market heterogeneity.10 We take a closer look at the implications of this trend in Chapter 6. Such markets tend to have charac. For marketers. Sheth. at least among the better-educated portion of the diaspora in the West. there is no dispute that their numbers have risen dramatically. 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. wal28949_ch04_085-113. many years of immigration from Mexico and Latin America have made the Sun Belt a bilingual region. take note (see Exhibit 4.

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

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

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

August 5. but also of reduced costs in communicating (voice or data). 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. computing.spotify. Source: Andrew McKie. “Born ity has been driven in part by videos posted on YouTube. perhaps sur.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.” says Britain’s Anna Calvi. following mechanization of the British textile industry in the eighteenth century and Henry Ford’s invention of mass production in the twentieth. advertising revenue from YouTube The Wall Street Journal European Edition. and entertainment industries. If you place the call on Skype. and this is now possible for everyone. and how individuals learn and earn as well as interact with one another. 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 crops are grown. smartphones.” sold a million copies in its first week alone. wal28949_ch04_085-113. airlines.” are making much of the difference.” to-consumer sales. sometimes earning thereby place themselves and their firms at the forefront of the innova- entrepreneurial fortunes in the process. and marketing research firms). 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 other sites. whose growing popular- in seven years. this Way. the source of a growing market for music. ing recording costs (an ordinary laptop is all you need) prisingly. Distance is no longer a factor—it costs about the same to make a trans-Atlantic call as one to your next-door neighbor.com. is. Lady Gaga’s May 2011 release. Revenues from new music-streaming websites such as Spotify. Technological progress is unlikely to abate. 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.indd 97 14/12/12 12:50 PM . retail stores. compact disks. technological developments are having a profound impact on all aspects of marketing practice.7). the death of the invoice. the cost of process- ing an additional telephone call is so small it might as well be free.7 The Music Industry Brightens Technology. how goods and services as well as ideas are exchanged. Consumers today enjoy check-free banking. Technology can also change how businesses operate (banks. sometimes earning entrepreneurial fortunes in the process. The cost of producing smaller batches with wider variety is falling dramatically. ever-more-powerful and ever- smaller computers. 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. and ticketless air travel. Many of these innovations are the result not only of changes in computing systems. while driv- music industry for more than a decade. In addition to creating attractive new markets. and concert royalties have driven overall For more on Spotify. p. other direct. What’s next? Some observers say the digitization of manufacturing will bring on the third industrial revolution. “Music Industry Sighs No More. Music-hungry consumers have been downloading music from legal and illegal sites. it can cost nothing at all! New developments in telecommunications and computing have led to the rapid conver- gence of the telecommunications. “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. Chapter 4 Understanding Market Opportunities 97 The Technological Environment In the past three decades. and distribution costs lower. see www. tion curve. and genetically engineered drugs. W8. For example. which has made life very difficult for the music revenue 50 percent higher since 2006. 2011. including marketing communica- tion (ads on the web or via e-mail). new lightweight materials.

One is to invest in research to find ways to save energy in heating and lighting. long synonymous with petrochemicals.com.8 Clean-Tech. . p.com).tsolar. Tesla’s electric Global Social Venture Competition held annually at the cars are cool (www. the United Kingdom’s largest supermarket chain. London. Mumbai. Sources: Mark Scott and Alex Morales.teslamotors. April 25. Green-tech outfits Social returns. rather than solely about profit. around the world. have begun adding carbon footprint labels to some of their products. And. car- pet. discussion of the problems in the natural environment has stressed the threats and penalties facing business throughout the world.23 There is a growing recognition that creating a more sustainable natural environment is an important job. In particular. recycled paper. which can go more than 50 miles on a gallon of gas. now motivate students to think in ingly everywhere else to invest in companies that hope triple bottom-line terms. organic fertilizers.amerescosolar. entrepreneurs and marketers are looking for ways to save the planet and deliver shareholder returns at the same time. packaging (use of new materials). In virtually every corner of the clean-tech and green-tech arenas. For example. like the website at www. high-efficiency LED lighting.20 We explore these kinds of changes and others in the ensuing chapters in this book. The skyrocketing price of oil has caused demand for gas-guzzling sport utility vehicles to plummet. 98 Section Two Opportunity Analysis goods bought and sold via the web). sustainability game.enel. and seem. Business plan competitions for so.indd 98 14/12/12 12:50 PM . wal28949_ch04_085-113. including a new corn-based fiber called Sorona. Clean-tech and green-tech investment funds have Berkeley. including Tesco. for example. tuna caught without netting dolphins.com) have raised capital in hot IPOs. Sustainability and You Fuel-efficient cars are once again in favor.22 Businesses have also seen opportunities in developing thousands of green products (those that are environmentally friendly) such as phosphate-free detergents. environmental returns. are getting in on the Technology.com). The world’s supply of oil is finite. a recent study has shown that social networks influence con- sumer decisions about staying with or leaving service providers.com).21 In general. including marketing. to create a more sustainable future. is reinventing itself as an eco-conscious com- pany. The Natural Environment Everything ultimately depends on the natural environment. 2010.8). a growing number of marketers.S. More than $5 billion of its $29 billion in revenue comes from sustainable products. too. and other products. and economic like Spain’s T-Solar (www. hot. Du- Pont. and solar energy is Haas School of Business at the University of California. and the more of all three? renewable unit of the Italian utility Enel (www. But business can do a number of things to turn problems into opportunities. Green-Tech. U. Another is to find new energy sources such as wind farms and hydroelectric projects. highly con- nected customers are more likely to defect from a service provider in response to others in their network doing the same.gsvc. the Global Social Venture Competition cially and environmentally friendly ventures. in response to growing consumer concern in Britain about environmental issues. green energy returns: Wouldn’t the world be a better place if we had producer Ameresco (www. Changes in the earth’s resources and climate can have significant and far-reaching effects. which can be used to make clothing. EXHIBIT 4. “A Gold Rush in Green Business school students.” Bloomberg Businessweek European Edition. 24. leading automakers to develop new hot-selling hybrid gas-electric vehicles such as the Toyota Prius. and clothes made from 100 percent organic cotton and colored with nontoxic dyes. one to which today’s newly educated marketers can contribute (see Exhibit 4. and marketing research (monitoring supermarket purchases with scanners or internet activity with digital “cookies”). and fed from a network of business schools sprung up in Silicon Valley.

and other products and services whose demand depends on the reliable coming of Old Man Winter. the bargaining power of buyers. over time. By most measures. Other natural trends. 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. Porter’s Five Competitive Forces24 Five competitive forces collectively determine an industry’s long-term attractiveness—rivalry among present competitors. such as the depletion of natural resources and fresh groundwater. is to construct a checklist based on Porter’s seminal work. this is a large. snowmobiles. Tracking such trends and understanding their effects is an important task. consumers and businesspeople have become hooked on cell phones. within the same industry. and frozen meals. the bargaining power of suppliers. if global warming continues. firms are mutually dependent: What one firm does affects others and vice versa.25 The strength of the individual forces varies from industry to industry and. Chapter 4 Understanding Market Opportunities 99 Trends in the natural environment are creating opportunities for companies like Du- Pont. growing. it may play havoc with markets for winter vacationers. Rivalry among Present Competitors Rivalry occurs among firms that produce products that are close substitutes for each other. salad bars. A determine an industry’s long-term useful way to conduct a five forces analysis of an industry’s attractiveness attractiveness. for example). which we address in this section. 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. 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. On the other hand. and attractive market. Thus. EXHIBIT 4.9 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_085-113.9). and the market for mobile communication has grown rapidly. may significantly impact firms in many indus- tries serving a vast array of markets. threat of new entrants into the industry. and the threat of substitute products (see Exhibit 4. the key forces are rivalry among pres- ent competitors (for example.indd 99 14/12/12 12:50 PM . In the fast-food industry. YOUR MARKET IS ATTRACTIVE: WHAT ABOUT YOUR INDUSTRY? As we saw at the outset of this chapter.

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

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

while three are unfavorable. and the faxing or e-mailing of documents versus over- night express delivery. Given this mixed outlook. Threat of substitutes Threat of substitutes is high: PDAs. we summarize one analyst’s judgment of the favorability of the five forces for the European cellular phone service industry in the year 2012. no threatening substi- tutes on the horizon. tablet computers. 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. Substitute products put a ceiling on the profitability of an industry by limiting the price that can be charged. 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 a cozier relationship with governments to provide bandwidth. packet switching. Overall conclusion: Only two of the five forces are favorable. In emerging markets. for which four or five of the forces might be favorable. 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. the industry in 2012 was probably less attractive than some industries.. Thus. customer switching costs are low. wal28949_ch04_085-113. and each constrains the prices that can be charged by the other. Thus.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. consistent with the preceding discussion. There. the cellular phone service industry. such as plastic bottles versus aluminum cans. since governments are more welcoming of telecom development. Thus industry attractiveness is brighter therein. at least in the European market. strategists would consider EXHIBIT 4.indd 102 14/12/12 12:50 PM . 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. aluminum cans are substitutes for plastic bottles and conversely. new service providers must purchase a bandwidth license by spending billions. less rivalry). digital photography over silver-halide film. and substitutes are not likely to enter anytime soon. 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. Buyer power Buyer power is low: very favorable Even large customers have little power to set terms and conditions in this industry. compared to earlier in the industry’s history when there were fewer players (thus. satellites).10. Thus. is not very attractive at this time. and laptops moderately unfavorable using Wi-Fi networks to access the web could cannibalize expected sales of 3G and 4G wireless network cell phones. in food-packaging. This analysis indicates that. supplier power and threat of substitutes are often more favorable.g.

a maker of aluminum beverage cans. profitable. and paper packaging industries.indd 103 14/12/12 12:50 PM . 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. For more on Blue Ford’s Model T automobile created a blue ocean. a maker of plastic bev- erage bottles. tial customers (those that are potentially willing and able to buy). of course. the processes by which value is added. If two or more of them are different. If two or all three of these value chain elements are similar. they made compe- tition irrelevant by creating a huge leap in value for both Source: W.11 Competing in Blue Oceans Chan Kim and Renée Mauborgne argue that one way automotive industry that barely existed at the time. and CNN in call blue oceans. Thus. it’s probably appropriate to say you are all in the same industry. and AMCOR. Henry egy. On the market side and recall- ing that markets consist of customers—whether individual consumers. in units consumed of a class of goods or services. CHALLENGES IN MACRO-LEVEL MARKET AND INDUSTRY ANALYSIS In order to analyze the attractiveness of one’s market or industry. an Ocean Strategy. On the industry side. a five forces analysis of the aluminum can industry would consider the threat of substitutes from the plastic. 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. see Exhibit 4. It is informative to measure market size and growth rates in customer numbers as well as in unit and value terms. We further develop this theme later in this chapter. but key suppliers (aluminum versus petroleum-based plastics) and value-adding processes (aluminum cans and plastic bottles are made very differently) differ. So. 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. an inherent assumption that’s all too on finding markets where there is little competition— frequent in strategic circles. out of today’s hotly contested industry spaces defined too. to rapid. did Federal Express in overnight package delivery.11. one must first identify. yet undiscovered by existing competition. there’s the question of how narrowly or broadly to define one’s in- dustry. including the degree to which they believe they are likely to be able to establish and sustain competitive advantage. “Blue Ocean Strat- the company and for the new buyers it served. Rejecting the tired strate- blue oceans—and then take steps to exploit and protect gic logic of red oceans—overcrowded industries where these oceans. exactly which market or industry is to be analyzed. Strategic Issue trade customers like retailers. glass.” Harvard Business Review. For an approach to strategic thinking that avoids the constraints of traditional industry definitions. EXHIBIT 4. Chapter 4 Understanding Market Opportunities 103 other factors. Rather than A key tenet of all these companies is that they re- focusing on “beating the competition. by conventional boundaries is to develop what they Cirque du Soleil in circus (or is it theater?). in terms of value (the aggregate spending on a class of goods or services) and so on. and often uncontested effective in creating blue oceans never used the com. petition as a benchmark. where many of the customers are the same. growth for a decade or more. Instead. or business users in B2B markets—the Markets can be measured in various challenge often lies in sizing the relevant market. companies seek ways of beating one another—can lead. jected the notion that there must be a trade-off between managers should focus more of their strategic efforts value and cost. Are Ball. and the kinds of buyers are the same for your company and other companies whose industry you may consider yourself a part of. as is the case for Ball and AMCOR. Chan Kim and Renée Mauborgne.” they argue. you probably are in different industries.com. previously unknown market spaces as news broadcasting. October 2004. wal28949_ch04_085-113. Their research found that companies that were they found.blueoceanstrategy. see www.

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

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

” BusinessWeek.” Financial Times. the Fight Is for Second Place. “Asia Gets Hooked on Wireless. 2005.com/ walker8e. "Mobile Phone Sales Sink for First Time in Three Years.” Financial Times. Information on the cellular telephone business in the 21st century comes from the following Endnotes sources: Moon Ihlwan. October 18. June 19. 2008. 13. 2010. p. Kevin J.” BusinessWeek. pp. . 34–40. carbonated drinks. Andy Reinhardt. Bea Hunt.” Financial Times. p.” Financial Times.html. therefore. May 4. 2010. . FTIT Review. 2. Andrew Parker and Paul Taylor.. http://www. “The Race to Rule Mobile. pp. “Smart Phones. identify important environmental issues. June 18. and dryers) that are manufactured and sold in the United States. “The Ageing Business: Companies and Marketers Wrestle with Adapting Their Products to Older Consumers’ Demands. Francesco Guerrera and Jonathan Birchall. May 25. p.. The cus- Questions tomers of such packaging.pcworld. June 7." Bloomberg Businessweek. January 30. p.mhhe. 2007. February 13. Steve Frank. 2006. 4. February 15. Discussion 1. p. 24–25. You are an entrepreneur who has developed a packaging technology that instantly chills single- serving containers of cold beverages such as beer. Dan Roberts.com/printable/ article/id. January 19. p. p. assess this opportunity and describe any strategic decisions you could make to maximize the opportunity’s attractiveness. 18. Mexico. Stephen Baker. • You should draw summary conclusions about the attractiveness of the overall market and the industry at the macro level. “For Cellphone Makers. “The Planet Is Ever Greyer: But as Longevity Rises Faster Than Forecast. “Online Overseas. “A Tough Call. Japan. pp. 65–66. Briefly describe your proposed system in terms of how you would organize your scanning activities. 2012. 2000. 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. You are not certain whether your technology is patentable.” The Wall Street Journal Sunday. 109. Roben Farzad. 5. 1999. Taking into account the five competitive forces. What problems and opportunities does this present for what consumer and industrial goods? 3. September 19. p. Norma Cohen and Clive Cookson. January 26.” The Economist. Edmond Lococo. The president of a large manufacturer of household appliances (such as dishwashing machines. 2012.” Financial Times. p. Stephen Baker. 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." The Economic Times Hyderabad. “The Lex Col- umn. “AT&T’s iMess. 2010. and fruit juices. February 15. Reuters Helsinki.” New York Times. “Banishing the Negative: How Kodak Is Developing Its Blueprint for a Digital Trans- formation. what do you think lies ahead for the worldwide automotive industry? 4. • Critical success factors should be just a few and might be inferred from trade magazine articles for the industry in question. 2012.” International Herald Tribune. 2. Using the seven domains framework. "Nokia Defends Ground Plans for a Turnaround. May 16. 19. Drinking water pollution (contamination) has become a serious problem in many countries. p. 3. 15. 1. 2000. 65. December 6.indd 112 14/12/12 12:50 PM . p. 2004. 2012. “Boom Time." Gartner. p.” Financial Times. 1. January 29. 2004.” Bloomberg Businessweek. and evaluate the impact of each issue.255692/printable. wal28949_ch04_085-113. 15. refrigerators. January 20. Mello Jr. 13. “Basking in 3G’s Rays. November 14. “Cell Phones for the People. 2005. "China Unicom’s Smart Call on Cheap Phones. “Not Just Talk. the Elderly Are Also Becoming Healthier. Joe Leahy. 18.” Financial Times.” BusinessWeek International Edition. H8. John P. 2000. p. O’Brien. 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. 2011. February 14. washers. “Darling to Dog to .” Financial Times. “Mobile Businesses Send out Differing Signal. 2000. February 21. would be beverage-makers.” BusinessWeek International Edition. Amy Yee. 18. 13.

30. p. 24.. and Robert P. One-. Mullins. The New Business Road Test.ca/news/ world/244957/fair-trade-movement-faces-crossroad/. p.254_157720. May 26. 194. 37–52. Patrick Barwise and Seán Meehan.” Fortune European Edition. 36–41. 2005.com. Plagues. 13 (London: Prentice Hall/FT. 24–38. 23. “The Capabili- ties of Market-Driven Organizations. 13. chap. Dave Gram. Martin Wolf. MA: Harvard Business School Press. Jin K. “How to Avoid the Value Trap. The Economist.uk/dietandfitness/getfit/cardio/articles/ 0. Kevin Zheng Zhou. 1980). at http://www." May 31. The Economist. "Weaving the World Together. 31. see George S. 35." February 25. "East or Famine. “Ryanair’s First-Ever Capacity Reduction Marks End of Discount- Airline Boom. see John W. chap.” April 29. 28.” Financial Times. and Julie Juan Li. 2004. p. pp. Kumar. pp. 18. 2012. 7.” Bloomberg. 26. October 7." April 21. 79–91. Quoted in Herb Greenburg. 1–16. 13. Eli Jones. 1–15. June 4. For more on how crucial flaws may be mitigated or resolved. pp.on-fuel-slower-traffic-growth-html. pp. K.unaids.” Journal of Marketing 75 (January 2011). 29." p. 11. June 10. "The Re-regulation of the American Financial System. April 21. Day. 16. February 27.” BusinessWeek European Edition. “Burgeoning Bourgeoisie. 76–78. 5." Technology Quarterly. Namwoon Kim. "UN AIDS Day Special Report. chap.bloomberg. Prahalad and Gary Hamel. Nicholas Varchaver. “Entry Barriers: A Dull-. 41–44. 17.” Financial Times. 2009. 2011.org. 12. pp. pp." November 19. 1–14." February 27. “People. The Economist. “Chemical Reaction. 20. Rajkumar Venkatesan. http://business. V. The Economist. Michael Porter. 25. "A Third Industrial Revolution. and C. “GM: Live Green or Die. 14. “Is Market Orientation a Source of Sustainable Competitive Advantage or Simply the Cost of Competing?” Journal of Marketing 75 (January 2011). p. 2003. p.” Journal of Marketing 65 (January 2001). pp. Competitive Strategy (New York: Free Press. pp.” Financial Times. Chapter 4 Understanding Market Opportunities 113 6. wal28949_ch04_085-113.” Journal of Marketing 58 (October 1994). and Hong-Bumm Kim. 2012. 2. 32. David Welch.html. 2012. The New Business Road Test. 17. The Economist. 34. 2010). 6. The Economist. Leone.com/2009/02/25/the-re-regulation-of-the-american-financial-system/ 19.com/news/2011-05-23/23/ ryanair-expects-similar-profit-this-year." Special Report. www. 2009. 77–78.00. “Kraft Blends Ethics with Coffee Beans.co. 13–15. 106. 33. see Mullins. 2011. Justin Fox. 10. For more detail on micro-market attractiveness.indd 113 14/12/12 12:50 PM . 2008. John Parker. 2002. p.” Harvard Business Review 68 (May–June 1990).” Fortune. 16–30. "The Third Industrial Revolution. http://metronews. 23. For an example of such a checklist. Mullins.” Journal of Marketing 75 (November 2011). Steve Rothwell. “Social Effects on Customer Retention.unaids.time.” The Economist. 2010. 22. pp. 21. see Mullins. 2003. 27. 2007. pp. “Airlines and the Canine Features of Unprofitable Industries. April 2. Simply Better: Winning and Keeping Customers by Deliver- ing What Matters Most (Cambridge." 2011. "UN Aids World AIDS Day Report 2011. 9. www. 6. Time. "Fair Trade Movement Faces Crossroad.” www. 8. "Following the Footprints. “The Core Competence of the Corporation. “The Ten Tricks of Buying Home Exercise Equipment. 5. and Prosperity: Five Trends that Promise to Transform the World’s Population within 50 Years. chap. For the classic articles on competencies and capabilities. The New Business Road Test. September 27. 2004). pp. Liz Neporent and Michele Bibbey. February 14. Shibin Sheng. Han.ivillage. p. “The Effects of Business and Political Ties on Firm Performance: Evidence from China. 15. pp. 9. Irit Nitzan and Barak Libai. or Two-Edged Sword for Incumbents? Unraveling the Paradox from a Contingency Perspective. ibid. The New Business Road Test. “A Club in Need of a New Vision. Sara Silver.

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

For new product managers in established firms. and stop when we are done. her quest. annual budgets are prepared to guide decision making for the coming year. ever-faster chips and market them everywhere. Says Bell. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 115 people at home with their families in every corner television. so Intel’s speedy but pricey Celeron badly designed. an early anthropologist. 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. and so on. internet.” says Stephen Paw- What is Bell Learning lowski.” As Bell puts it. Perhaps if Bell has her way. Once wal28949_ch05_114-138. who brings to her craft a doctorate in anthro- can’t you live without?” pology from Stanford University. better way to go. 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.” Let’s hope people like to happen. 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. I don’t know why to be subservient to the products we buy. The old takes of its own home—you realize that elec. “Genevieve and her team make us engineers think differently. “Anthropology continues to be a In a study of early adopters of social networking really important way to bring voices into the tech- technology. These decisions determine staffing. levels of operating expense. of the world’s leading thinkers on the mash-up of gist’s toolkit is the digital camera. There is nothing like the film a five-year. these planning and budgeting activities begin with a sales forecast.indd 115 14/12/12 2:22 PM . These plans can take many forms. smartphone. we mostly don’t behave now as we did then. we also ask questions about technology: What do you love about it. “We intend to use Bell’s expertise heavily as we focus on emerging growth markets. 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. In organizations of all kinds. Or if she fails in somehow different from their parents’ generation. who leads Intel’s chip architecture research about Generation X? team. “It’s just not going the world safe for people. Apple will continue its inroads into the “I don’t think it’s as easy as we sometimes think.” Seeing the world as it really is and chips are not very relevant in some markets. In al- most every case. means text on trical outlets are everywhere and furniture is really a cell phone. It doesn’t demand so much when I have of the planet. investments in productive capacity. how does Can Bell’s Work Make a Difference? it frustrate you. in many parts of the world. Benedict. “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. Bell spoke to a young woman who had nology realm that really need to be there. Ruth just had a baby and was no longer blogging as much. rather we believe that because we were all 16 once. “We can humanity and technology. and than masters of them. “At Intel. And the rest of us will continue will do for the rest of your life.” PC. 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. For entrepreneurs a business plan may be needed to raise the necessary capital to start the venture. what Bell. and other consumer electronics says Bell. 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.” One of the questions Bell and her team are some. has become one One of the key tools in the modern anthropolo. what do you hate about it.

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

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

since there is no history in their venture on which to base a statistical forecast.com. forecasting sales for corporate growth objectives. using macroeconomic data. and other relevant factors to forecast market potential as well as Michelin’s own replacement tire sales for the coming year. statistical methods have important limitations. to get additional lines. a top-down figure is prepared at Ready?” Harvard Business Review. When tire manufacturers produce automo- bile tires that last 80. when its statistical models used to predict needs for telephone capac- Sometimes this is not the case. In established firms. Banana three forecasts are then compared. 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. for established products. statistical models used with- out adequate judgment may not keep pace. gether with the ensuing discussion lead to substantially agers then provide their input and sum these numbers to better forecasts.” Most category—women’s knit tops. the and bottom-up approaches are used. the average number of lines per home skyrocketed. curement and expense budgets is determined. Old Navy finds that the different processes to- can achieve for the next year. differences debated. 118 Section Two Opportunity Analysis EXHIBIT 5. and so on— important. statistical methods are extremely use- ful. faxes. the last few years’ demand. wants to forecast demand for the replacement automobile tire market in Asia for the next year. to forecast the future based on an extrapolation of the past. When Michelin. summing stores and groups of McClelland. predictions of GDP for the region.000 miles instead of 30.000 to 50. though there is little else to support some forecasts! Statistical Methods Statistical methods use past history and various statistical techniques.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. Suddenly. Consumers had to wait. broad involvement in the process helps to ensure both At Old Navy. As with all forecasting methods. The the next year for each of its key brands—Gap. US WEST (now Strategic Issue CenturyLink). create a total forecast from a merchandising perspective. including how much merchan. for example. Though dise to plan to buy for the coming year. it can build a statistical model using such factors as the number and age of vehicles currently on the road in Asia.000 miles. Most important of these is that statistical methods generally assume that the future will look very much like the past. “Rocket Science Retalling Is Almost Here: Are You stores. switches.indd 118 14/12/12 2:22 PM . Gap. Fisher. Such a pro- cedure is likely to result in a more accurate forecast than other methods. see www. Both top-down the effort to prepare such a forecast is considerable. and Old Navy—is an important process that and a final figure on which to base merchandise pro- drives a host of decisions. the regional Bell telephone company serving the Rocky Statistical methods generally assume that Mountain and Northwest regions of the United States. Simultaneously. men’s jeans. and second lines for teenagers in American homes. ity failed to allow for rapidly increasing use of the internet. sometimes for months.1 Forecasting Next Year’s Sales at Gap At international retailer Gap Inc. not evidenced-based—the SWAG method (Silly Wild-@*# Guess)—is not con- doned here. A second bottom-up forecast is generated by the store Source: Marshal L. the annual demand wal28949_ch05_114-138. For more on headquarters in California. and they were not happy about it! Similarly. Group merchandise man. such as multiple regression or time series analysis. Republic. July–August 2000. Sometimes this is not the case. method.gap. each merchandiser gen.. and there was not enough physical plant—cable in the ground. if product or market characteristics change. the tire manufacturer. Ananth Raman. ran into trouble the future will look very much like the past. especially because Michelin has years of experience with which to calibrate its statistical model. and so on—to accommodate the growing demand. and Anna Sheen operations organization. and other factors.

For example. complet- ing a survey of salesforce opinion. Surveys or Focus Groups Another common way to forecast sales or estimate market potential is to conduct surveys or focus groups. For new-to-the-world Observation-based forecasting is attractive products. observation-based forecasting is attractive because it is based on what people actually do. 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. at the library. but if asked wal28949_ch05_114-138. 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. Market tests and concept tests. As part of their research in Dar es Salaam. 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. If behavioral or usage data can be found from existing second- ary sources—in company files. many large-capacity pickup trucks sold in the United States feature six wheels. and so on—can also be surveyed. For one. Had there been no pay phones in Tanzania or a similar country. suppliers. Salespeople can be asked how much they are likely to sell. can be asked how likely they are to buy. Surveys and focus groups possess important limitations. in concept form. If automobile manufacturers were to change the num- ber of wheels on the typical car from four. however. Revenue for most pay phones fell into the US $100 to $150 range. bottom-up forecast of market potential.indd 119 14/12/12 2:22 PM . Business customers spent an average of US$10 per week for 14 pay phone calls. or how much they use. however. are increasingly done online. since the product often does not yet exist. Maddy and Laguë surveyed pay phone customers to find out more about them. consultants. Maddy and Laguë now had what they needed to prepare an evidence-based. and 17 percent were other nonbusiness customers. which we discuss later in this section. observation is typically not possible. Buyers can also be asked about their current buying behavior: what they currently buy. 4 By combining these data with demographic data on the Tanzanian population. These methods can be done with various kinds of respondents. and in today’s internet age. are two ways to get real purchase data about new-to-the-world products. Strategic Issue For one. what people say is not always what people do. For one common approach to doing so.2.3 Like statistical methods. and nonbusiness custom- ers spent US$6 per week for 12 calls. however. Consumers. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 119 for replacement tires is reduced. the persons who are surveyed may not be knowledgeable. 20 percent were students or teachers. 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. and secondary because it is based on what people data are not available. except actually do. after being shown a state- ment of the product concept (a concept test) or a prototype or sample of the product. say is not always what people do. trade association executives. what people fact. 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. Second. the old statistical models would also be in trouble. how often. Experts of various kinds—members of the distribu- tion channel. market segment by market segment. observation would not have been possible. see Exhibit 5. 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.

case no. 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.nestle. the number of old cars actually on the road or the length of pay phone calls in Tanzania). it wanted to forecast the likely first-year sales volume if the acquisition were completed.indd 120 14/12/12 2:22 PM . Reprinted by permission. reduced the 70% figure by more than half. are superior to survey methods of forecasting because such methods are based. 9-595-035. Boston: Harvard Business School.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. for their opinion.” These adjustments. the product is compared with simi- lar historical data that are available. When Danone. Similar logic is useful in a variety of forecasting situations.6% # 12.” they will surely provide a response. statistical and observational methods. how likely they were to try the fresh pasta product. Rule of Thumb Reduction Percentage of Market Deemed Purchase Intent % Response for Forecasting Purposes Likely to Actually Buy Definitely would buy 27% Multiply by . Nestlé used a concept test in which consumers were asked.g. while “probably” responses were reduced by 70%.9% " 34.3 43% ! . Copyright © 1995 by the President and Fellows of Harvard College. its managers look at the sales history of ear- lier introductions to forecast the sales for the newest flavor. 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. Under this method. This method is also used for new-to-the-world high-technology products. 1995. to 34.5%. the leading marketer of yogurt in Europe. Kasturi Rangan.6% Probably would buy 43% Multiply by . 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. among other things. 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. at least in part. what people imagine about a prod- uct concept in a survey may not be what is actually delivered once the product is launched.. Whether they will actually like the taste and texture of the sauce that the lab develops is another story! In general.8 " 21.9% Might or might not buy 22% Count as zero Probably or definitely 8% Count as zero would not buy Totals 100% 21. they will probably provide it! Third. where adequate data or settings are available in which to apply them.5% Even though 70% of consumers surveyed indicated they were likely to buy. “A Survey of Buyers’ Intentions: What People Say Is Not What They Do” from Nestlé Refrigerated Foods: Contadina Pasta and Pizza. a less reliable indicator of their future behavior.8 27% ! . The results were as shown in the first two columns in the following table. see www. plans to introduce a new flavor. To do so. Nestlé’s experience indicated that these “top two box” percentages should be cut sharply: “definitely” responses were reduced by 20%. 120 Section Two Opportunity Analysis EXHIBIT 5. shown in columns three and four.com. on what people have actually done or bought (e. and “maybe” responses were considered as “no. Source: Marie Bell and V.3 " 12. for which product prototypes are often either not available or extremely expensive to produce. a fresh pasta company.

More im- portantly. First. the Sony Walkman had sold more than 300 million units. What price should Apple charge. whether it is used solely and intuitively or in concert with evidence-based methods. Such conditions must be taken into account. First. Nonetheless. since capable and informed judgment is required for all methods. Use of live test markets has declined over the past few decades for two reasons. I just know. I rely on my sense of color and texture. forecasters consider related product introductions with which the new product may be compared. but Apple planned to ask consumers to pay for their tunes. which eventually convinced the courts that Napster was illegal). proving there was vibrant demand for a portable music player. but at times I cannot explain why I feel a certain way . and with free downloads available. are intuitive in their decision processes and cannot always articulate the basis for their judg- ments. offering deep wal28949_ch05_114-138. it is often diffi- cult for them to defend their forecasts against those prepared by evidence-based methods when the two differ. Indeed. Second. 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?). sometimes forecasts are made solely on the basis of experienced judgment. 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. in today’s data-intensive environment. Used largely for new consumer products. Some decision makers. the free peer-to-peer music- sharing site.5 As always. would customers be willing to pay anything at all? Sec- ond. 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. . “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. Apple. there are limitations. Napster. Judgment While we hesitate to call this a forecasting method of its own. especially for consumer products sold through supermarkets and mass merchants. was all the rage with consumers (though not with the music publishing industry. the new product and its pricing are never exactly like that to which the analogy is drawn. . Said a footwear buyer at Nine West Group. the importance of experienced judgment in forecasting. or intuition. conducting the test by increasing sampling programs.indd 121 14/12/12 2:22 PM . More diabolically. First. 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. Use of test markets has declined over the competitors can engage in marketing tactics to mislead the company past few decades for two reasons. even effective ones. 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. . in developing its now wildly successful music business. Unfortunately. Downloaded music from Napster was free. an international manufacturer and retailer of shoes and fashion accessories. 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. The use of analogs like these. Experiments and Market Tests Market tests of various kinds are the last of our six commonly used forecasting methods. market and competitive conditions may vary from when the analogous product was launched. can- not be discounted.

3 and Exhibit 5.indd 122 14/12/12 2:22 PM .5% will try the 77. In Exhibit 5. have also been devel- oped. The coming of the internet has made possible a new kind of market test: an offer di- rectly to consumers on the web.7 million ! 48% 12. interest groups. The market potential is then multiplied by various fractional factors that.7 million households figure from Exhibit 5. or otherwise distorting normal purchas- ing patterns in the category. case no. 122 Section Two Opportunity Analysis discounts or buy-one-get-one-free promotions.0 million will try the likely extent of distribution in tain distribution product supermarkets. Copyright © 1995 by the President and Fellows of Harvard College. 9-595-035 (Boston: Harvard Business School Publishing. Other Mathematical Approaches: Chain Ratios and Indices Two additional mathematically-driven approaches to forecasting are the chain ratio calculation or the use of indices. or e-mail lists of cur- rent customers are among the common approaches.3 Chain Ratio Forecast: Trial of Fresh Pasta Once Nestlé’s research on fresh pasta had been completed (see Exhibit 5.4 million market Concept purchase intent: adjusted 34.S. 1995). See Exhibit 5.8 discussed in the next section. We explore these and other internet marketing strategies in greater detail in Chapter 11. the factors reflect the appeal of the product to consumers.” from Nestlé Refriger- ated Foods: Contadina Pasta.4). pre- dict the portion of the overall market potential that one firm or product can expect to obtain.4 for examples apply- ing these mathematical calculations to arrive at sales forecasts. as measured by marketing research data and the company’s planned marketing program. Experimental test markets. Other quantitative methods. Source: Marie Bell and V. Offers to chat rooms.com wal28949_ch05_114-138.4 million ! 34. and methods to mathematically model the diffusion of innovation process for consumer durables. which shows the more detailed of the two approaches.8 million ! 70% 9. are still commonly used. Kasturi Rangan. Reprinted by permission. 12.2). Both approaches begin with an estimate of market potential (the number of households in the target market in Exhibit 5. the national market potential for a product category in Exhibit 5. households Similar chain ratio logic is useful in a variety of forecasting settings. “Chain Reaction Forecast: Trial of Fresh Pasta. on the other hand.7 a method to forecast the impact on consumer de- mand of different combinations of attributes that might be included in a new product.3.2 product will try if aware Awareness adjustment: based on 48% will be aware 26. For more on Nestlé. it used the chain ratio method to calculate the total number of households who would try their fresh pasta.nestle. especially useful for new products. and Pizza. These include conjoint analysis. see www. given the introductory reaching 70% of trade promotion plan U. The chain ratio calculation went like this Data from Chain Ratio Research Results for: Research Calculation Result Number of households in target 77.3. EXHIBIT 5.8 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.5% 26. taken together. Use of such techniques has increased due to companies’ ability to carry out such tests quickly and at low cost.

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

well-known name in the field. They naively forecast that their innovations will managers sometimes naively forecast that capture 10 or 20 percent of the market in its first year. while others take years. the diffusion process may be faster when there is strong competition among competitors. 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. and laggards.7.5% 34% 34% 16% Innovators Laggards wal28949_ch05_114-138.12 Some new products move quickly through the adoption process (a new breakfast cereal). early majority.indd 124 14/12/12 2:22 PM . five major groups can be distinguished: innovators. the success of historical product launches or hiring a cereal). (5) the extent to which its trial can be accomplished on a small-scale basis. particularly at the individual level. If we use time of adoption as a basis for classify- ing individuals. while others take years. are also at work. People who are better connected in so- cial networks tend to adopt earlier. People who serve as hubs in social networks may even provide clues to the future success of innovations. even a compellingly 20 percent of the market in its first year.5% Majority 2. these adopter groups can be considered market segments. attractive one. and when they allocate substantial sums to R&D (to improve performance) and marketing (to build awareness).6 for the approximate size and characteristics of each group. Thus. when they have favorable reputations. For a discussion of the challenges in transition- ing marketing efforts from group to group. 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. Thus.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 for an illustration and Exhibit 5. See Exhibit 5. see Exhibit 5.5 Diffusion of Innovation Curve Early Majority Early Adopters Late 13.13 Because each category comprises individuals who have similar characteristics and because individuals differ substantially across categories. will win all of the innovators plus most of the early EXHIBIT 5. 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. while less important. Adopter Categories Early adopters differ from later adopters. 124 Section Two Opportunity Analysis and behavior. due to their earlier exposure to an innovation.10 Other factors. and (6) the ease with which the central idea of the new product can be communicated. including the growing influence of social media. late majority. Legitimacy may come from associations with the adoption process (a new breakfast established firms. early adopters. How likely their innovations will capture 10 or is it that a truly innovative new product. Early cell telephones scored high on most of the key adoption factors.

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

Relative advantage # Enabled people to make $ It was not clear. what the anywhere—in the car or at the advantages of a PC were in the beach! home. on average. and RAM. Relative simplicity # Early cell phones were easy to use. Forecasters often fall prey to what Dan Lovallo and Daniel Kahneman call the planning fallacy. 126 Section Two Opportunity Analysis EXHIBIT 5. for better or worse.9.15 Second.14 A solution they espouse. whether intentionally or otherwise. especially in new product or new venture settings. 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. but contracts #/$ One could visit a store for hands-on required. wal28949_ch05_114-138. trial but couldn’t understand the “bits. First. Key: # Favorable for rapid adoption $ Unfavorable for rapid adoption CAUTIONS AND CAVEATS IN FORECASTING Psychological Biases in Forecasting To a varying degree. Compatibility with current # Just like making or receiving a $ Lots of learning required to use. the effectiveness of all of the forecasting methods we’ve just re- viewed is often undermined by excessive optimism on the forecaster’s part. if given away to attract early adopters it turned out not to be useful. who agreed to one year’s usage. with different levels of competition. capacity constraints are sometimes misinterpreted as forecasts. forecasters are subject to anchoring bias. in the early days and receive phone calls from of personal computing.indd 126 14/12/12 2:22 PM . Common Sources of Error in Forecasting Several sources of potential error in forecasts should be recognized. Another source of error in forecasting is incentive pay. Put- ting similar 80-table restaurants in two trade areas with different population makeup and density. Bonus plans can cause man- agers to artificially inflate or deflate forecasts. based on the systematic use of multiple analogs. Ease of small-scale trial #/$ Easy to demonstrate. thus not of benefits easy to understand. $ Early PCs were inordinately complex to use. bytes. 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.” Ease of communication # “Make or receive calls anywhere” is $ Benefits were not clear. communicable.5 times each night. even though market conditions have markedly changed. A restaurant chain that is able to turn its tables 2. may result in vastly different sales levels. behavior phone call at home or office.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. where forecasts are perhaps inappropriately “anchored” in recent historical figures. is discussed in Exhibit 5. must still do local market research to ascertain how much volume a new restaurant will really generate.

indd 127 14/12/12 2:22 PM .17 There are two im- portant keys to improve the credibility and accuracy of a set of forecasts of sales and mar- ket potential. should be applied to such a forecast. not some illusory set of certainties that are. Finally. How to Master Business Forecast- ing. today’s forecasting culture—based on a command-and-control mind set. project in that distribution. as shown in Exhibit 5. not certain at all.” as they call it. in fact. and then positioning the current “Delusions of Success. Dan Lovallo and Daniel Kahneman argue that the overoptimistic. Is your concept well defined or your prototype ready to show? Conduct a survey of buyer wal28949_ch05_114-138. using the chain ratio method (see Exhibit 5. In today’s fast-changing world that is becoming harder and harder to predict. In their new book. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 127 EXHIBIT 5. No such data? Find some suitable analogies. 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. Future Ready. How should one choose? Do you have historical data? Use one or more statistical methods.9 Managing the View through Your Rose-Colored Glasses Even in new product and new venture settings. set in New York’s Harlem in on the project itself. rosy view can be mitigated by sys. Their evidence-based forecast was instrumental in their obtaining US$3. and data to support the the credibility and accuracy of forecasts of assumptions can be obtained. Steve Morlidge and Steve Player argue that. an annual budget-driver schedule.” Harvard Business Review. Are there similar prod- ucts in the market already? Find some customers to observe as they use or buy them. Boston: Harvard out the distribution of actual outcomes of those proj. But there are so many methods. This “outside view. virtu. The resulting forecast will be ally nothing is completely new. Even in is much more likely to yield realistic estimates because the theatre. Getting to Plan B: tematically assembling a class of similar projects. and a predict and comply approach—has simply gone wrong (See Exhibit 5. July 2003. 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. in many companies. Sources: John Mullins and Randy Komisar. these common sources of error in forecasting are only the beginning of the challenge that fore- casters must address. useful than stating mere opinions about whether the forecast is too high or too low. or ventures have undoubtedly preceded yours. 2009.18 The second key to effective forecasting is to use multiple methods.2) may indicate their willingness to buy a new grocery product. de- pending on the nature of the planned marketing program for the product. Assumptions of awareness and distribution coverage at levels less than 100 percent. the 1950s. While 34. the assumptions can be debated.5 million in start-up capital to get their venture off the ground. such as fresh pasta. This way.5 percent of those surveyed (after adjustments. laying Breaking Through to a Better Business Model. 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. unstated but implicit assumptions can overstate a well-intentioned forecast. ects from best to worst. and Dan Lovallo and Daniel Kahneman. if there is debate or doubt about There are two important keys to improve the forecast. For ACG. tend to hype the more typical “inside view” that’s based speare’s Romeo and Juliet. The first of these is to make explicit the assumptions on Strategic Issue which the forecast is based. The resulting conversation is far more sales and market potential.3). Business Press.10). “Sandbagging”—setting the forecast or target at an easily achievable figure in order to earn bonuses when that figure is beaten—is common.16 Keys to Good Forecasting A key goal of good forecasting is to identify the full range of possibilities about the future. Many similar products far more accurate.

As should be clear to the reader by now.indd 128 14/12/12 2:22 PM . any forecast is almost certainly wrong.satoripartners. market- ing decisions are likely to be misguided. 2010).19 Obtaining market knowledge also requires data. 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. 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. Ultimately. intentions. without adequate market knowledge. The world is too complex and too dynamic to do so with any confidence. is to employ multiple methods. WHY DATA? WHY MARKETING RESEARCH? In the first portion of this chapter. West Sussex. as we saw in Exhibit 5. the best way to forecast.html. For an example of how Starbucks uses qualitative marketing research to systematically tap into its customers’ ideas and sugges- tions.co. Ltd. see http://www.10 Mastering Forecasting Let’s face it. 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. each of which requires that data be collected. It is nigh on impossible to predict the future. see Exhibit 5.9. 128 Section Two Opportunity Analysis EXHIBIT 5. Do you have early adoption data? Model the diffusion process. Contingency plans should be developed to cope with the reality that ultimately unfolds. perhaps using the approach suggested in Exhibit 5. And so on. Future Ready: How to Master Business Forecasting (Chichester. 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. based perhaps on hunches or intuition that may or may not be correct. If the results of two or more forecasting methods converge on similar results. 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. and so far we’ve provided little discus- sion of exactly how one might best find the necessary data. For more on Steve Morlidge.11. however.1. as shown in the table below. 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. market knowledge is generally incomplete and often ill-informed. Without relevant and timely data. Thus. Similarly. we provided several approaches to forecasting. Can you produce some product or deliver the service. that will build your and others’ confidence in what the forecasts say. UK: John Wiley and Sons. at least on a trial basis? Try an experimental market test of one kind or another. If not.uk/ About_Me.

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

not just retailers. A similar report provides infor- mation about all other styles currently in Nine West’s stores. but also which salespeople are selling how much. several companies launched extensive and expensive projects to help them better manage customer relationships through enhanced use of customer data. a series of questions to help marketing decision makers specify what internally generated sales data are needed.” Unfortunately. so that slow sellers can be marked down or transferred to stores where those styles are in higher demand.” Unfortunately. each director learns which items in his or her stores are selling fast and need to be reordered. Marketers of kitchen gadgets through infomercials on late-night television need to know which ads on which stations in which cities are per- forming. 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. such systems just track dollars of revenue. in which stores. For those charged with developing or updating internal record systems in their compa- nies. too. dress or casual).20 By style and color. 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. in order to place media spending where it will be most productive. accounting systems keting information varies from company to company and industry generally do not collect such data. to which customers. CRM has proved to be very successful in managing marketing campaigns and in serving customers more effectively and more efficiently. and at what level of aggregation. when. customer purchasing history.” a tabu- lation of detailed sales and inventory information about the fastest-selling items in Nine West stores from the prior week.g. in Exhibit 5. needs infor- mation about status of current orders. not just retailers. But what constitutes critical mar- not. in which locations. at what times of day. needs are provided to the right people at the right time is a critical market- information about “what’s hot. 130 Section Two Opportunity Analysis Internal Records Systems Every Monday morning. so it provides password-protected online access to such data to some suppliers. a leading operator of shoe specialty stores. accounting systems generally do not collect such data. Telemarketers need to know which callers are producing sales.12. area. Thus. by store. Marketing Databases Make CRM Possible In the technology boom of the late 1990s. we provide. receives the “Godzilla Report. each retail director at the headquarters of Nine West Retail Stores. wal28949_ch05_114-138. Walmart believes its key suppliers need to know its store-by-store item and category sales data. for whom. marketers need internal records systems to track what is sell- ing. and for various time periods. at what margins and expense rates. and to whom. Typically. by merchandise category (e. at what rate.indd 130 14/12/12 2:22 PM . what’s not. with no information about which goods or ser- vices were sold. Every marketer. to industry. The salesforce. in what sequence. how fast. Companies selling their wares to industrial markets through outside salesforces need to know not only which products are selling to which customers. Additional reports aggregate sales information by style and color. and for which products. and so on. what’s ing responsibility in any company. Strategic Issue Providing input on the design of such systems so that the right data Every marketer. Although many large-scale CRM projects have failed to show an adequate return on investment. or region. and so on. needs information about “what’s hot.. The answers to these questions should drive the design of such systems as well as the design and formatting of their output. Nine West retail directors need to know which styles and colors are selling.

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

it must obtain demographic and life- style data about them. Airlines track members of their frequent flyer programs and target some with special promotions. the program junkies that many consumers are in the West? United Kingdom’s largest loyalty program with 18 mil. If a company wants to know more about the demographics and lifestyles of its best cus- tomers. In an industry where less than 7 percent of retail value-added is the data. income.” The Economist. 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. By mining the data for its member merchants. including the Nectar card. Aimia is now taking on its 2011. to offer Nectarlike chants give us to keep us coming back for more. Bean. Source: “Spies in Your Wallet. L. p. Suhel Seth. 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. and other mer. Will Indian consumers soon become the loyalty- rope and the Middle East. 132 Section Two Opportunity Analysis Many companies have become quite sophisticated about using marketing databases. and much more. a marketing observer in India. Aimia will need many of Aimia. Catalog marketers such as Lands’ End and L. as discussed in Ethical Perspective 5. Many skeptical Indians consider such programs to be lion subscribers. Aimia. but also recognize the customer when he or she logs on to their site. November 5. wal28949_ch05_114-138. 85. managing coupon campaigns.indd 132 14/12/12 2:22 PM . then storing and maintaining it. a Canadian firm. and much more.2 billion multina. runs multimerchant programs across Eu. Doing so is more difficult than it sounds. in addition to their purchasing histories. and the rapid ad- requires that several major issues be vances in technology that permit the data to be used to maximum considered.” says Rupert Duchesne. EXHIBIT 5. motions to their customers. the United King. Aimia enables them to offer targeted discounts and other pro. The cost of collecting such information must be weighed against its value. Online mar- keters such as Amazon use “cookies. know who are their best customers and what categories they tend to buy. give Tata and Aimia a good chance to succeed. and what kind of car they drive. effective advantage of customer data that the economic benefits of using the data. Collecting information.13 Loyalty Cards Go Global Many of us have wallets full of so-called loyalty cards.” says supermarket shopping (from Sainsbury. Nectar cardholders earn points on their plots. advantage. so they not only keep track of what each customer has bought. on their airline thinks that the trust Indians have in the Tata brand will tickets (from Expedia and easyJet).22 The use of sophisticated loyalty cards by large retailers has now gone global (see Exhibit 5. whether they play tennis. tailoring product portfolios to individual stores. airlines. “[t]he real dustry. always costs money. member merchants to take part. a $2.13). India’s the reward cards that retailers. the ability of the company companies are in a position to collect to keep the data current in today’s mobile society. based in the United States. Tesco uses its analysis in deciding product placement on shelves. many people are unwilling to spend much time filling out forms that ask nosy questions about educa- tion. largest family-run conglomerate. next challenge. “To make them buy things they don’t want. While loyalty solutions for India’s highly fragmented retail in- keeping us coming back is one important goal. tional company.1. teaming up with the Tata Group.” electronic signatures placed at a customer’s personal computer. But even Seth dom’s number two supermarket retailer). Designing marketing databases that take effective advantage of Strategic Issue customer data that companies are in a position to collect requires that Designing marketing databases that take several major issues be considered: the cost of collecting the data. the CEO volume is done by chain retailers.

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

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

One is www. 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. It is based on the idea that more than 80 percent of all information is public knowledge. such as prices or proposed advertising campaigns. CRM is a topic about which whole chapters—even entire books—have been writ- ten. and so on—along with all kinds of personal tidbits. collection. government documents. and assessing the likelihood that consumers will buy proposed new products. The steps in the marketing research process are shown in Exhibit 5. the marketing research process is fraught with numerous opportunities for error.1to1 .or part-time? In companies that operate in industries with dynamic competitive contexts. and reporting of research intended to gather data pertinent to a particular marketing chal- lenge or situation. Another is www.com. com. speeches by company executives. online databases. The word particular is very important. 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.crmdaily. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 135 keep track of clients’ names. so they can use it.14. MARKETING RESEARCH: A FOUNDATION FOR MARKETING DECISION MAKING We now turn very briefly to the marketing research task: the design. Competitive Intelligence Systems29 In today’s fast-paced business climate. 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. There are a couple of good websites for those interested in learning more about CRM. a leading consultancy in this arena.indd 135 14/12/12 2:22 PM . wal28949_ch05_114-138. so we’ve just scratched the surface with our treatment here. and share it with the decision makers in the organization. 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. The most important sources of CI information include companies’ an- nual and other financial reports. As this exhibit shows. Competitive intelligence (CI) is a systematic and ethical approach for gathering and analyzing information about competitors’ activities and related business trends. trade organizations. analysis. the website of the Peppers and Rogers group. addresses. analyze it. phone and fax numbers. keeping up with competitors and the changing mac- roenvironment is no easy task. testing consumer responses to elements of marketing programs. The chal- lenge is to find the relevant knowledge. as well as the popular and business press. the use of full-time CI staff is growing. 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).

however. In the remaining chapters in this book. Collector bias: hearing what you want to hear. Some users do not really want objective information—they want to prove what they already believe to be true. wal28949_ch05_114-138. if any. sample. WHAT USERS OF MARKETING RESEARCH SHOULD ASK The steps identified in Exhibit 5. 5. based on the proposed research. is on target? 3. 4. faster secondary data used where possible? Is qualitative research planned to ensure that quantitative research. data These are technical issues best managed by skilled practitioners. but also the design and implementation of marketing programs. Determine data sources (primary or Primary data are collected when cheaper and faster secondary data secondary) and types of data and research will do. 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. Are the planned analyses appropriate? They should be specified before the research is conducted. Are the data sources appropriate? Is cheaper. numerous text- books and websites on marketing research are available. Design research: type of study. Analyze data. 1. For those wishing to read more on this topic. ideally before implementing the research or if necessary subsequent to its completion. 3. Report results to the decision maker. 6. while quantitative research is better for measurement of a population’s attitudes and likely responses to products or marketing programs. to ensure that the research is unbi- ased and the results are trustworthy.14 Steps in the Marketing Research Process: What Can Go Wrong? Steps What Frequently Goes Wrong? 1. The informed and critical user of marketing research should ask the following questions. 2. collection approach. Tabulation errors or incorrect use or interpretation of statistical procedures may mislead the user. to instruct the reader in how to design marketing research studies.indd 136 14/12/12 2:22 PM . Doing these steps poorly can generate misleading or incorrect results. Quantitative data are collected without first collecting approaches (qualitative or quantitative) qualitative data. Collect data. Identify managerial problem and establish Management identifies no clear objective. It is beyond the scope of this book. 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. required. etc. 136 Section Two Opportunity Analysis EXHIBIT 5. no decision to be made research objectives. 4. 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.14 make clear where many of the potential stumbling blocks are in designing and conducting marketing research. What are the objectives of the research? Will the data to be collected meet those objectives? 2.

1999). “Intel’s Cultural Anthropologist. guides for focus group sessions or in-depth interviews.com/hardware-opinion/50438- genevieve-bell-intel. 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. 4. Where might you find up-to-date information about each of the variables in your index? 3.intel. African Communications Group (Condensed). Discussion 1. What variables would you include in a multi- factor index for measuring relative potential? Explain your rationale for including each variable. http://www. Rob Enderle. 2010. 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.indd 137 14/12/12 2:22 PM . http://www.com/ walker8e. African Communications Group (Condensed) (Boston: Harvard Business School Publishing. Lawrence. pp. plans for how you will conduct observational research. McGahan. Prepare drafts of questionnaires. Kenneth D. Copeland. Identify your methods. and appropriate qualitative and/or quantitative research should be competently designed. McGahan.htm. Endnotes 1.tgdaily.net/chips/. Intel. 2010. Lawrence. the product has yet to gain acceptance by many consumers.” Hoteliers. 2009). 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. • 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. and the Intel website at http:// www.com/4hots_nshw. http://www.” TG Daily. 2. your sample.” TechEye.mhhe. 2011.com/pressroom/kist/bios/gbell. This material is drawn from Stephen Prentice. • Design the research to get you there. “Intel’s Genevieve Bell: An Anthropologist at the Cutting Edge of Technology and Society: A Gartner Fellows Interview. 2. and any statistics (means. After many years.) you will employ. Suppose you are the product manager responsible for General Electric’s line of trash compactors. Your research design should clearly identify and satisfy your research objectives. Michael V. 16–17.techeye.gartner. Klimberg. and Sheila M.com/displaydoument?id1358720. Anita M. http://www.4hoteliers. Ronald K. Fundamentals of Forecasting Using Excel (New York: Industrial Press. Precisely spell out the mathematics that will do this. To more effectively allocate promotion expenditures and sales efforts.” Fortune European Edition. September 27. Given that absolute market potential almost always exceeds actual industry sales. March 17. “Intel’s Genevieve Bell Drank Water out of Frogs. connecting it to specific secondary data or specific answers to questions or observations from your primary data. etc. The research plan needs to do three things: Plan Exercise • Precisely spell out the research objectives the research is intended to meet. “Mobile Etiquette Mishaps Are Running Rampant. Mike Magee.” April 23. “Intel’s Secret Weapon. Use the diffusion of innovation theory discussed in the text to explain why trash compactors have achieved such poor market penetration. wal28949_ch05_114-138. 3. 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. and so forth.php?mwi8403. using what you learned in previous coursework or any supplementary readings necessary.

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

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

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

however. These three decision processes—market segmentation. Chapter 6 Targeting Attractive Market Segments 141 Vervatwala offers—overall appearance. 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. Why do market segmentation and target marketing make sense? Why not sell the same fitness services—or bank accounts. and attitude—are more difficult to quan- tify. the benefits you’ll offer to customers in that segment.indd 141 14/12/12 2:23 PM . a venture capital investor in Silicon Valley or Hyder- abad. or whatever—to everyone? How can potentially attractive market segments be identified and defined? Finally. 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. these tools provide the platform on which most effective marketing programs are built. Together with differentiation and brand positioning. By focusing marketing effort on the most important customers. competitive intensity. and the key features of your goods or services that will deliver these benefits. which we address in Chapter 7. we encourage those working on marketing plans to use this chapter’s lessons to clearly identify the market segment(s) you will target. In virtually any market. or position. endurance enhanced) as well as the emotional needs that consumers attach to their favorite pursuits (looking good in the clubs or at work). target mar- Strategic Issue keting. She positioned her fitness studios as the ones that were focused on women only. Learning to apply these tools effectively. Target marketing requires evalu- ating the relative attractiveness of various segments in terms of market potential. muscles finely toned. requires addressing several important questions. No really necessary? matter how large the firm. 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. 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. higher average customer profitability and return on sales is realized. how can these segments be prioritized so that the most attractive ones are pursued? Answering these ques- tions should enable an entrepreneur. its resources are usually limited wal28949_ch06_139-161. 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. without any ogling males anywhere nearby. growth rate. where important is defined by customer satisfaction. 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. energy. automobiles.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. In the Marketing Plan Exercise at the end of this chapter. and other factors. A recent cross-industry study demonstrated the importance of choosing one’s market seg- ments carefully. however. in order to choose which segments it will serve. In Chapter 6. and positioning—are closely linked and have strong interde- Are all these analyses and conscious pendence. in the customer’s mind. if different segments can be clearly identified. customer loyalty and share of wallet. 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. along with the firm’s mission and capabili- ties to deliver what each segment wants.

there is an increasingly important trend toward microsegmentation in which extremely small market segments are targeted. Thus. Variation among market segments in product preferences. size of and growth in demand. Second. 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. tastes. which has enabled firms to mass-customize many products as diverse as wal28949_ch06_139-161. and more product-markets are maturing. For a discussion of how one company built itself into a multimillion-dollar business while serving a very small niche. and desires. When Nokia’s researchers discovered that many cell phones in India were used by more than one person. Nokia de- veloped handsets with multiple address books.indd 142 14/12/12 2:23 PM . and competitive structures further affect the differences and response rates. it’s had to adapt the design of its cell phones. higher edu- cational levels.”5 The critical issue for marketers is to find an appropriate segmentation scheme that will facili- tate target marketing. . as they search for faster-growing markets. for example. In East Africa. and price and promotion elasticities. Today’s Market Realities Often Make Segmentation Imperative Market segmentation has become increasingly important in the development of market- ing strategies for several reasons. . purchase rates. adding dust-proof keypads and eliminating other features to make its phones affordable to India’s low-income masses. Nokia has become the market leader. Even in the unusual case where a firm can afford to serve all market segments. Coke’s sales in Africa surpassed $550 million in 2009. They want products that talk just to them. Third. their response rates to products and marketing programs differ. 142 Section Two Opportunity Analysis compared with the number of alternative market segments available for pursuit. Thus. media habits.3 By tailoring its promotion and distribution methods by market and market segment. and the formulation and implementation of successful marketing strategies and programs.7 Whether Nokia can retain its lead in India as the smartphone revolution takes hold there remains to be seen.1. see Exhibit 6. and more awareness of the world have produced customers with more varied and sophisticated needs. it must determine the most appropriate allocation and deployment of its marketing effort across segments.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. Often. As New York–based trend tracker Tom Vierhile notes. positioning. Nokia. wants.000 small distributors—many of whom use pushcarts and hand trucks—to reach local mom and pop retailers. a firm must make choices. and lifestyles than ever before. Coca-Cola relies on more than 13. First. population growth in many developed countries has slowed. their attention turns to the developing world. “what consumers really ap- pear to hunger for are products that fit their unique needs. has targeted the fast-growing Indian mar- ket. to reach rural villages.6 By developing products uniquely suited to the Indian market and various segments therein. This has led to an outpouring of goods and services that compete with one another for the opportunity of satisfying some group of consumers. where the enormous diversity in demographic profiles and market conditions makes careful market segmenta- tion and targeting essential. and appeal just to them on an emotional level. where a majority of the population lives in rural areas. In doing so. . for example. such social and economic forces as expanding disposable incomes. markets are complex entities that can be defined (and segmented) in a variety of ways. This trend has been accelerated in some industries by new technology such as computer- aided design.

“Tight Skivvies. such as Time. satisfied customers and grew with Season. Will Under Armour be able to withstand Under Armour. and The Economist and Hello in Britain. November 1–7. 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.” Under Armour’s sales soared to sporting goods shops.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. April 30. He 2006 and more than $850 million in 2009. just before grad. T-shirts and coffee mugs.S. such as classical music.” BusinessWeek big break due to a product placement in the Oliver Stone European Edition. January 13. size. For more on and a first-time ad in ESPN Magazine during the movie Under Armour. Kevin realized that there was not U. since companies like these let everyone choose their own style. No longer must everyone at the company picnic wear exactly the same T-shirt.underarmour. In the United King- dom. Elaine of $17. made its first sale of 200 let them see me sweat. 65. more broad-based magazines. 2010. even designer jeans and cars. and even the slogan. Shannon. and Reebok. radio sta- tions with formats targeted to different demographic groups. with almost instant delivery. p.” Bloomberg Businessweek. For example. in the United States. Ironically. football movie Any Given Sunday. or postal codes. 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. willingness to pay. many new media have sprung up to appeal to narrow interest groups. country. 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. Customized products have been shown to generate greater appeal for customers than products designed for specific segments. recent entrants to this segment are Nike his teammates. An ad- vertiser can target specific regions. many marketing organizations have made it easier to implement sharply fo- cused marketing programs by more sharply targeting their own services. In March 1996. and positive at- titude towards the product. the company that was soon born in the competitive heat? Kevin Plank’s reaction? “I’ll never his grandmother’s basement. Chapter 6 Targeting Attractive Market Segments 143 EXHIBIT 6. and jazz. and Stanley sales to athletic teams in colleges. offer advertisers the opportunity to target specific groups of people within their subscription base. p.000.underarmour. 2007. set out to create one.com. see www. “Matt Townsend. and cable TV channels.$55 million in 2002 and more than $400 million in a single product on the market that met his needs. Kevin ended his company’s first year with sales Source: Company website: www. particularly in terms of purchase intention. They’re What Everyone’s Wearing This mouth from happy. 2003. A1. 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. and color. Also. Under Armour was marketed by word-of. “Under Armour’s Daring Half-Court Shot. rock.” Time. The company got its Holmes. or even selected income groups. these include special interest magazines. 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. such as Wanderlust and Autocar. cities. pp.indd 143 14/12/12 2:23 PM .com. “Under Armour May Be Overstretched. 24–25. not to mention chat shows of various kinds. Here’s Why.” shirts for $12 apiece to the football team at Georgia Tech. Buzz from the movie European Edition.8 Finally. such as Sky Sport and the Discovery Channel. The underserved niche market segment that Kevin uation.35 million athletic underwear—he simply wanted a comfortable in 1999. After hunting through all the Supplier of the Year.

single Income Under $15. clerical. what kinds of segmentation criteria.000–24. Jewish. price. The segmentation criteria should measure or describe the segments clearly enough so that members can be readily identified and ac- cessed. 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. industry. In most developed countries. wal28949_ch06_139-161. 144 Section Two Opportunity Analysis Strategic Issue elements of the marketing mix—the 4 Ps (product. supervisor. $15. sales. some college. student.2. we usually think of demographics in terms of attributes of indi- vidual consumers. the segmentation process should deter- mine the size and market potential of each segment for use in prioritizing which segments to pursue. Finally. Given these objectives. homemaker. For Dinaz Vervatwala. Scandinavian * Others include marital status. Like most retailers. • Determine segment size and potential. unemployed Education Some high school. manager. single. graduations. some mobile service providers have focused their attention on the 55–65 and 65-plus segments to improve usage and penetration. Anglo-Saxon. no children. 25–34. $25. most other fitness clubs in India targeted men and women. 12–17. are most useful? Segmentation decisions are best made in one of three ways: based on who the cus- tomers are. graduated college Events Birthdays. Occupation Professional.indd 144 14/12/12 2:23 PM . Vervatwala targets well-defined trading areas in placing new studios. or based on how they behave relevant to the market in question. The three approaches apply in both consumer and organizational markets.999.) are useful in segmenting organizational markets. youngest child under 6. older. We examine each of these approaches as follows. 65 and over Sex Male. home ownership. 50–64. EXHIBIT 6. and presence and age of children.000. 18–24. blue collar. Who They Are: Segmenting Demographically While firm demographics (age of firm. graduated high school. Since mobile phone penetration has reached saturation levels in most of Europe and the United Kingdom. etc. whether of goods or services. These segments’ high disposable incomes and their ability to devote time to new habits are seen as a lucrative market opportunity. • Specify criteria that define the segment. detailed demographic data showing what kind of people live where is readily available. Some examples of demographic attributes used to segment consumer markets are as follows: • Age. or descriptors. There are three important steps in the and place). 6–11. older couples with dependent children. sporting events Race and ethnic origin African American. 35–49. Asian. newly married. anniversaries. etc. older couples retired. 2–5. female Household life cycle Young. size of firm. older couples without dependent children.000–74. a topic we address in more detail later in this chapter.2 Some of the More Commonly Used Demographic Attributes* Demographic Descriptors Examples of Categories Age Under 2. Hispanic. promotion. as shown in Exhibit 6. based on where they are. Italian. youngest child 6 or over. women were targeted even though market segmentation process.999. national holidays.

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

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

Other con- siderations in the purchase of industrial products/services include on-time delivery. Mountain bike makers Specialized and Gary Fisher target bicyclists who wish to ride on single-track trails or Strategic Issue back-country terrain. customers consider relevant benefits that include product performance in different use situations. In virtually every consumer and organizational market there are segments like these just waiting to be identified and targeted by insightful marketers. is assigned to one of 14 social groups and 11 life stage groups. and. This simple segmentation scheme created a whole new category of “sports beverages. In the end.4. for example. Europe’s easyJet airline originally targeted lei- Gatorade’s simple segmentation scheme created a whole new category of “sports sure travelers. wal28949_ch06_139-161. quickness. These examples all demonstrate the power of highly specific behavioral descriptors in defining sharply focused market segments. the product that pro- vides the best bundle of benefits—given the customer’s particular needs—is most likely to be purchased. Since purchasing is a problem-solving process.S. now part of Nielsen. In organizational markets. which often cuts across demographic categories or varies within them.” who needed to replenish water and salts lost through perspiration. They include product usage. Product Usage and Purchase Influence In addition to highly specific behavioral attributes such as those just discussed. but based on what they do. each of which. economy. and training. and status. households into 66 demographically and behaviorally distinct clusters. though Gatorade still dominates the category. Thus. 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. How They Behave: Behavioral Segmentation There is no limit to the number of insightful ways successful marketers have segmented markets in behavioral terms. This onetime niche market has grown into a multibillion-dollar market in the United States alone. on the structure of firms’ purchasing activities and the types of buying situ- ations they encounter. For example. including lifestyle. Behavioral attributes can take many forms. For an example of how targeting a distinct set of consumer needs has taken a late entrant to the top of the car rental industry. in organiza- tional markets. Kevin Plank of Under Armour initially targeted college and university athletic teams. different automobile manufacturers have emphasized different benefits over the years. Consumer Needs Customer needs are often expressed in benefits sought from a particular product or ser- vice. based not on who the target consumers are or where they live. Gatorade’s original target market consisted of athletes beverages. Different individual customers have different needs and thus attach different degrees of importance to the benefits offered by different products. on more general behavioral patterns. offers datasets for other countries as well. credit terms. in turn. Claritas’s PRIZM service classifies all U. 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.” which grew to include entries from Coke (Powerade) and Pepsi (All Sport). such as Volvo’s safety versus Jaguar’s styling. spare parts availability. universities. and research labs. see Exhibit 6.16 Claritas. We examine some of these forms next. on product usage patterns.indd 147 14/12/12 2:23 PM . there are more general product-related attributes as well. consumers often evaluate product alterna- tives on the basis of desired characteristics and how valuable each characteristic is to the con- sumer—choice criteria. including those based on consumer needs. Firms typically single out a limited number of benefit segments to target. loyalty. Chapter 6 Targeting Attractive Market Segments 147 consumer information available at the block and zip code or postal code levels.

In orga- nizational markets. the car-replacement market. that have below-average customer service scores. “This stuff is a lot each customer: Are you satisfied with our service? Would more complicated than handing out keys at the airport.com. Source: Simon London. and heavy or large users (often called key accounts) are easier to identify. Enterprise mea- Serving this market required a completely different sures each of its branches each month in terms of both prof- sort of service—delivering the car to the customer. and no one gets promoted from branches says Andy Taylor. wal28949_ch06_139-161. Jack’s son and now chairman and CEO. Even among demographic groups that might at first glance seem homogeneous. or psychographics. but joint husband–wife decisions are becoming more common. behavioral segmentation based on lifestyle is identifying new target markets for savvy marketers (see Exhibit 6. as well as North America. For more on Enterprise Rent-a-Car. segments markets on the basis of consum- ers’ activities. lynchpin of the company’s wider success. its clear focus on a narrowly see www. what they do or believe. From such information it is possible to infer what types of products and services appeal to a particular group. rather than who they are in a demographic sense. In organizational markets. compared to 665 serv- ings in Mexico.000 vehicles and Clear targeting. like Kenya. and Germany. and purchase influence. Ireland. and provide replacement cars for peo. company was able to grow.enterprise. whose people guzzle more Coke than those anywhere else. if unexceptionally. no mat- The business grew steadily. when the younger Taylor stepped on the gas and found that customers who answer “completely satisfied” cruised past Hertz and Avis to take the number one spot on question one are three times more likely to come back. several individuals or units with varying degrees of influence participate in buying decisions. June 3. Taylor’s strategy was to serve beachhead and an impregnable foundation on which the a completely different target market than the majors. where annual per capita consumption is just 39 servings. purchase predisposition. Product usage is important because in many markets a small proportion of potential customers makes a high percentage of all purchases. for example.17 Market segmentation based on sources of purchase influence for the product category is relevant for both consumer and organizational markets.” While Enterprise now serves target segments beyond Financial Times. for itability and customer service (two questions are asked of example—than the majors provided.S. the strong Hertz and Avis. and just $2. It’s more than $6 billion in revenue for the privately held a combination that’s kept Enterprise rolling for nearly company. Coke provides refrigerated coolers to the mom and pop dukas where Kenyans shop.indd 148 14/12/12 2:23 PM .4 Enterprise Rent-a-Car: Targeting Pays Off In 1963. market. 148 Section Two Opportunity Analysis EXHIBIT 6. Canada and Europe followed and 50 years. Exceptional customer service. differences in product usage rates provide clues to where its growth prospects are most attractive.5). as well as how best to commu- nicate with individuals in the group. and opinions—in other words. For Coca-Cola. with a fleet of 500. 2003.” you come back?). Lifestyle Segmentation by lifestyle. and gifts are clearly influenced by a variety of family members. Equally important. in the U.9 billion in 2009. all of which can be used to segment both consumer and industrial markets.6 billion worth of Coke in 1989. and even prescribes exactly how they should be stocked: half-liter bottles of Coke at the top. North Americans bought $2. Enterprise has 1990s. “Driving Home the Service Ethic. Many products used by various family members are purchased by the wife. until the ter how strong their financial performance. Jack Taylor added car rentals to his small au. and large bottles at the bottom. prescription drugs. Fanta in the middle. Children’s products. customer service culture and decentralized decision mak- ple involved in accidents or breakdowns and those who ing that were crucial to the initial strategy have become the were grounded while their cars were being serviced. the customers are better known. defined segment that the majors had ignored provided the tomobile leasing business. So Coke is looking elsewhere for growth. interests. Enterprise now serves the United Kingdom.

Better still for Vespa. They include education. and to be less cost-conscious. strivers. vice president for active-adult business de- ers aged 50! buy a quarter of all Vespa motor scooters velopment at Del Webb. and energy level—on a continuum from minimal to abundant. Principle- oriented consumers are motivated by abstract and idealized criteria. For more on Vespa’s and Del Webb’s marketing healthier diets and lifestyles to help them age gracefully. In a decentralized situation.. In such a structure the buyer is likely to consider all transactions with a given supplier on a companywide or global basis. and segment to which they belong. Based on these two dimensions. “The War Generation was far in the United States. As a result. Schreiner. Purchasing structure is the degree to which the purchasing activity is centralized. to baby boomers. Thus. Consum. health.” BusinessWeek. segmentation service (called VALS 2). Some marketers segment their markets accordingly and target customers whose purchasing structure is simi- lar (companies who buy centrally from one location to meet their global needs. with boomers’ more predictable and con sistent. But that doesn’t mean all boomers are fantasizing about their younger days.strategicbusinessinsights .” of-the-line models.S. variety. they are motivated by the orientations of principle. fulfillers. status. Indeed. for example). though. see www. Those interested in the VALS segmentation scheme can complete a short survey on the VALS website (log onto www. thereby permitting a Strategic Issue cross-classification of VALS type with the product usage and personal Those interested in the VALS segmentation information collected by such companies. is changing the way it mar- 60-year-olds alone. gives you a bunch of paradoxes. and strugglers. while status-oriented consumers shop for products that demonstrate the consumer’s success. which builds on the concept of self-orientation and resources for the individual. but this generation empty-nester spending power. Claritas and similar commercial organizations identify each of the respondents as to their VALS type. intelligence. Organizational Behavioral Attributes Purchasing structure and buying situation segmentation attributes are unique to organi- zational markets. along with October 24. the buyer is apt to be more sensitive to the user’s need. G. Action-oriented consumers are guided by the need for social or physical activity. With combined spending power Hardly. and to minimize risk. makers. wrinkles Source: Louise Lee. and risk-taking. to emphasize product quality and fast delivery. Resources include all of the psychological. to emphasize cost savings. what their media habits are. wal28949_ch06_139-161. Chapter 6 Targeting Attractive Market Segments 149 EXHIBIT 6. In doing so. believers.indd 149 14/12/12 2:23 PM . the retirement-community of more than $1 trillion per annum among the 50.to division of Pulte Homes Inc.shtml) and discover the VALS segment to which they belong. similar data. Behavior is the key. Strategic Business Insights. and gray hair are in among many boomers. “Love Those Boomers. self-confidence. Del Webb. What marketers are discovering.” says David segmentation just won’t do. demographic. more than half the baby boomers in the United But are these consumers counting their days until States—those born between 1946 and 1964—had they can retire to the shuffleboard court or bingo parlor? turned 50 or older. physical. and material means con- sumers have to draw on. 2005. experiencers. The VALS system has been further developed in Europe and Asia.delwebb. is that and active lifestyles that many of tomorrow’s retirees will these aging customers aren’t all the same.vespa. they tend to buy the top. with more emphasis on the varied ignored. Self-orientation is based on how consumers pursue and acquire products and services that provide satisfaction and shape their identities. Demographic lead. income.com/vals/presurvey. eagerness to buy. achievers. VALS 2 defines eight segments that exhibit distinctive behavior and decision making—actualizers. and action. formerly a division of the Stanford Research Institute (SRI) has created a U. “We have to keep up with residents.com. users can determine scheme can complete a short survey on the VALS website and discover the VALS what each VALS segment bought.5 Marketing to Baby Boomers: Rethinking the Rules By 2006. this growing market simply cannot be kets its properties.com and www.

Exhibit 6. “Decision Making and Coping of Functionally which are words. But these groups have surprising pur.indd 150 14/12/12 2:23 PM . LEGO toys. a recurring situation handled on a routine basis. As several examples in this section have shown. most of James Edwin Harris. even if the driving force behind the segmentation scheme is geographical and/or behavioral in nature. Marketers with superior market knowl- At the foundation of many a marketing edge are probably more likely to generate the insights necessary to breakthrough one often finds an insightful define market segments in these innovative and meaningful ways. however. Often. Innovative Segmentation: A Key to Marketing Breakthroughs At the beginning of this section. and have found shopping environment. EXHIBIT 6. this consumer population. we identified three steps in the market segmentation process: • Identify a homogeneous segment that differs from others. and a new buying situation. the use of pictorial information the United States alone in 2003. pp. Skilled marketers. various kinds of marketing efforts—from price promotions. 15–31. however. and other measures can ers do not assimilate information in the same way liter. make these consumers both loyal and profitable. segmentation scheme that is sharply Sometimes these insights are counterintuitive. and Enterprise Rent-a-Car. self-esteem (what happens if they don’t have enough chasing power. has changed in a client–supplier relationship.” Journal of Marketing 69 (January 2005). ways to better meet these consumers’ needs. to the Source: Madhubalan Viswanathan. wal28949_ch06_139-161. In many developing countries. Business-to-business marketers seeking new customers often find the buying situation to be a useful way to decide which new customers to target. it is useful to know the demographic profile of the target market to be pursued. modified rebuy. know that following this process to an insightful and innovative market segmentation scheme is often the key to marketing breakthroughs. controlling $380 billion in spending in money at checkout). ate consumers do. • Specify criteria that define the segment. Such ment.6). Some marketers are are necessary to effectively navigate today’s typical retail addressing this opportunity. even surprising (see focused in a behavioral way.6 Illiterate Consumers: A Segment Worth Targeting? Some 21–23 percent of United States consumers simply tactics may even cause these consumers to switch away do not have the basic language and numeracy skills that from the brands being promoted. such as the creators of Under Armour athletic wear. Generally. which occurs when some element. training to help reduce customers’ possible losses of ate is even higher. which is likely to require the customer gathering considerable information and evaluating alternative suppliers. and packaging of “new and improved” products. combina- tions of different attributes are used to more precisely target an attractive segment: perhaps some behavioral dimension together with a carefully defined demographic profile within some geographic region. alongside word information. such as price or delivery schedule. because understanding the demographic profile of a target market enables the marketer to better choose targeted advertising media or other marketing communication vehicles. Because these consum. 150 Section Two Opportunity Analysis The buying situation attribute includes three distinct types of situations: straight rebuy. Illiterate Consumers and Some Implications for Marketing Manage- or even misleading to. Employee the proportion of consumers who are functionally illiter. • Determine segment size and potential. to retail signage. José Antonio Rosa.and numbers-based—are wasted on. at the foundation of many a mar- keting breakthrough one often finds an insightful segmentation scheme that is sharply Strategic Issue focused in a behavioral way.

Chapter 6 Targeting Attractive Market Segments 151 CHOOSING ATTRACTIVE MARKET SEGMENTS: A FIVE-STEP PROCESS Most firms. We are concerned with the second application here. not even Coca-Cola. Project the future position of each market based on expected environmental. 4. and Diet Coke—and marketing programs to the particular desires and idiosyncra- sies of each segment. Instead. wal28949_ch06_139-161. customer. Underlying such a ma- trix is the notion that managers can judge the attractiveness of a market (its profit potential) EXHIBIT 6. Then they tailor products—such as Coca-Cola. no longer aim a single product and marketing program at the mass market. With this approach. and competitive trends. To prioritize target segments by their Strategic Issue potential. marketers must evaluate their future attractiveness and their Most firms no longer aim a single product firm’s strengths and capabilities relative to the segments’ needs and and marketing program at the mass market.indd 151 14/12/12 2:23 PM . 5. One useful analytical framework managers or entrepreneurs can use for this purpose is the market attractiveness/competitive position matrix. Exhibit 6. managers use such models at the corporate level to al- locate resources across businesses. or at the business-unit level to assign resources across product-markets.7 Steps in Constructing a Market Attractiveness/Competitive Position Matrix for Evaluating Potential Target Markets 1. they break that market into homogeneous segments on the basis of meaningful differences in buyer behavior or in the benefits sought by different groups of customers. 3. competitive situations. But not all segments represent equally attrac- tive opportunities for the firm. Assess the current position of each potential target market on each factor. rather than allowing each business unit or product manager to develop an approach to evaluate the potential of alternative market segments. Within an established firm. Coke Zero. Evaluate implications of possible future changes for business strategies and resources requirements. 2. Coke Light. Choose criteria to measure market attractiveness and competitive position. it is often better to apply a common analytical framework across segments. As we saw in Chapter 2. Weight market attractiveness and competitive position factors to reflect their relative importance. man- agers can compare the future potential of different segments using the same set of criteria and then prioritize them in order to decide which segments to target and how resources and marketing efforts should be allocated.7 outlines the steps involved in developing a market attractiveness/competitive position matrix for analyzing current and potential target markets.

1 In 2003. and ethical issues (see Ethical Perspective 6.000 Role of Product Harm and Consumer Vulnerability. pp. competitive. In targeting of Marketing 61 (July 1997). This reflects the fact that a decision to target a particular segment is a strategic choice that the firm will have to live with for some time. in turn. Craig Smith. are to identify the most relevant variables for evaluating alternative market segments and the firm’s competitive position regarding them and to weight each variable in importance. For more on Cad- children and families with this promotion.uk. that Exhibit 6.000 grams of fat. ing an earlier and very successful promotion that Empirical research by Craig Smith and Elizabeth Tesco. industry and competitive situation.co.cadbury. market potential are necessary. “Ethics and Target Marketing: The would. they need to E Ethical Perspective Eat Chocolate.” Business of Cadbury products. estimates. and environmental factors that may influence prof- itability. including risk. involve consuming more than 20. emulat. in any sense. lead to ethical concerns. “Marketing managers should be alert to public Cadbury withdrew the program. a growing consideration is given. now a division of Kraft. “Out of Leftfield: Societal Issues would require consumer tokens from £38 worth as Causes of Failure of New Marketing Initiatives. Managers can as- Strategic Issue sess both dimensions on the basis of information obtained from analyses Both market and competitive perspectives of the environment. Cadbury.” Journal calories and over 1. perceived to be harmful. they can estimate the strength of the firm’s competitive position by looking at the firm’s capabilities or shortcomings relative to the needs of the market and the competencies of likely competitors. As Smith and Cooper-Martin problem in the United Kingdom and elsewhere.” Cadbury offered those that arose here are particularly likely to arise to buy fitness equipment for schools in exchange for over targeting strategies where the target market tokens obtained through consumer purchases of Cad. in which Thus. To make these assessments. Summer 2007. the mission of the firm. Step 1: Select Market Attractiveness and Competitive Position Factors An evaluation of the attractiveness of a particular market or market segment and of the strength of the firm’s current or potential competitive position in it builds naturally on the kind of opportunity analysis developed in Chapter 4. concerned are.” especially when consumer vulnerability and “Cadbury’s wants children to eat 2 million kilograms product harm enter the equation. and N. Following howls of protest in the media. wal28949_ch06_139-161. but separately from.” According to the Food Commission’s calculations. a netball that sold for £5 in sporting goods stores Sources: N. By combining the results of these analyses with other considerations.indd 152 14/12/12 2:23 PM . the British confectionery company. 152 Section Two Opportunity Analysis by examining market. Get Fit? 6. segmentation decisions to which insufficient ethical sidered to be associated with child obesity. of fat (more than 4 million pounds)—to get fit. note.K. see www. too. Similarly. the leading grocer in the United Kingdom.7 suggests conducting a forecast of future changes in market at- tractiveness or competitive position in addition to. The first steps in developing a market-attractiveness/competitive-position matrix. is perceived as vulnerable and where the products bury confectionery.’s Food Commission calculated. 1–20. evidence-based conclusions about which markets and market segments should be pursued can be reached. These £38 worth of products Strategy Review. Craig Smith and Elizabeth Cooper-Martin. gies. Cadbury bury’s. Note. and customer needs. disquiet over the ethics of certain targeting strate- As the U. an assessment of the current situation.1). it’s not necessarily the products themselves that the program was characterized as a perverse incen. but targeting and market tive for children to eat more of a product widely con. cerns over child obesity. overlooked or misunderstood consumers’ rising con- launched a “Sports for Schools” promotion. had Cooper-Martin indicates that ethical concerns such as run called “Computers for Schools.

Simply put. is the degree to which the firm’s proposed product will be sufficiently differentiated from its competitors. Entering a new market or market segment without a source of sustainable competitive advantage is often a trap. however. it is likely to be difficult to win customer loyalty. • Might the target segment constitute a distribution.8 Factors Underlying Market Attractiveness and Competitive Position Market Attractiveness Factors Competitive Position Factors Customer needs and behavior Opportunity for competitive advantage • Are there unmet or underserved needs we • Can we differentiate? can satisfy? • Can we perform against critical success factors? Market or market segment size and growth rate • Stage of competing products in product life cycle: Is the • Market potential in units. In the absence of unmet or underserved needs.indd 153 14/12/12 2:23 PM . EXHIBIT 6. Competitive Position Factors As we showed in Chapter 4. given the critical success factors and prod- uct life-cycle conditions already prevalent in the category. financial. Of more immediate and salient concern. manufacturing. Similarly. most new goods or services need to be either better from a consumer point of view or cheaper than those they hope to replace. “Me-too” products often face difficult going in today’s highly competitive markets. such as those shown in Exhibit 6. can be identified. against which prospective markets or market segments can be evaluated. assessing the attractiveness of markets or market segments involves determining the market’s size and growth rate and assessing various trends— demographic. understanding the attractiveness of the industry in which one competes is also important. and natural—that influence demand in that market. however. and otherwise—to effectively compete in the new segment. R&D. Market Attractiveness Factors As we saw in Chapter 4. revenue. An even more critical factor in determining whether to enter a new market or market segment. number timing right? of prospective customers Firm and competitor capabilities and resources • Growth rate in units. political/ legal. etc. technological. sociocultural. is the degree to which unmet customer needs.8. number of • Management strength and depth prospective customers • Financial and functional resources: marketing. decision makers need to know whether their firm has or will be able to acquire the resources it will take—human. revenue. Chapter 6 Targeting Attractive Market Segments 153 establish criteria. platform for later expansion into related • Brand image segments in the market as a whole? • Relative market share Macro trends: Are they favorable. on balance? Attractiveness of industry in which we would compete • Demographic • Threat of new entrants • Sociocultural • Threat of substitutes • Economic • Buyer power • Political/legal • Supplier power • Technological • Competitive rivalry • Natural • Industry capacity wal28949_ch06_139-161. or needs that are currently not being well served. Entering a segment in a way that would place the firm in an unattractive industry or increase its exposure therein may not be wise. economic. regardless of how large the market or how fast it is growing. Both market and competitive perspectives are necessary.

and the factors and their weights may differ across markets where a category is relatively mature versus na- scent.0 8. Plot Results on Matrices This step requires that evidence—typically both qualitative and quantitative data—be col- lected to objectively assess each of the criteria identified in Step 1.3 9 2.. but are easily imitated. like the growing middle class in the developing world. Both the scores and the weights placed on different factors may differ in emerging versus developed markets. Weights that Under Armour’s Kevin Plank might have assigned to the major factors in Exhibit 6.2 5 1. • The athletic team segment is small. Some users would rate each bullet point in Exhibit 6. Score: 6. Score: 9.4 Macro trends .2 7 1. but easily identified and reached and might lead to other segments in the future.9.9. and no doubt was. For Under Armour the assessment of the various factors might have looked as shown in Exhibit 6.0 wal28949_ch06_139-161.7 Total: Market attractiveness 1. The task of weighting the factors—as well as determining them in the first place—gets more complicated as companies reach out to new and different markets. While more detailed evidence than we discuss here should have been. Score: 7. EXHIBIT 6.0 5. where both population growth and Soft drink consumption have been relatively flat or down. a numerical weight is assigned to each factor to indicate its relative importance in the overall assessment. Score: 9.g.0 Total: Competitive position 1. for example.8 independently. assigning a weight to each one. and niche brands for other athletic pur- suits (e. Kevin Plank might have reached the following conclusions: Market Attractiveness Factors • Unmet needs for wicking underwear for athletic teams have been identified and are well understood.indd 154 14/12/12 2:23 PM . Patagonia for outdoor enthusiasts).0 Industry attractiveness .5 Segment size and growth rate .4 5 2. gathered.4 Capabilities and resources . • Macro trends are largely favorable: Sports are “in. Under Armour.6 Competitive-position factors Opportunity for competitive advantage . Macro trends are generally more favourable for Coca-Cola in emerging markets with growing middle classes. 154 Section Two Opportunity Analysis Step 2: Weight Each Factor Next. have been successful. than in North America or western Europe.” the number of people in athleti- cally active demographic groups is growing. for example. Step 3: Rate Segments on Each Factor.9 Assessing the Athletic Underwear Market Segment at Under Armour’s Inception Weight Rating (0–10 Scale) Total Market-attractiveness factors Customer needs and behavior: unmet needs? .4 6 2.5 9 4. has no track record. Competitive Position Factors • Opportunity for competitive advantage is modest: Proposed garments will be differenti- ated. as a new firm.8 are shown in Exhibit 6.

if not longer.com). was banking on expectations that today’s baby boomers will remain active as they pass the age of 50. compelling evidence that a proposed entry entry into a new segment will satisfy some into a new segment will satisfy some previously unmet needs. strategy. a social networking site for U. It is especially important to undertake a detailed analysis of key competitors.” he says. and shifts in the bargaining power or vertical integra- tion of customers.S. and changes in their strategies. Eons’s founder (who was founder and CEO of the job site Monster. Score: 5. Similarly. the internet. Score: 5. and other EXHIBIT 6. Both qualitative and quantitative marketing research results competitive advantage. such as possible changes in product or process technology. but not today’s baby boomers. buyer power and sup- plier power are low (favorable). Eons. baby boomers. Chapter 6 Targeting Attractive Market Segments 155 • Resources are extremely limited. for Under Armour at Inception Market Attractiveness High (8–10) Moderate (4–7) Low (0–3) Weak Moderate Strong (0–3) (4–7) (8–10) Company’s Competitive Position = Market attractiveness and competitive position for Under Armour at inception wal28949_ch06_139-161. Managers must also address several broader issues. and mar- Compelling evidence that a proposed keting programs. The starting point for this assessment is to consider possible shifts in customer needs and behavior.18 Many 50-plus consumers have been using cell phones. Once these assessments have been made.indd 155 14/12/12 2:23 PM . and ri- valry among existing firms is modest. resources. and do previously unmet needs. the impact of social or political trends. having fun on the flip side of 50. are typically used for this purpose. Mere armchair judgments about each criterion are not very credible and run the risk of taking the manager or entrepreneur into a market segment that may turn out not to be viable. though the founder knows the athletic community. says people in previous generations may have “dried up like a raisin” as they got older.10. Strategic Issue especially with regard to their objectives. the entry or exit of competitors. there is little threat of substitutes (favorable). shifts in the economic climate. • Five forces are mixed: Entry barriers are very low (unfavorable). is called for. Step 4: Project Future Position for Each Segment Forecasting a market’s future is more difficult than assessing its current state. “They’re pumping up life. For example.com. Jeff Taylor.10 Market-Attractiveness/Competitive-Position Matrix. the weighted results can be plotted on a market attractiveness/competitive position matrix like the one shown in Exhibit 6. is way that can bring about sustainable called for. and do so in a so in a way that can bring about sustainable competitive advantage. Managers or entrepreneurs should first determine how the market’s attractiveness is likely to change over the next three to five years.

market into narrow niches and then choosing one niche to target is not wal28949_ch06_139-161. “We thrive on competition of any kind. Unfortunately for Eons. both its 2008 entry into the cross-trainers category and its 2009 entry into running flopped. assuming that it responds effectively to projected environmental changes but the firm does not undertake any initiatives requiring a change in basic strategy.10. Thus. it can also be useful. 156 Section Two Opportunity Analysis high-tech gadgets for two or three decades. Under Armour used its growth in the apparel category and its retailer relationships to expand the range of its apparel and. Step 5: Choose Segments to Target. Eons was unceremoniously sold in 2011. Undeterred. But segmenting the target narrowly defined market segments. DIFFERENT TARGETING STRATEGIES SUIT DIFFERENT OPPORTUNITIES Most successful entrepreneurial ventures target narrowly defined market segments at the outset. We expect to further expand our leadership position. for two reasons. both financial and otherwise. to enter the market for athletic foot- wear.indd 156 14/12/12 2:23 PM . might be reduced. for assessing markets or market segments from which to withdraw or to which allocations of resources. a busi- segment to be a desirable target only if it is ness may decide to enter a market that currently falls into one of the strongly positive on at least one of the two middle cells under these conditions: (1) managers believe that the dimensions of market attractiveness and market’s attractiveness or their competitive strength is likely to im- potential competitive position and at least moderately positive on the other. so Taylor figured that his target market would be internet-savvy. However. One. or (3) shared costs or synergies are present. (2) they see such markets as stepping- stones to entering larger. thereby obviating the need for a social network of their own. Second. taking on Nike and its firmly entrenched 95 percent share in the basketball category. Anticipating such changes may be especially important in today’s internet age and in today’s increasingly integrated and competitive global economy. more recently. doing so puts the nascent firm in position to achieve early success in a market segment Strategic Issue that it understands particularly well. However. Exhibit 6. Will Under Armour be able to successfully migrate from its original niche un- derwear segment into footwear? Nike does not seem worried. as did Dinaz Vervatwala and Kevin Plank.19 Once they have determined any changes likely to occur in market attractiveness. man- agers must next determine how the business’s competitive position in the market is likely to change. this includes markets positioned in any of the three Managers should consider a market cells in the upper right-hand corner of the matrix. Allocate Resources Managers should consider a market segment to be a desirable target only if it is strongly positive on at least one of the two dimensions of market attractiveness and potential competitive position and at least moderately positive on the other. more attractive markets in the future. thereby benefiting another entry. Strategic Issue In Exhibit 6. such a strategy conserves Most successful entrepreneurial ventures precious resources. prove over the next few years.11 summa- rizes one observer’s generic guidelines for strategic objectives and resource allocations for markets in each of the matrix cells.”20 The market attractiveness/competitive position matrix offers general guidance for stra- tegic objectives and allocation of resources for segments currently targeted and suggests which new segments to enter. Says Nike spokesman Derek Kent. Under Armour launched its Micro G basketball shoe in October 2009. many baby boomers joined their younger chil- dren on Facebook. The ex- pected changes in both market attractiveness and competitive position can then be plotted on the matrix in the form of a vector to reflect the direction and magnitude of the expected changes. financial and otherwise. especially under changing market conditions.

growing at more than 20 percent annually. as Dinaz’s Fitness Studios and Under Armour did. at 10 times the price per cup compared to buying unground beans at the supermarket—Nespresso brand of cof- fee. overall coffee consumption is down in some countries. P. and D. Day.21 Such a strategy is designed to avoid direct competi- tion with larger firms that are pursuing the bigger segments. mass-market.indd 157 14/12/12 2:23 PM . cut fixed costs and earnings without speeding avoid further investment market’s decline Sources: Adapted from George S. Strategic Objectives. Mass-Market Strategy A business can pursue a mass-market strategy in two ways. pp. Chapter 6 Targeting Attractive Market Segments 157 EXHIBIT 6. and Resource Allocation Competitive Position Weak Moderate Strong Build selectively: DESIRABLE POTENTIAL TARGET DESIRABLE POTENTIAL TARGET • Specialize around limited Invest to build: Protect position: strengths • Challenge for leadership • Invest to grow at maximum High • Seek ways to overcome • Build selectively on strengths digestible rate weaknesses • Concentrate on maintaining • Reinforce vulnerable areas • Withdraw if indications of strength sustainable growth are Market Attractiveness lacking Limited expansion or harvest: Manage for earnings: DESIRABLE POTENTIAL TARGET • Look for ways to expand without • Protect existing strengths Build selectively: high risk. it can ignore any seg- ment differences and design a single product-and-marketing program that will appeal to the largest number of consumers. 204. otherwise. Paul: West. Wade. minimize • Invest to improve position • Emphasize profitability by Moderate investment and focus operations only in areas where risk is low increasing productivity • Build up ability to counter competition Divest: Manage for earnings: Protect and refocus: • Sell when possible to • Protect position • Defend strengths Low maximize cash value • Minimize investment • Seek ways to increase current • Meantime.” Long Range Planning 11 (1978). Unfortunately. Nespresso has become a $3 billion business. Niche-Market Strategy This strategy involves serving one or more segments that. 1986). Analysis for Strategic Market Decisions (St. E. This strategy requires wal28949_ch06_139-161. Nestlé did just this in launching its exclusive—and pricey. see Exhibit 6. “The Directional Policy Matrix: Tool for Strategic Planning. R. The primary object of this strategy is to capture suf- ficient volume to gain economies of scale and a cost advantage. Hitchens. particularly for established firms having substantial resources. consist of a sufficient number of customers seeking somewhat-specialized benefits from a good or service.11 Implications of Alternative Positions within the Market Attractiveness/Competitive Position Matrix for Target Market Selection. and S. 8–15. First. Three common targeting strategies are niche-market. J. For an example of an American bank pursuing a niche market strategy in a services business. as four-dollar lattes have become less fashionable in the distressed global economy. packed in single-serve capsules for high-end consumers who would like to enjoy an espresso or cappuccino at home. and growth-market strategies. p.12. Robinson. while not the largest. always the best strategy.

As Gen Y grows up. A second approach to the mass market is to design separate products and marketing programs for the differing segments. In fact. more-specialized segments of the market. by PNC Financial Services’ her account and doesn’t have to worry about going definition. wal28949_ch06_139-161.’” signing on daily. when Honda first entered the American and European motorcycle markets. Mar- riott and Europe’s Accor do this with their various hotel chains. see www. This is often called differentiated marketing.com.” ting account balances by text message. “This group Wallet customers. “User-Friendly Finance for Generation Y.” all linked together investments. the PNC executive who led 2008. Source: Burt Helm. What sets Virtual Wallet apart from other banks’ products is features such as get. banking-wise. including production capacity. Some. segmenting global markets presents similar. December 8. For example.12 PNC Bank Targets Generation Y When it comes to banking.” and “Growth. PNC had signed up more than 20.” “Reserve. so two years. of which 70 percent fell into the Gen understands how to research online. Automakers like Ford and Toyota design cars on global platforms. By late write checks. whose largest markets for passenger jets are now in India and China.” she says. Consequently. challenges compared to segmenting their home markets. if not more daunting. and other financial services.000 Virtual a project to target these customers says. 158 Section Two Opportunity Analysis EXHIBIT 6. 66. don’t even let customers rarely call customer service or show up in know how to balance a checkbook because they rarely a branch office. with a user-friendly interface. it can also increase costs in prod- uct design. low-priced cycles. BusinessWeek. mortar branch would take. It is a strategy often favored by smaller companies to avoid direct confrontations with larger firms while building volume and share. “Spend. some do. is PNC likes this target market because it tends to hold that they tend to be clueless about how to manage their higher balances than others and because Virtual Wal- money. even though these segments may not currently be very large. inventory. doesn’t have to more about PNC Bank. the members of Genera. it targeted the high-volume segment consist- ing of buyers of low-displacement. especially promotion. With an average of 130 new customers need help helping ourselves. manufacturing. European Edition. Most venture capital firms invest only in firms pursuing growth-market strategies because doing so is the only way they can earn the 30 percent to 60 percent annual rates of return on investment that they seek for portfolio companies. a year less than a conventional brick-and- they developed a new online product called the “Vir. For a 24-year-old teacher from Pittsburgh. p. Honda subsequently used the sales volume and scale economies it achieved in that mass-market segment to help it expand into smaller. As Michael Ley. “I always know how much money I have different needs from their parents’ generation.” Virtual Wallet consists of three accounts: plans to add additional user-friendly tools for loans.pnc. PNC tual Wallet. keeping handling costs down. including many of the readers of this book— online to find out. but they said. PNC expected to break even in about PNC decided that Gen Y was worth targeting. But for most companies. it is favored by larger companies or business units or by those whose parent corporation provides substantial support. Growth-Market Strategy Most companies would probably prefer to make life simple and sell more or less identical products wherever they go. An Apple iPod is an iPod wherever you go. most important of these differences. and good mass-marketing capabili- ties. ‘We Y demographic. Boeing. Colleen Rohlf. and marketing. substantial resources. Although such a strategy can generate more sales than an undifferentiated strategy. worry any more about exactly how much money is in tion Y—those aged 18–34.22 Businesses pursuing a growth-market strategy often target one or more fast-growth segments. sells more or less the same planes there that they sell elsewhere. The have.indd 158 14/12/12 2:23 PM . 2008. in this debit card day and age.

Firms also enter overseas markets to earn foreign exchange and. however. Others. is that fast growth. One problem. through a joint venture with Mitsubishi Heavy Industries. whose user base has grown at a torrid pace. the multiplayer online gaming company whose games are played by more than 120 million users. Star TV’s launch of a Pan-Asian satellite television service broadcasting throughout Asia in English and Chinese is an example of such a strategy. A growth-market strategy usually requires strong R&D and marketing capabilities to consistently identify and develop products appealing to newly emerging user segments.” crowed Reid Hoffman. In recent years Japanese automobile companies that have created U. In the online world. The acquisition of Playfish by longtime gaming leader Electronic Arts may give Zynga a run for its money and compound its difficulties. As we have seen earlier in this chapter. are subsidized by their governments to do so.25 The goal of the early entrant is to have developed an enduring competitive position via its products. Another reason a firm may go overseas and target a specific country is to service cus- tomers who are also engaging in global expansion. they are far from certain to deliver strong long-term financial performance. has for more than 30 years made a substantial investment in Japan to deny its J