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Edition Eighth Edition

Marketing Strategy
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:

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.

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 Orville C. Walker, Jr.
John W. Mullins


Marketing Strategy
A Decision-Focused Approach Eighth Edition

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

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

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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

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by the authors or McGraw-Hill, and McGraw-Hill does not guarantee the accuracy of the information presented at these sites.

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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
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.


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Brief Table of Contents
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
Implementation and Control 305
Opportunity Analysis 85 12. Organizing and Planning for Effective
Implementation 307
4. Understanding Market Opportunities 87
13. Measuring and Delivering Marketing
5. Measuring Market Opportunities: Performance 333
Forecasting and Market Knowledge 114
6. Targeting Attractive Market Name Index 361
Segments 139
7. Differentiation and Brand Positioning 162 Subject Index 364


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

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vi Table of Contents

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

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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. 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. Table of Contents vii Marketing Research: A Foundation for Marketing Step 1: Identify a Relevant Set of Competitive Decision Making 135 Products 168 What Users of Marketing Research Should Ask 136 Step 2: Identify Determinant Attributes 170 Step 3: Collect Data about Customers’ Perceptions for Chapter Six 139 Brands in the Competitive Set 171 Targeting Attractive Market Segments 139 Step 4: Analyze the Current Positions of Brands in the Competitive Set 171 Strategic Challenges Addressed in Chapter 6 140 Step 5: Determine Customers’ Most Preferred Do Market Segmentation and Target Marketing Make Combination of Attributes 176 Sense in Today’s Global Economy 141 Step 6: Consider Fit of Possible Positions with Customer Most Markets Are Heterogeneous 142 Needs and Segment Attractiveness 177 Today’s Market Realities Often Make Segmentation Step 7: Write Positioning Statement or Value Imperative 142 Proposition to Guide Development of Marketing How Are Market Segments Best Defined? 143 Strategy 178 Who They Are: Segmenting Demographically 144 The Outcome of Effective Positioning: Building Where They Are: Segmenting Geographically 146 Brand Equity 181 Geodemographic Segmentation 146 Managing Brand Equity 181 How They Behave: Behavioral Segmentation 147 Positioning Decisions in Global Markets 183 Innovative Segmentation: A Key to Marketing Some Caveats in Positioning Breakthroughs 150 Decision Making 183 Choosing Attractive Market Segments: A Five-Step Process 151 Step 1: Select Market Attractiveness and Competitive SECTION THREE 187 Position Factors 152 Step 2: Weight Each Factor 154 Formulating Marketing Strategies 187 Step 3: Rate Segments on Each Factor.indd vii 17/12/12 11:40 AM .

Chapter 11 279 Maintenance Objectives 226 Does Every Company Need a Digital or Social Fortress. 24/7 Access. 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.indd viii 17/12/12 11:40 AM . and Instantaneous Flanking and Encirclement Strategies 240 Delivery 287 Guerrilla Attack 241 Are These Digital World Fundamentals Supporting Evidence 242 Opportunities or Threats? 287 First-Mover Advantage: Fact or Fiction? 289 Chapter Ten 245 Developing a Strategy for a Digitally Networked Strategies for Mature and Declining World: A Decision Framework 290 Marketing Applications for a Digitally Networked Markets 245 World 290 Strategic Challenges Addressed in Chapter 10 246 Developing Digital World Marketing Strategies: Challenges in Mature Markets 246 The Critical Questions 296 Challenges in Declining Markets 247 Managing Digitally Networked Strategies: The Talent Shakeout: The Transition from Market Growth to Gap 300 Maturity 247 Developing Strategies to Serve Digital and Social Characteristics of the Transition Period 247 Networking Markets 301 Strategic Traps during the Transition 248 Serving the Digitally Networked Markets of Strategic Choices in Mature Markets 249 Tomorrow 301 wal28949_fm_i-xvi. 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. or Position Defense. or Strategic Withdrawal. 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

effective product financial or human business unit’s positioning. superiority resources. 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. • Shared resources • Shared marketing technologies. 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. competencies. or (including favorable resources. Business. more competencies relative on one or more corporate R&D.indd 9 14/12/12 12:26 PM . 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. Business. MIS) entry Sources of competitive • Primarily through • Primarily through • Primarily through advantage superior corporate competitive strategy.2 Key Components of Corporate. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. and Marketing Strategies 9 EXHIBIT 1.

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

such as advertising messages. Business. Market-oriented organizations tend to operate according to the business philosophy known as the marketing concept.”6 Other variables appear to impact marketing’s influence regardless of national culture. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. marketing is more influencial in firms that have strong “customer-connecting” capabilities.8 More critically. marketing and sales executives exerted significantly more influence than managers from other functions on strategic decisions concerning tra- ditional marketing activities. They also are willing and able to quickly adapt products and wal28949_ch01_001-030. More surprisingly. the selection of strategic business partners. Interest- ingly. marketing managers also were perceived to wield significantly more influence than managers from other functional areas on cross-functional. expansion into new geo- graphic markets. on average. the influence of sales executives was perceived to be even greater than that of marketing managers on some of these decisions. Thus. pricing. and measurement and improvement of customer satisfaction. distribution. For instance.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. 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. such as cross-functional work teams? The study’s results suggest not. the strength of that influence varies across organiza- tions. As one of the study’s authors points out. marketing and sales managers exert more influence on decisions concerning the strategic direction of the business unit. and new product development. While the views of finance and operations executives carry more weight in approving major capital expenditures. marketing managers may not play as pervasive a strategic role in other cultures as they do in the United States. though. 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. For example. customer-oriented aspects central to marketing. Similarly. 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. As originally stated by General Electric six decades ago. “Germany has tradition- ally stressed technology and operations more than the softer. For one thing. marketers tend to have a greater influence on all levels of strategy in organizations that embrace a market-oriented philosophy of business. managers in other functional areas of market-oriented firms incorporate more customer and competitor information into their decision-making processes as well.indd 11 14/12/12 12:26 PM . and Marketing Strategies 11 The study found that. especially when marketing has responsibility for the sales force. One reason—particularly in the indus- trial goods firms selling electronic equipment and machinery—may be that sales managers have more detailed information about customer needs and desires because they have direct and continuing contact with existing and potential buyers. business-level strategic decisions. the study detailed in Exhibit 1. Variations in Marketing’s Strategic Influence Although marketing managers often have substantial influence on strategy formation at the corporate and business unit levels. Might the relative influence of the different functions become more similar as firms adopt more integrative organizational forms. Not surprisingly.3 found that marketers’ influence on both tactical and strategic issues was significantly lower in German firms. customer service and support. Marketing’s influence was not significantly reduced in compa- nies that had instituted cross-functional structures and processes.

Manage for profitability. Such firms pay a great deal of at- tention to customer research before products are designed and produced. 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. The public does not know what is possible. marketers.4. such as the Chrysler minivan and Compaq’s pioneering PC network server. 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. 12. Frederick E. designers. were developed with little or no market research. and McDonald’s McLean low-fat hamburger. Measure and manage customer expectations. 2. These and other actions recom- mended to make an organization more market-driven and responsive to environmental changes are summarized in Exhibit 1. 6.4 Guidelines for Market-Oriented Management 1. Build customer relationships and loyalty. 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. such as Ford’s Edsel. They embrace the concept of market segmentation by adapting product offerings and marketing programs to the special needs of different target markets. Target customers precisely. 7. 8. Samsung uses cross-functional teams of engineers. 11. Source: Reprinted with permission from Marketing Management. Create customer focus throughout the business. Define marketing as market intelligence. Define the business as a service business. 10. Manage culture along with strategy and structure. published by the American Marketing Association. but we do. functional programs to fit changes in that environment. Define and nurture your distinctive competence. encouraging entrepreneurial thinking among lower-level manag- ers. Market-oriented firms also adopt a variety of organizational procedures and structures to improve the responsiveness of their decision-making. the late visionary CEO of Sony. 13. we refine our thinking on a product and its use and try to create a market for it by educating and communicating with the public. and using interfunctional management teams to analyze issues and initiate strategic actions outside the formal planning process.” Marketing Management 3. 9. They argue that customers cannot always articulate their needs and wants.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. Let the customer define quality. 1 (1994). 3. in part because they do not know what kinds of products or services are technically possible. seeking frequent feedback from and coordinating plans with key customers and major suppliers. 4. New Coke. 14. 12 Section One Introduction to Strategy EXHIBIT 1. Grow with partners and alliances.. once said: Our plan is to lead the public with new products rather than ask them what kind of products they want. On the other hand. some famous duds. “Executing the New Marketing Concept. decentral- izing strategic decisions. So instead of doing a lot of marketing research. 10. real-time information systems. Destroy marketing bureaucracy. Listen to the customer. not sales volume. Make customer value the guiding star.10 Others have pointed out that some very successful new products. As Akio Morita. 15. p. Commit to continuous improvement and innovation. 5.9 For instance. Webster Jr. were developed with a great deal of cus- tomer input.indd 12 14/12/12 12:26 PM . including using more detailed environmental scanning and continuous.

even en. wal28949_ch01_001-030. ferent countries. the company has found that de- core product line as well.5 How LEGO Revived Its Brand Not many toy companies in the world have as much firm’s ultimate consumers. namely that the products being de- native creations for kids to build with LEGO bricks. Paradoxically.5. those complex designs incorporated about what they want to buy. “Children are . what benefits it will offer to customers. and refined at customer beta sites. the new designs did not appeal to the kids who are the Design Is How It Works (New York: Portfolio/Penguin Group. many of which were not stack up. 2010). EXHIBIT 1.indd 13 14/12/12 12:26 PM . aged by teams involving marketing managers familiar One reason for the decline was a loss of strategic fo. freedom of the firm’s designers. . around the world have built cars. preferences. LEGO’s vice president of products and veloped many increasingly complex and artistic designs.” interchangeable with those of other products in the fire trucks. manufacturing managers who could ures drawn from that series. The signed appeal to the customers who will use them. Top executives decreed the firm’s profits declined dramatically in the early to that new product development projects should be man- mid-2000s. described in Exhibit 1. July 23. Mads Nipper. ence or special expertise. with the Swedish company’s plastic bricks. some constraints. About half of all manufactured goods in most countries are sold to other organizations rather than individual consumers. Most consumers have little knowledge of scientific advancements and emerging technologies. the Swedish toy company. LEGO began foundering within its competitive strength. and Marketing Strategies 13 extensions of products and services that already exist. they will go somewhere else. and sales of the company’s brand recognition as LEGO. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. and then there is development—the conversion of technical con- cepts into actual salable products or services. many of . parts inventories exploded and supply costs Source: Jay Greene. uct prototypes. Top management had given signers function most successfully when placed under free reign to the firm’s designers to develop more imagi. Many high-tech industrial products are initiated at the urging of one or more major customers. “How LEGO Revised Its Brand. As for consumer markets. with tastes. However. To make matters worse. they usually don’t— and probably shouldn’t—play a role in influencing how firms allocate their basic re- search dollars. a set of action fig. one way to resolve the conflict between the views of technologists and marketers is to consider the two components of R&D. Jay Greene. First there is basic research. 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. If your offer does not thousands of new components. See also. the solution to LEGO’s product design tire cities. the same is not true for industrial purchasers. developed with their cooperation (perhaps in the form of an alliance or partnership). markets points out. 2010. very demanding Unfortunately.businessweek . 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.” www went through the roof. As a result. and profitability problems involved reducing the creative But despite its widely known and respected brand. a customer focus is critical to development. 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. LEGO launched a kid’s TV series. and whether customers will value those benefits sufficiently to make the product a commercial success. and purchase behaviors in dif- cus. Therefore. as well as designers. While innovative product design is LEGO’s primary More critically. 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. and other products in highly help control production and supply costs. as illustrated by the travails of LEGO. Business. As designers happily embraced their new freedom and de. Three generations of kids core products went downhill.

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

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

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

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

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

internet sales from businesses to consumers (the upper-right quadrant in Exhibit 1. Marks & Spencer Consumer-to-Business (C2B) Consumer-to-Consumer (C2C) Example: Examples: Consumer • Sites that enable consumers to bid • Auction sites. internet revenues of manufacturers. conduct all or a large portion of their purchasing activities over the web. such as E*Trade. 26 percent said they are currently tracking blogs. Such paperless ex- changes reduce mistakes and billbacks. minimize inventory levels. As Exhibit 1. such as 3M and Walmart • Websites of traditional retailers. Amazon. Cisco • E-tailers. and Marketing Strategies 19 market feedback. QXL on unsold airline tickets and other • Blogs praising/criticizing companies or goods and services. and financing arrangements to fit such segments. and selected service firms amounted to over $3. and Cisco Systems.24 Roughly 80 percent of those sales were business-to-business transactions. p. For example.4 trillion in the United States in 2009 (the most recent census data available at the time of this writing). Many high-tech firms such as Oracle Corp. Global sales over the internet are growing so fast that solid estimates of their volume www are hard to come by. producers and distribution channel Ryanair. February 26. and 48 percent are tracking customer reviews and ratings.8 Categories of E-Commerce Business Consumer Business-to-Business (B2B) Business-to-Consumer (B2C) Examples: Examples: Business • Purchasing sites of Ford. wal28949_ch01_001-030. such as Priceline brands Source: Adapted from “A Survey of E-Commerce: Shopping Around the web. Sofitel Hotels members.8) accounted for only about 8 percent of retail sales in the United states in EXHIBIT 1. improve cash flow. In contrast. which figure out automatically when to replenish each product and schedule deliveries direct to each of the retailer’s stores. prices.indd 19 14/12/12 12:26 PM . retailers. and worldwide volume of about $8 trillion seems a reasonable guess for 2012. make sales. Lands’ End. 42 percent examine third-party reviews. such as Dell. promotional appeals. such as those in the upper-left quadrant of Exhibit 1.” The Economist. Perhaps even more important.8 suggests. though. such as eBay. new information and communications technolo- gies are enabling firms to forge more cooperative and efficient relationships with their suppliers and distribution channel partners. However. 11.8. 2000. Chapter One Market-Oriented Perspectives Underlie Successful Corporate. such as Sears. and even some more traditional companies such as Ford. one simple way of categorizing these new channels is based on whether the suppliers and customers involved are organizations or individual consumers. and deal with customer problems. And many firms rely on their websites to communicate product information to potential customers. Procter & Gamble and 3M have formed alliances with major retailers—such as Kroger and Walmart—to develop auto- matic restocking systems. Oracle. Business. wholesalers. 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. and increase customer satisfaction and loyalty. iTunes • Supply chain networks linking • Producers’ direct sales sites.23 A second impact of information technology has been to open new channels for com- munications and transactions between suppliers and customers. Sales information from the retailer’s checkout scanners is sent directly to the supplier’s computers.22 Thus.

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

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

a new product. 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. Thus.indd 22 14/12/12 12:26 PM . In other achievable with the company’s available words. 22 Section One Introduction to Strategy EXHIBIT 1. 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. the roles marketers and other functional managers play in shaping the strategic direction of their organizations and business units. 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.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. 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. segmentation. the first step in developing a strategic marketing plan—for a new venture. or an existing product or product wal28949_ch01_001-030.

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

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

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

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

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

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

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

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

and other in-flight services. Such dered how the firm would ever make money of. airports offer the company more favorable terms fering €99 fares from Dublin to London when the with respect to taxes. ing their flights since Ryanair carries 15 percent Therefore. operating policies are designed with efficiency in It is even difficult for customers to buy their tick- mind. seeking a competitive advantage by offering and stow their own bags and do without meals. There is not Of course. all of Ryanair’s functional activities and more seats per aircraft than traditional airlines. 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 8.000 costs by increasing utilization rates for planes and employees flying nearly one thousand different flight crews. they have to carry ion. Chapter Two Corporate Strategy Decisions and Their Marketing Implications Ryanair: Low Prices. Not only do cus- focusing exclusively on providing low-cost air trans. 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. facilities fees. its strong- of €375 million on revenues of €3. tomer comfort and convenience. 10 years. Unfortunately. the firm owns rather than leases ets because the company pays no fees to com- its airplanes. Over the first time record of any European airline. the company has instituted maintenance activities and parts inventories. 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. drinks. 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. and nearly all 275 of those planes are puter reservation systems and no commissions to Boeing 737s. 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. Most recently Ryanair made a net profit substantially lower than even easyJet’s. travelers won. 89 percent. the lowest fares of any airline operating in Europe. High Profits—But Increasing Competition1 When the Ryan family launched Ryanair as Europe’s underutilized regional airports such as Stansted out- first low-fare.6 billion in 2011. For instance. 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. many of From the beginning. Indeed. side of London and Charleroi south of Brussels. It also helps Ryanair achieve the best on- routes to 155 airports in 26 countries. decade of the twenty-first century.indd 31 14/12/12 12:30 PM . thereby allowing standardization of travel agents. But the Irish ports closer to major cities. Ryanair earned healthy profits in 9 out of the tive strategy and hold its average fare below €35. airports far from the big cities. no-frills airline in 1985.

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

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.indd 33 14/12/12 12:30 PM . (4) a development strategy for future growth. or functions (e. and customer-based intangibles (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. Exhibit 2. brand recognition. mission. facilities. knowledge. plants.g. (5) the allocation of corporate resources across the firm’s various businesses. and (6) the search for syn- ergy via the sharing of corporate resources.. market segments. (3) a source of competitive advantage. 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. (2) company goals and objectives. this chapter examines the components of a well-defined corporate strategy in more detail: (1) the over- all scope and mission of the organization. or programs across businesses or product lines.1 Corporate Strategy Components and Issues Strategy Components Key Issues Scope. 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. technical. For instance. salesforce) might the firm’s businesses share to increase their efficiency? wal28949_ch02_031-057.g.1 summarizes some of the crucial questions that need to be addressed by each of these six components. and intent • What business(es) should the firm be in? • What customer needs. 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.. the firm’s competitive strategy of offering the lowest fares of any airline operating in Europe obviously constrains managers’ pricing decisions. competencies. In view of the interactions and interdependences between corporate-level strategy deci- sions and strategic marketing programs for individual product-market entries. 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. 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. On the other hand.

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

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

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

and thereby reduce future sales revenues. 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. in 2009 American courts fined KBR. the negative publicity surrounding the ex- posure of unethical practices can raise doubts about future sales revenues and cash flows. in a recent survey of over 90.000 business people in 68 different countries. different firms or managers can pursue somewhat different ethical standards. As a result. a German conglomerate. The firm puts all of its employees through online anticor- ruption training. and less than 1 percent in Denmark and Norway. and Halliburton. But when employees are caught engaging in unlawful behavior— particularly bribery—by government regulators. $579 million for paying bribes to obtain contracts in Nigeria. And they hit Siemens. 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. 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. For example. thereby making investors more reluctant to commit funds and reducing the firm’s mar- ket capitalization. and the German authorities also fined Siemens a similar amount. Exhibit 2.3 displays a comparison (across three geographic regions) of the proportion of company ethical statements that address a set of specific issues. marketers sometimes feel pressure to engage in actions that are inconsistent with what they believe to be right. that would mean a wealth loss of nearly $1 billion. 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. it is not always easy to decide what a firm’s ethical policies and standards should be. There are multiple philosophical traditions or frameworks that managers might use to evaluate the ethics of a given action. where more than half of respondents had paid at least one. For a large firm like Pfizer. for instance. A study of regulatory exposure of deceptive marketing practices in the pharmaceutical industry.13 Unfortunately. Consequently. and consequently to unethical—and possibly illegal—behavior. compared to 23 percent in Latin America. with an $800 million fine. For example.indd 37 14/12/12 12:30 PM . For example. but employees receive zero tolerance and face tough penalties for any infractions.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.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. Its executives also promote an open-door policy and a hot line for report- ing bribe requests and suggesting ways around sticky situations. more than one-quarter of respondents reported paying a bribe in the past year. particularly across national cultures. its former parent.11 Even when the fines imposed are not large. We have already seen that customers’ perceptions of unethical behav- ior can damage their positive attitudes and loyalty toward the firm. Bribes were most common in sub- Saharan Africa. found that the average capitalization loss following a Food and Drug Administration citation was about 1 percent. a construction firm. for example. not all customers or competing suppliers adhere to the same ethical standards. 19 percent in the Western Balkans and Turkey. 5 percent in the European Union and North America. fines and penalties can increase the costs dramatically. 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. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 37 Unfortunately.

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

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

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

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

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

This typically requires actions such as making product or service spent hundreds of millions of dollars early in its development on warehouses.indd 43 14/12/12 12:30 PM . proprietary software. investments that helped earn the loyalty of its customers. and other order fulfillment and customer service activities. additional growth may be possible by encouraging current customers to become more loyal and con- centrate their purchases. even though the expense of such activities postponed the firm’s ability to become profitable. use it more often. or use it in new ways. cutting costs and prices as Ryanair has done. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 43 EXHIBIT 2.25 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. and Amazon was ranked as the world’s best customer service or- ganization in the annual J. affinity groups. For example. the vast majority of the firm’s revenues around the world comes from repeat purchases. Amazon. 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. In addition to its promotional pursued a combination of all these actions—as well as forming alliances with web portals. As a result. Power-Business Week survey in 2009. Amazon. use more of the product or service. such as cookies and desserts.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. Even when a firm holds a commanding share of an existing product-market. D. Arm & Hammer successfully introduced a laundry wal28949_ch02_031-057. and the like—to expand its share of web shoppers. or outspending competitors on advertising or promotions.

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

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

“Strategy and the Business Portfolio. 9–15. 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. and the horizontal axis shows the business’s relative market share.6. with permission from Elsevier. wal28949_ch02_031-057. value-based planning. 46 Section One Introduction to Strategy resources across the firm’s various businesses and product-markets. as shown in Exhibit 2. Thus. It analyzes the impact of investing resources in different businesses on the corporation’s future earnings and cash flows.” Copyright 1977. and models that measure customer equity to estimate the value of alternative marketing actions. The growth-share matrix assumes that a firm must generate cash from businesses with strong competitive positions in mature markets. Similarly. Thus. Barry Hedley. Then it can fund investments and expendi- tures in industries that represent attractive future opportunities. Portfolio Models One of the most significant developments in strategic management during the 1970s and 1980s was the widespread adoption of portfolio models to help managers allocate cor- porate resources across multiple businesses. The vertical axis indicates the industry’s growth rate. in Exhibit 2. Each busi- ness is positioned within a matrix. a business’s relative market share is a proxy for its competitive strength within its industry. 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.1 Relative market share Source: Reprinted from Long Range Planning.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 0.6 a EXHIBIT 2.indd 46 14/12/12 12:30 PM . the market growth rate on the vertical axis is a proxy measure for the maturity and attractiveness of an industry. It is computed by dividing the business’s absolute market share in dollars or units by that of the leading competitor in the industry. pp. The Boston Consulting Group’s (BCG) Growth-Share Matrix One of the first—and best known—of the portfolio models is the growth-share matrix developed by the Boston Consulting Group. Volume 10.

Such businesses do not require much additional capital investment. • Stars. a relative share of 1. As their industries mature. Businesses in high-growth industries with low relative market shares (those in the upper-right quadrant of Exhibit 2.0 or larger). 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. it eventually turns into a dog as the industry matures and the market growth rate slows. but also for marketing activities (or reduced margins) to build market share and catch the industry leader. Their markets are stable. the size of the circle representing each business is proportional to that unit’s sales volume. • Question marks. and their share leadership position usually means they enjoy economies of scale EXHIBIT 2. But if man- agers fail. although stars are critically important. that of the next leading competitor (i.7) are called question marks or prob- lem children. Such businesses require large amounts of cash. If management can suc- cessfully increase the share of a question mark business. businesses 7 and 9 are the largest-volume businesses in this hypothetical company. A star is the market leader in a high-growth industry. Chapter 2 Corporate Strategy Decisions and Their Marketing Implications 47 business is in a strong competitive position if its share is equal to. whereas business 11 is the smallest.e. 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.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. Thus. 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. not only for expansion to keep up with the rapidly growing market. The implications of each are discussed below and summarized in Exhibit 2. Stars are critical to the continued success of the firm. 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. it becomes a star. or larger than. they move into the bottom-left quadrant and become cash cows. • Cash cows. in the exhibit.indd 47 14/12/12 12:30 PM .7. Finally.. Paradoxically.7).

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

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

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

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

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

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

of course. But because those salespeople were paid a commission on their total sales revenue.000 salty-snack route salespeople to distribute the new line to grocery stores. and the like. quality control systems. the sharing of op- erational facilities and functions may not produce positive synergies for all business units. wal28949_ch02_031-057. they were reluctant to take time from their salty-snack products to push the new cookies. employee training and reward programs. over a specified time frame.) emphasize their corporate brands. and functions across business units. For example. 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. We will explore such organization design issues and their marketing strategy impli- cations in more detail later in Chapter 12. This is due. such as its physical facilities. two or more businesses might produce products in a common plant or use a single salesforce to contact common custom- ers. compared to the other alternatives.indd 54 14/12/12 12:30 PM . Synergy from Shared Resources A second potential source of corporate synergy is inherent in sharing operational resources. facilities. it can improve the efficiency of each of the businesses involved. The resulting lack of a strong sales effort contributed to Grandma’s failure to achieve a sustainable market share. 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. when Frito-Lay attempted to enter the packaged cookie market with its Grandma’s line of soft cookies. Marriot. The obvious question. As we shall see in Chapter 3..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. measured in terms of sales and/or market share and profit contribution. in part. 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. Disney. is whether a firm’s decision-making structure influences brand strategy. For instance. However. Set the objectives that your plan or project is intended to accomplish. Marketing Write a draft mission statement for your company. 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.5 your plan will pursue. The firm thought its huge and well- established snack salesforce would give its cookies a competitive advantage in gaining shelf space and retailer support. Cathay Pacific. or vice versa. 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. many service organi- zations (e. Identify which (if any) of the growth strategies identified in Exhibit 2. When such sharing helps increase economies of scale or experience-curve effects. 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. Plan Exercise based on your still very preliminary thinking. Thus. etc. the company relied on its 10. Such sharing can limit a business’s flexibility and reduce its ability to adapt quickly to changing market conditions and opportunities.g.47 For instance. Finally.

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

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

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

abrasives. operates in an indus- markets. various business units to pursue their growth • The Electro and Communications Sector sup. Growth in this group results from extending leader in the sales of films and reflective 58 wal28949_ch03_058-084.6 billion in global sales in 2011. filters. Division within the Industrial and Transporta- ucts for electronics and telecommunications tion Sector. and specialty chemicals for industrial applica. The company supports its growth • The Industrial and Transportation Sector makes strategy with a R&D budget of more than $1.indd 58 14/12/12 4:22 PM . billion. The company also pursues growth through the tions ranging from electronics to aerospace to aggressive development of foreign markets. side the United States. such as Post-it Differences in customer needs and life-cycle brand repositionable notes and Scotch brand stages across industries. and dental countries. try where both the product technologies and the customer segments are relatively mature and sta- • The Display and Graphics Sector is a world ble.5 a variety of tapes. for example. objectives in different ways. additional organizational sector is responsible for • The Health Care Sector markets a variety of coordinating the firm’s marketing efforts across medical.5 percent of total revenue. generated $29. 3M attained $19. splicing. In 2011. and protective prod. adhesives. The company produced $6 billion in operating The corporation’s growth strategy has focused income. Security. Today it is • The Safety. facturing sandpaper a century ago. touch screens. The company con. The firm makes ing from respirators for worker safety to clean- more than 60. pharmaceutical. As you might expect of a firm with so many emphasizing both improved products for existing products. and traffic control. and Protection Services the leader in dozens of technical areas from Sector markets a wide variety of products rang- fluorochemistry to fiber optics. better known as 3M. Company. sales—66 percent of its total revenue—from out- • The Consumer and Office Sector offers prod. ucts for homes and offices. strategic business units (SBUs). 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. lead 3M’s tapes. and an automobile manufacturing. surgical. however. Chapter Three Business Strategies and Their Marketing Implications Business Strategies and Marketing Programs at 3M1 The Minnesota Mining and Manufacturing materials for electronic displays. which ing supplies to fire protection products. primarily on internal new product development.6 billion in products and services. 3M is organized into a large number of customers and new products for new markets. began manu. nearly 5. The Industrial Tape plies connecting. commercial graphics.000 different products.

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

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

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

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

as when multiple products are produced in the same plant or sold by the same salesforce. attempts to model the impact of vari- ous marketing initiatives on customer equity. and (3) focus. the unit’s core competencies and resources. engineering. or generic. in which the business avoids direct con- frontation with its major competitors by concentrating on narrowly defined market niches. Because this allocation process is quite similar to allocating corporate resources across SBUs. and marketing competencies and resources continue to outweigh those of its competitors.3 but many difficulties remain. wal28949_ch03_058-084. Allocating Resources within the Business Unit Once a SBU’s objectives and budget have been approved at the corporate level. determine the viability of any particular competitive strategy.4 HOW DO BUSINESSES COMPETE? As mentioned. for instance. at the SBU level managers must determine the attractiveness of individual target markets.indd 63 14/12/12 4:22 PM . 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 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. as discussed in Chapter 2. many firms use similar economic value. the essential strategic question at the SBU level is: How are we going to compete in this business? Thus. or service. On the other hand. or portfolio analysis tools for both. This is because the product-market entries within a business unit often share the benefits of common investments and the costs of functional activities. As we shall see in Chapter 13. Consequently. will continue to work only if the firm’s R&D. together with the customer and competitive characteristics of its industry. some firms have adopted activity-based costing systems in an attempt to resolve such prob- lems. and performance in different businesses. practice. Of course. are probably more appropriate at the product-market level than at the business level. 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. 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. its man- agers must decide how the available resources should be allocated across the unit’s vari- ous product-market entries. (2) differentiation—building customer perceptions of superior product quality. 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. business strategies are primarily concerned with allocating resources across functional activities and product-markets to give the unit a sustainable advantage over its competitors. Unfortunately. value-based planning is not a useful a tool for evaluating alternative resource allocations across product-market entries. design. 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. value-based planning. the competitive position of their products within those markets. Of course. The question is: What alternative strategies are available to a busi- ness unit? What are the basic.5 The 3M drug delivery unit’s strategy of gaining revenue growth via technological leadership and aggressive new product and mar- ket development.

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

For example. Evidence suggests that a substantial portion of businesses fall into the reactor category.indd 65 14/12/12 4:22 PM . 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. a defender business unit could pursue a variety of competitive approaches to protect its market posi- tion. for instance. it is more germane to a discussion of the business’s target market strategy (as discussed in Chapter 6) than to its competitive strategy. whether their domain is broad or narrow. Most businesses compete in a reasonably con- sistent way across all of their product-markets.2 describes only six business strategies. 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). Units primarily actively seeking concerned with to expand into maintaining a Competitive strategy related product. reactors have no clear competitive strategy. Prospectors are also shown as a single strategic category in Exhibit 3. One study. Exhibit 3. 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.2 to provide a more comprehensive overview of business strategies.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.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. Units primarily product-market strategy actively seeking concerned with opportunities maintaining a to expand into related product. Exhibit 3. In other words. found that 50 out of 232 businesses examined could be classified as reactors. Thus. Although this distinction is useful.8 By definition. Therefore. neither is complete by itself. differentiated Units primarily markets with position in Units with no concerned with differentiated mature markets clearly defined attaining growth through offerings product-market aggressive development or Units with strong competitive pursuit of new Cost leadership core business. wal28949_ch03_058-084. We view reactor and prospector business units as two homogeneous categories. Chapter 3 Business Strategies and Their Marketing Implications 65 EXHIBIT 3.2 because the de- sire for rapid new product or market development is the overriding aspect of their strategy. we have combined the two typologies in Exhibit 3. rather than the eight that one might expect. we will largely ignore them during the rest of this discussion. 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. such as offering the lowest cost or differentiating itself on quality or service.

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

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

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

In addition. wal28949_ch03_058-084. we doubt that competition will focus exclusively on price. the internet is primarily a communications channel. we said that all strategies consist of five components or underlying dimensions: scope (or breadth of strategic domain). and synergy. the internet will make it easier for firms to customize their Strategic Issue offerings and personalize their relationships with their customers. Finally. resource deployments.2 are defined largely by their dif- ferences on only one dimension: the nature of the competitive advantage sought. over the past few years. Thus. stance. 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. a basis for achieving a sustainable competitive advantage. goals and objectives. even though each customized gar- ment costs more and takes longer to arrive. they are less likely to be swayed by superficial distinctions between brands. including price information. All the business-level competitive strategies focused on differentiation will become less viable. the largest e-tailer as of early 2012. And customers who customize are more loyal to the company. Consumer goods and services firms. about 40 percent of shoppers who buy clothing at Lands’ End—both men and women—choose a customized garment tailored to their per- sonal dimensions over the standard-sized equivalent. For in- their relationships with their customers. innovation is likely to continue—and probably accelerate—in the future. also are using the internet’s interactive capabilities to acquire and communicate information and build customer relationships.4 and discussed as follows. at least until its competitors offer something similar. it should still be able to differentiate its offering and command a premium price. 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. to effectively implement a prospector strategy—should be successful regardless of whether they are the lowest-cost producers in their industries. For example. and even internet portals. whereas firms pursuing low-cost strategies will be more successful. Although it facilitates the dissemination of information. Each strategy also involves some important differences on the other four dimensions— differences that are outlined in Exhibit 3. As customers gather more information from the internet and become better informed. But the generic strategies summarized in Exhibit But if a firm offers unique benefits that a segment of customers perceives as meaningful. the goods and services themselves will continue to offer different features and benefits. For one thing. Although we agree that the internet has increased both efficiency and competitive- ness in many product-markets. Unique new products and services will continue to emerge and provide a way for the in- novator to gain a competitive advantage. Reorder rates for custom-clothing buyers are 35 percent higher than for buyers of Lands’ End’s standard items.indd 69 14/12/12 4:22 PM . 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. at least in the short term. Amazon.15 HOW DO COMPETITIVE STRATEGIES DIFFER FROM ONE ANOTHER? In Chapter 1. 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. is generally not the lowest priced. the internet has played a major role in developing logistical alliances among organizational buyers and their suppliers.

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

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

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

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

and many others. as discussed in Exhibit 3.6. For example. Appropriate Conditions for an Analyzer Strategy The analyzer strategy is a hybrid. At the same time. On one hand. and other functional areas that identify new technology and convert it into innovative products and second. two broad areas of competence: first. the firm was eventually forced to change its strat- egy and concentrate on manufacturing products under licenses from larger firms. However. such industries tend to be at an early stage in their life cycles and offer many opportunities for new product-market entries.indd 74 14/12/12 4:22 PM . 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. 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. Competitors are rela- tively few and well established. Few businesses have the resources and competencies needed to successfully defend an established core business while generating revolutionary new products at the same time. stable industry. Thus. In either case. marketing. auto manufacturers around the world. In some cases. 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. but technology continues to advance. shifting customer needs. The actions of Toyota and Honda illustrate one problem with an analyzer strategy. because competitors such as Procter & Gamble and Colgate-Palmolive introduced competing brands with advertising and promotion budgets much larger than Minnetonka could match. Consistent with the “constant improvement” principles wal28949_ch03_058-084. and few businesses (or their parent companies) have such universal strengths relative to com- petitors. product engineering. the market is relatively mature except in emerging econo- mies like China and India. This dual focus makes the analyzer strategy appropriate for well- developed industries that are still experiencing some growth and change as a consequence of evolving customer needs and desires or continuing technological improvements. even though a prospector business has strong product development and marketing skills. however. rapidly changing environ- ments resulting from new technology. including Toyota. Recent changes in the industry’s environment—such as rising fuel prices and concerns over the impact of auto emissions on global warming—have underscored the need for more efficient and ecologi- cally friendly technologies. It is most appropriate for units with a profitable share of one or more major segments in a relatively mature. marketing research. are investing billions in a variety of different technologies to develop a new generation of cars. Success on both dimensions requires strengths across virtually every functional area. Automobile manufacturing is an example of such an industry. Because they emphasize the development of new products and/or new markets. Therefore. Honda. and sales—functions necessary for the identification and develop- ment of new market opportunities. the most successful prospectors are usually strong in. or both. Appropriate Conditions for a Defender Strategy A defender strategy makes sense only when a business has something worth defending. R&D. 74 Section One Introduction to Strategy Appropriate Conditions for a Prospector Strategy A prospector strategy is particularly well suited to unstable. 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. They may not be as profitable in defending their core businesses as defenders. and devote substantial resources to. it may lack the resources to maintain its early lead as product-markets grow and attract new competitors. analyzers are often not as innovative in new product development as prospectors.

like the Nissan Leaf and the Mitsubishi rising gas prices and growing concerns over the impact i-MiEV. Chapter 3 Business Strategies and Their Marketing Implications 75 EXHIBIT 3. December 10. most successful defenders initiate process improvements. and “Revenge of the Petrolheads. and ter.indd 75 14/12/12 4:23 PM . pp. Honda hopes to have the Source: Ian Rowley. including those that nology to improve the efficiency of their traditional gas carry the luxury Acura brand.” Fortune. scale and experience will be critical for the car’s future.” technology ready for the mass market within 10 years. the company is eyeing plug-in electric porting electric car technology more than any other cars. If a business’s differentiation is based on superior product quality. such as Soft Breadsticks. 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.businessweek. 73. To that end. July 2. 2010. But they devote relatively few resources to basic R&D or the development of in- novative new products. Beijing has already pledged over $17 billion search division. or line extensions to help protect and strengthen their established positions. 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. The unit generates substantial profits from well-established refrigerated dough products such as Pillsbury Crescent rolls and Grands biscuits. November 1. For instance. Range-extenders. electric cars on “green” criteria will become smaller. 138–148. process engineering. auto industry off guard that year. the relative superiority of the new hybrids and vehicles that run on liquid hydrogen and emit only wa. Toyota has created a special battery re. Brian Dumaine. Pure strongest position to respond to the double whammy of electric cars. 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. which can go 280 miles on premium. “Japan’s New Green Car Push. country. 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. can be recharged either by offerings and invest in R&D to further improve their ef. quality control. of total quality management. customer and technicians. and the like. p. www. was to rapidly expand its hybrid Ampera in Europe in 2010). most have been reconfigurations of the same basic dough-in-a-can technology. version of the Prius. Differentiated Defenders To effectively defend its position by differentiation. But while it has introduced a number of line extensions over the years. Honda is focusing on fuel cell efficient. October 9. Meanwhile. at like the General Motors’ Volt (introduced as the least for the short term. Thus. 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. the installation of charging stations. “A Sparky New Motor. and perhaps product engineering wal28949_ch03_058-084.” The Economist. vehicles from China. Electric cars come in two varieties. 89–90. $1 million to produce. The Chinese government is sup- Longer term. those key functional areas include production. 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 the firm has introduced a plug-in subsidies. and diesel-powered cars. plugging into an outlet or by a small onboard gas en- ficiency.6 Analyzer Strategies in the Auto Industry Given that Toyota was already selling 300. 2011. The firm’s strategy. 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. in its larger cars. New hybrid models—including one in the firm’s gine. but it also offers new clean-diesel engines.” The Economist. it was in the electric motors. cost reductions via economies of pp. But as those cars become more For the longer term. Pillsbury’s prepared-dough products SBU— now part of the General Mills Company—has pursued a differentiated defender strategy for years. But since every Clarity currently costs an estimated “China Charges into Electric Cars. 2010. a business must be strong in those functional areas critical for maintaining its particular competitive advantages over time. complete with more than 100 engineers for R&D. more fuel-efficient version of the Prius. product improvements.

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

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

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

whereas prospectors rely more heavily on independent channel members—such as manufacturer’s representatives or wholesale distributors—to distribute their products. such a policy is inconsistent with both differentiated defender and prospector strategies.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. Differentiation also provides customers with additional value for which higher prices can be charged. liberal credit terms. stimulate trial. and other incentives to induce cooperation and support from their independent channel members. particularly differentiated defenders. as well as lowering ROI—at least in the short term. for instance. However. Promotion Policies Extensive marketing communications also play an important role in the successful im- plementation of both prospector and differentiated defender strategies. may differ under the two strategies. the costs and benefits of new product and market development by prospector businesses require and justify relatively high prices.26 Because prospectors focus on new products where success is uncertain and sales vol- umes are small in the short run. however. This can best be accomplished through tight control of company-owned channels. Similarly. Chapter 3 Business Strategies and Their Marketing Implications 79 the low prices critical to its strategy. it seems more likely that a relatively high degree of forward vertical integration is found among defender businesses. The drug delivery SBU at 3M. Distribution Policies Some observers argue that prospector businesses should show a greater degree of forward vertical integration than defender businesses. This is particularly true for defenders who rely on good customer service to dif- ferentiate themselves from competitors. Further. 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. Because prospectors must constantly work to generate awareness. The form of that communication. quantity discounts. 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. Attempting to maintain tight control over the behavior of channel members is a more appropriate policy for defenders who are trying to maintain strong positions in established markets. The higher costs involved in differ- entiating a business’s products on either a quality or service basis require higher prices to maintain profitability. they are likely to devote a larger percentage of sales to trade promotions than are defender businesses. Thus. these arguments seem inconsistent with the prospector’s need for flexibility in constructing new channels to distribute new products and reach new markets.24 Pricing Policies Success in offering low prices relative to those of competitors should be positively re- lated to the performance of low-cost defender businesses—for low price is the primary competitive weapon of such a strategy. Prospectors rely on trade promotion tools such as slotting allowances. differentiated defenders and prospectors seldom adhere to a policy of low competitive prices. and build primary demand for new and unfamiliar products. However. as well as to maintaining an extensive salesforce. Thus. devotes substantial resources to ad- vertising in professional journals and distributing samples of new products. wal28949_ch03_058-084.indd 79 14/12/12 4:23 PM .

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

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

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

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

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

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

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

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

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

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

markets and industries must be assessed at both the macro and micro levels of analysis. specific target customers and companies themselves. and other goods and services have taken note of the graying of the world’s population and are taking steps to develop marketing strategies to serve this fast-growing market. The Demographic Environment As the saying goes. there are cur- are governed to a significant extent by demographic changes. Chapter 4 Understanding Market Opportunities 91 EXHIBIT 4. 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.1 shows. strategy textbooks have taught stu. as a whole. respectively. economic. But what do these levels really mean? On both the market and industry sides. 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. the effect of the AIDS plague on demography. life insurance. Providers of health care.indd 91 14/12/12 12:50 PM . The seven domains framework by the firm in a particular market and industry setting. target market. according to current projections. explicitly. and natural arenas. At the micro level. Aging Exhibit 4. but it fails to organize the and does so in a manner that addresses such questions output into answers to important strategic questions. the macro-level analyses are based on environmental conditions that affect the market or industry. The macroenvironment can be divided into six major components: demographic. regulatory. rently four major global demographic trends that are likely to influ- ence the fortunes of many companies. and more. of course. that is. and threats faced competitive advantage. As Exhibit 4. All kinds of things influence one marketer or another is without limit. a rapidly growing middle class in emerging a countries. indeed. MACRO TREND ANALYSIS: A FRAMEWORK FOR ASSESSING MARKET ATTRACTIVENESS. wal28949_ch04_085-113. for example. in developing any coherent marketing strategy. technological. weaknesses. the analyses look not at the market or the industry overall but at individuals in that market or industry. whether favorably or unfavorably. nearly half the population will be over 60 by the year 2040. then we address the micro-level analyses. MACRO LEVEL Assessing market attractiveness requires that important macroenvironmental trends— or macro trends for short—be noticed and understood. These external and often uncontrollable forces or conditions must be reckoned with in assessing and shaping any opportunity and. sociocultural. without regard to a particular company’s strategy. 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. demography is destiny. The chart shows that in Italy. vacation homes. opportunities.3 shows the projected increase in the portion of the population aged over 60 in several of the world’s most developed countries. While the number of specific demographic trends that might Demography is destiny. Doing so is useful. organizes similar information as a SWOT. for better or worse: the aging of the world’s population. and increased levels of immigration.2 Why Not a SWOT? For many years. We develop and apply the relevant analytical frameworks for the macro-level analyses first. or its role in its industry. respectively.

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

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

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

political and legal trends. “The bus can be security pat-down either! inconvenient. Or It’s good for everyone. see Professor of transportation Joseph Schwieterman at www. Whether the current economic difficulties in Europe are resolved smoothly or not—as we write. disenchanted. 64. and power outlets on board. they are where any growth in demand must come from. three of the world’s four biggest economies (China. Rather. street. DePaul is not surprised.6). which thrive when times Take robust economic health. including cars (35 percent of global demand in 2009) and mobile phones (43 percent).17 Tomorrow’s business leaders will need truly global perspectives to make the most of these changes. There will still be strong growth next summer but trying to open up new routes with high oil prices is stupid in the winter. to be sure. and India) are already in Asia.”16 The hundred-dollar price per barrel of oil has forced even the discounters like Ryanair and Southwest to raise prices. p.megabus. In purchas- ing-power-parity 2008. the pessimists appear to hold the upper hand—it seems abundantly clear that the world’s wealth is moving inexorably eastward and south. “but it’s so much cheaper to string bus trips together than to fly. right? what about discount airlines? Shouldn’t they be thriving in a troubled economic environment? Ryanair. and cash-strapped travelers are finding other ways to get around (see Exhibit 4. for example.” DePaul University reports that curbside carriers. annually and take 24. at current BusinessWeek European Edition. especially those that result in regulation or deregulation. with their easy internet booking. are winning cus. announced that it would cut its capacity—grounding 80 of its 300 jets—for its winter season beginning in October 2011.boltbus. “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. “The Megabus Effect.” A study by Chicago’s Sources: Brian Burnsed. As with the other macro trend components. Japan. September 29. free WiFi. but they can be far subtler than one might imagine. Asia is already the largest market for many product categories. The Regulatory Environment In every country and across some countries—those that are members of the EU.” says Crail. to the rapidly growing markets of Asia and Latin America. capacity. Take robust economic health. for example.aspx. as we’ve just seen in the example of retailing in India (Exhibit 4. can have powerful impact on market at- tractiveness. For more on Megabus or Boltbus. EXHIBIT 4.5). however (see Exhibit 4. take their shoes off unless they want to. “It’s the first time ever that we’ll go negative on traffic.6).” CEO Michael O’Leary said in an interview. Europe’s largest airline by passenger count. 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. 63–67. eliminate 11 million gallons of fuel consumption Ben Austen.” Bloomberg Businessweek. 2011. April 17. are tough and people need to turn unwanted assets into cash quickly. right? Not if you’re the operator of Strategic Issue a chain of check-cashing outlets or pawn shops. and more than half of global GDP growth over the past decade has come from Asia. passengers don’t have to side pickup.5 No Pat-Downs on Megabus Long distance discount bus operators like Mega-bus and the hassle factor at the airports that has left many fliers BoltBus. and there’s no tomers like Chicago’s Bobbie Joe Crail. for example—there is a regulatory environment within which local and multinational firms operate. “It’s not just high fuel prices—it’s wal28949_ch04_085-113. Chapter 4 Understanding Market Opportunities 95 The implications of trends like these in consumer spending can be dramatic for marketers.” On Megabus. Doing so is not always or www.000 cars off the road. where barriers to foreign direct investment are helping retailers like Easy Day and Pantaloon grow. “Suddenly It’s Cool to Take the Bus.indd 95 14/12/12 12:50 PM . pp. It’s good for everyone. including the BRIC countries and others.

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

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

com. and other products. which can go more than 50 miles on a gallon of gas. too. More than $5 billion of its $29 billion in revenue comes from sustainable products. around the world.22 Businesses have also seen opportunities in developing thousands of green products (those that are environmentally friendly) such as phosphate-free detergents.teslamotors. highly con- nected customers are more likely to defect from a service provider in response to others in their network doing the same. have begun adding carbon footprint labels to some of their p. Clean-tech and green-tech investment funds have Berkeley. But business can do a number of things to turn problems into opportunities. packaging (use of new materials). are getting in on the Technology. the Global Social Venture Competition cially and environmentally friendly ventures.20 We explore these kinds of changes and others in the ensuing chapters in this book. in response to growing consumer concern in Britain about environmental issues. and marketing research (monitoring supermarket purchases with scanners or internet activity with digital “cookies”). including marketing. “A Gold Rush in Green Business school students. including Tesco. the United Kingdom’s largest supermarket chain. wal28949_ch04_085-113. sustainability game. Sustainability and You Fuel-efficient cars are once again in favor. London. recycled paper. 24.8 have raised capital in hot IPOs. 98 Section Two Opportunity Analysis goods bought and sold via the web). Sources: Mark Scott and Alex Morales. Another is to find new energy sources such as wind farms and hydroelectric projects. to create a more sustainable future. April 25. In virtually every corner of the clean-tech and green-tech arenas.gsvc. One is to invest in research to find ways to save energy in heating and lighting. The Natural Environment Everything ultimately depends on the natural environment. EXHIBIT 4. for example.indd 98 14/12/12 12:50 PM . discussion of the problems in the natural environment has stressed the threats and penalties facing business throughout the world. green energy returns: Wouldn’t the world be a better place if we had producer Ameresco (www. a recent study has shown that social networks influence con- sumer decisions about staying with or leaving service providers. hot.S. leading automakers to develop new hot-selling hybrid gas-electric vehicles such as the Toyota Prius. and seem. U. like the website at www. including a new corn-based fiber called Sorona.8).com).23 There is a growing recognition that creating a more sustainable natural environment is an important job. And. The world’s supply of oil is finite.amerescosolar. long synonymous with petrochemicals. is reinventing itself as an eco-conscious com- pany. and solar energy is Haas School of Business at the University of California. a growing number of marketers. Mumbai. organic fertilizers. now motivate students to think in ingly everywhere else to invest in companies that hope triple bottom-line terms. entrepreneurs and marketers are looking for ways to save the planet and deliver shareholder returns at the same time. In particular. and fed from a network of business schools sprung up in Silicon Valley. Du- Pont. one to which today’s newly educated marketers can contribute (see Exhibit 4.21 In general. and economic like Spain’s T-Solar (www.enel. environmental returns. Changes in the earth’s resources and climate can have significant and far-reaching effects. and the more of all three? renewable unit of the Italian utility Enel (www.” Bloomberg Businessweek European Edition. tuna caught without netting dolphins. which can be used to make clothing. Business plan competitions for so. rather than solely about profit. Tesla’s electric Global Social Venture Competition held annually at the cars are cool (www. and clothes made from 100 percent organic cotton and colored with nontoxic dyes. 2010. For example. .tsolar. The skyrocketing price of oil has caused demand for gas-guzzling sport utility vehicles to plummet. Green-tech outfits Social returns. Green-Tech. car- pet. high-efficiency LED lighting.

is to construct a checklist based on Porter’s seminal work. YOUR MARKET IS ATTRACTIVE: WHAT ABOUT YOUR INDUSTRY? As we saw at the outset of this chapter. Chapter 4 Understanding Market Opportunities 99 Trends in the natural environment are creating opportunities for companies like Du- Pont. consumers and businesspeople have become hooked on cell phones. salad bars. the key forces are rivalry among pres- ent competitors (for example. this is a large. if global warming continues. A determine an industry’s long-term useful way to conduct a five forces analysis of an industry’s attractiveness attractiveness. By most measures. and the market for mobile communication has grown rapidly. 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. which we address in this section.25 The strength of the individual forces varies from industry to industry and. Porter’s Five Competitive Forces24 Five competitive forces collectively determine an industry’s long-term attractiveness—rivalry among present competitors. for example).9). growing. and the threat of substitute products (see Exhibit 4. EXHIBIT 4. On the other hand. 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. Thus.indd 99 14/12/12 12:50 PM . firms are mutually dependent: What one firm does affects others and vice versa. Rivalry among Present Competitors Rivalry occurs among firms that produce products that are close substitutes for each other. over time. within the same industry.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. Tracking such trends and understanding their effects is an important task. Other natural trends. it may play havoc with markets for winter vacationers. In the fast-food industry. and other products and services whose demand depends on the reliable coming of Old Man Winter. especially when one competitor acts to improve its standing or protect its position. the bargaining power of suppliers. and frozen meals. threat of new entrants into the industry. such as the depletion of natural resources and fresh groundwater. the bargaining power of buyers. may significantly impact firms in many indus- tries serving a vast array of markets. and attractive market. 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. snowmobiles.

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

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

Threat of substitutes Threat of substitutes is high: PDAs. aluminum cans are substitutes for plastic bottles and conversely. supplier power and threat of substitutes are often more favorable. less rivalry). at least in the European market.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. Overall conclusion: Only two of the five forces are favorable. new service providers must purchase a bandwidth license by spending billions. satellites). such as plastic bottles versus aluminum cans. strategists would consider EXHIBIT 4. 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. is not very attractive at this time. digital photography over silver-halide film. 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.. the cellular phone service industry. and a cozier relationship with governments to provide bandwidth. packet switching. consistent with the preceding discussion. Thus. Buyer power Buyer power is low: very favorable Even large customers have little power to set terms and conditions in this industry. customer switching costs are low. wal28949_ch04_085-113. There. 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. Supplier power Supplier power is high: moderately Governments in developed markets unfavorable have raised the price of additional bandwidth through auctions. while three are unfavorable.10. and the faxing or e-mailing of documents versus over- night express delivery. 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. This analysis indicates that. especially when supply exceeds demand. Thus industry attractiveness is brighter therein. for which four or five of the forces might be favorable. in food-packaging. Substitute products put a ceiling on the profitability of an industry by limiting the price that can be charged. Given this mixed outlook. since governments are more welcoming of telecom development. tablet computers. 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 substitutes are not likely to enter anytime soon.g. In emerging markets. the industry in 2012 was probably less attractive than some industries. Thus. and laptops moderately unfavorable using Wi-Fi networks to access the web could cannibalize expected sales of 3G and 4G wireless network cell phones. Thus.indd 102 14/12/12 12:50 PM . and each constrains the prices that can be charged by the other. compared to earlier in the industry’s history when there were fewer players (thus.

” Harvard Business Review. October 2004. CHALLENGES IN MACRO-LEVEL MARKET AND INDUSTRY ANALYSIS In order to analyze the attractiveness of one’s market or industry. On the market side and recall- ing that markets consist of customers—whether individual consumers. “Blue Ocean Strat- the company and for the new buyers it served. On the industry side. they made compe- tition irrelevant by creating a huge leap in value for both Source: W. and paper packaging industries. So. Their research found that companies that were they found. For an approach to strategic thinking that avoids the constraints of traditional industry definitions. and often uncontested effective in creating blue oceans never used the com. Chan Kim and Renée Mauborgne. or business users in B2B markets—the Markets can be measured in various challenge often lies in sizing the relevant market. glass. a maker of aluminum beverage cans. 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. the processes by which value is added. Chapter 4 Understanding Market Opportunities 103 other factors. one must first identify. exactly which market or industry is to be analyzed. If two or more of them are different. jected the notion that there must be a trade-off between managers should focus more of their strategic efforts value and cost.11. in units consumed of a class of goods or services. where many of the customers are the same. 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. including the degree to which they believe they are likely to be able to establish and sustain competitive advantage. Strategic Issue trade customers like retailers. If two or all three of these value chain elements are similar. you probably are in different industries. see Exhibit 4. companies seek ways of beating one another—can lead. Thus. there’s the question of how narrowly or broadly to define one’s in- dustry. Rejecting the tired strate- blue oceans—and then take steps to exploit and protect gic logic of red oceans—overcrowded industries where these oceans. tial customers (those that are potentially willing and able to buy). of course. and the kinds of buyers are the same for your company and other companies whose industry you may consider yourself a part of. see www. EXHIBIT 4. and CNN in call blue oceans. by conventional boundaries is to develop what they Cirque du Soleil in circus (or is it theater?). Henry egy. previously unknown market spaces as news broadcasting. Are Ball. did Federal Express in overnight package delivery. We further develop this theme later in this chapter.indd 103 14/12/12 12:50 PM . an Ocean Strategy. as is the case for Ball and AMCOR. out of today’s hotly contested industry spaces defined too. profitable. growth for a decade or more. in terms of value (the aggregate spending on a class of goods or services) and so on. It is informative to measure market size and growth rates in customer numbers as well as in unit and value terms. Instead. a maker of plastic bev- erage bottles. 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. it’s probably appropriate to say you are all in the same industry.” they argue. an inherent assumption that’s all too on finding markets where there is little competition— frequent in strategic circles. a five forces analysis of the aluminum can industry would consider the threat of substitutes from the plastic.blueoceanstrategy. wal28949_ch04_085-113. and AMCOR. Rather than A key tenet of all these companies is that they re- focusing on “beating the competition.11 Competing in Blue Oceans Chan Kim and Renée Mauborgne argue that one way automotive industry that barely existed at the to rapid. yet undiscovered by existing competition. but key suppliers (aluminum versus petroleum-based plastics) and value-adding processes (aluminum cans and plastic bottles are made very differently) differ. petition as a benchmark.

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,
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

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 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.
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.

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.

wal28949_ch04_085-113.indd 104 14/12/12 12:50 PM

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;
and trade magazines Encyclopedia of Associations;
UK Trade Association Forum; European Trade
Information on specific Hoover’s Online Business; Ward’s
companies Business Directory; Dun and Bradstreet
Million Dollar Directory; Moody’s Industrial
U.S. demographic and Lifestyle Market Analyst
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,
graphics and world trade and International
Macro trends Statistical Abstract of the United States; (Asia)
Business Periodicals Index
E-commerce Red Herring magazine
Proprietary providers of
research reports
Market share information Market Share Reporter
Average financial state- Annual Statement Studies, Risk Management
ments by industry Association, formerly, Robert Morris and verse/productsandservices/RMA
Associates bookstore/statementstudies/
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.

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
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.

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.

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.

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.

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

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

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
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.

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
High 4 1
Low 2 3

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

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

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

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

*Profits or market share or both

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

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

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

33. pp. 35. “Kraft Blends Ethics with Coffee Beans.” www." April 21. Prahalad and Gary Hamel.” Journal of Marketing 65 (January 2001). V. Jin K. "Weaving the World Together. “How to Avoid the Value Trap. 1–15.ivillage. 20. "Following the Footprints. The world/244957/fair-trade-movement-faces-crossroad/. 106. ibid. pp. 13." Special Report. 34. 32. “The Capabili- ties of Market-Driven Organizations. For an example of such a checklist. The Economist. pp. 17. John Parker. 77–78. June 10. pp. 21. 2004. Mullins. Steve Rothwell. Dave Gram. “The Effects of Business and Political Ties on Firm Performance: Evidence from China. “Airlines and the Canine Features of Unprofitable Industries. The Economist. Namwoon Kim. 25. Kevin Zheng Zhou." February 0." p. http://metronews. wal28949_ch04_085-113. 41–44. pp. Leone. 16. 26.” April 29. pp..” Financial Times. The Economist. http://business. 23.unaids. 2009. p. 13. 6. Patrick Barwise and Seán Meehan. 2012. Justin Fox. 31. 1–14.” Financial Times. Mullins. “A Club in Need of a New Vision. K.indd 113 14/12/12 12:50 PM . The New Business Road Test. chap. The Economist. 24–38. June 4. 2007. 2." November 19. and Julie Juan Li. Martin Wolf. "The Third Industrial Revolution. “People. Michael Porter. www. 14. Chapter 4 Understanding Market Opportunities 113 6. October 7. Kumar. 2005. pp. 16–30. Irit Nitzan and Barak 24. “GM: Live Green or 19. 2009. Liz Neporent and Michele Bibbey. “Ryanair’s First-Ever Capacity Reduction Marks End of Discount- Airline Boom. 1– 9. www. and C. MA: Harvard Business School Press.” Fortune. “The Ten Tricks of Buying Home Exercise Equipment. 5. and Robert P. pp. September 27. pp. 10. 13–15. p. 6. Eli Jones. The New Business Road Test. Rajkumar Venkatesan.” Journal of Marketing 75 (January 2011). “Is Market Orientation a Source of Sustainable Competitive Advantage or Simply the Cost of Competing?” Journal of Marketing 75 (January 2011). February 27. Nicholas Varchaver.” Harvard Business Review 68 (May–June 1990). 12.” Journal of Marketing 75 (November 2011).00. Shibin Sheng. 2011. 2002. p. 17.on-fuel-slower-traffic-growth-html.unaids. 194. 5. 79–91. 11. Time. 36–41. 18. 7. chap. For more on how crucial flaws may be mitigated or resolved. One-. 22. and Prosperity: Five Trends that Promise to Transform the World’s Population within 50 Years. Simply Better: Winning and Keeping Customers by Deliver- ing What Matters Most (Cambridge. Competitive Strategy (New York: Free Press.” The Economist. "UN AIDS Day Special Report. p. 13 (London: Prentice Hall/FT. 8. Han. chap. 29.254_157720. “Entry Barriers: A Dull-. 2004). p. 2003.” Financial Times. 30. p. Plagues. “Chemical Reaction. 27. or Two-Edged Sword for Incumbents? Unraveling the Paradox from a Contingency Perspective. 9. 15. 2008.” Fortune European Edition. 37–52. “Social Effects on Customer Retention.” Journal of Marketing 58 (October 1994). February 14." 2011. "UN Aids World AIDS Day Report 2011. see Mullins. “The Core Competence of the Corporation. April 21." May 31. Sara Silver. The Economist." Technology Quarterly. For the classic articles on competencies and capabilities.html. "A Third Industrial Revolution. see Mullins. April 2. May 26. pp. and Hong-Bumm Kim. Day. 23. chap. The New Business Road Test.” BusinessWeek European Edition. 2010. 2010). “Burgeoning Bourgeoisie. 76–78. p. 2011. 1980).com/news/2011-05-23/23/ ryanair-expects-similar-profit-this-year. 2003. see John W. see George S. The New Business Road Test.” Bloomberg. David Welch. "East or Famine. pp. pp. "The Re-regulation of the American Financial System. For more detail on micro-market attractiveness. 28." February 25. at http://www. Quoted in Herb Greenburg. "Fair Trade Movement Faces Crossroad.

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

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

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

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

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

are two ways to get real purchase data about new-to-the-world products. 4 By combining these data with demographic data on the Tanzanian population. suppliers.3 Like statistical methods. 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. Consumers. For new-to-the-world Observation-based forecasting is attractive products. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 119 for replacement tires is reduced. Experts of various kinds—members of the distribu- tion channel. the persons who are surveyed may not be knowledgeable. Maddy and Laguë now had what they needed to prepare an evidence-based. and so on—can also be surveyed.indd 119 14/12/12 2:22 PM . after being shown a state- ment of the product concept (a concept test) or a prototype or sample of the product. 20 percent were students or teachers. 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. 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. however. are increasingly done online. what people fact. and nonbusiness custom- ers spent US$6 per week for 12 calls. Revenue for most pay phones fell into the US $100 to $150 range. observation would not have been possible. 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. For one common approach to doing so. how often. trade association executives. or how much they use. the old statistical models would also be in trouble. and in today’s internet age. see Exhibit 5. except actually do. For example. 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. Maddy and Laguë surveyed pay phone customers to find out more about them. Surveys and focus groups possess important limitations. For one. Strategic Issue For one. Business customers spent an average of US$10 per week for 14 pay phone calls. observation-based forecasting is attractive because it is based on what people actually do. what people say is not always what people do. but if asked wal28949_ch05_114-138. 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 17 percent were other nonbusiness customers. in concept form. which we discuss later in this section. If automobile manufacturers were to change the num- ber of wheels on the typical car from four. bottom-up forecast of market potential. 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. Had there been no pay phones in Tanzania or a similar country. Salespeople can be asked how much they are likely to sell. Buyers can also be asked about their current buying behavior: what they currently buy.2. creating a survey of buyers’ intentions. however. As part of their research in Dar es Salaam. Consumer sur- Surveys and focus groups possess important veys of buyer intention are always heavily discounted to allow for this limitations. market segment by market segment. however. These methods can be done with various kinds of respondents. Second. since the product often does not yet exist. observation is typically not possible. consultants. say is not always what people do. and secondary because it is based on what people data are not available. at the library. Market tests and concept tests. can be asked how likely they are to buy.

g. its managers look at the sales history of ear- lier introductions to forecast the sales for the newest flavor. Reprinted by permission. a fresh pasta company.nestle. When Danone. are superior to survey methods of forecasting because such methods are based. Boston: Harvard Business School. reduced the 70% figure by more than half.indd 120 14/12/12 2:22 PM .8 " 21. the product is compared with simi- lar historical data that are available.. a less reliable indicator of their future Similar logic is useful in a variety of forecasting situations.” they will surely provide a response. while “probably” responses were reduced by 70%. they will probably provide it! Third. statistical and observational methods. 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. Copyright © 1995 by the President and Fellows of Harvard College. what people imagine about a prod- uct concept in a survey may not be what is actually delivered once the product is launched. among other things. on what people have actually done or bought (e. to 34.” These adjustments. Nestlé’s experience indicated that these “top two box” percentages should be cut sharply: “definitely” responses were reduced by 20%. it wanted to forecast the likely first-year sales volume if the acquisition were completed. To do so. If consumers are asked if they will buy an “old world pasta sauce with homemade flavor.5% Even though 70% of consumers surveyed indicated they were likely to buy. the leading marketer of yogurt in Europe. where adequate data or settings are available in which to apply them. shown in columns three and four. Rather than conduct surveys to wal28949_ch05_114-138. plans to introduce a new 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. the number of old cars actually on the road or the length of pay phone calls in Tanzania). how likely they were to try the fresh pasta product. and “maybe” responses were considered as “no. for which product prototypes are often either not available or extremely expensive to produce. Whether they will actually like the taste and texture of the sauce that the lab develops is another story! In general.6% # 12. 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. This method is also used for new-to-the-world high-technology products.9% " 34. see www. Rule of Thumb Reduction Percentage of Market Deemed Purchase Intent % Response for Forecasting Purposes Likely to Actually Buy Definitely would buy 27% Multiply by . Under this method. The results were as shown in the first two columns in the following table. case no. Nestlé used a concept test in which consumers were asked. 9-595-035. at least in part.8 27% ! . “A Survey of Buyers’ Intentions: What People Say Is Not What They Do” from Nestlé Refrigerated Foods: Contadina Pasta and Pizza.9% Might or might not buy 22% Count as zero Probably or definitely 8% Count as zero would not buy Totals 100% 21.6% Probably would buy 43% Multiply by .3 " 12. Source: Marie Bell and V.3 43% ! .5%.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. Kasturi Rangan. for their opinion. 120 Section Two Opportunity Analysis EXHIBIT 5. 1995.

First. Use of live test markets has declined over the past few decades for two reasons. an international manufacturer and retailer of shoes and fashion accessories. Some decision makers. especially for consumer products sold through supermarkets and mass merchants.”6 Those with sufficient experience in a market they know well may be quite accurate in their intuitive forecasts. 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. Unfortunately. Napster. the new product and its pricing are never exactly like that to which the analogy is drawn. Nonetheless.5 As always. . Use of test markets has declined over the competitors can engage in marketing tactics to mislead the company past few decades for two reasons. proving there was vibrant demand for a portable music player. The use of analogs like these. Used largely for new consumer products. 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?). 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. Apple. are intuitive in their decision processes and cannot always articulate the basis for their judg- ments. Indeed. More im- portantly. More diabolically. Such conditions must be taken into account. Experiments and Market Tests Market tests of various kinds are the last of our six commonly used forecasting methods. the free peer-to-peer music- sharing site. it is often diffi- cult for them to defend their forecasts against those prepared by evidence-based methods when the two differ. What price should Apple charge. Second. 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. the Sony Walkman had sold more than 300 million units. conducting the test by increasing sampling programs. but at times I cannot explain why I feel a certain way . the importance of experienced judgment in forecasting.indd 121 14/12/12 2:22 PM . market and competitive conditions may vary from when the analogous product was launched. offering deep wal28949_ch05_114-138. in today’s data-intensive environment. I rely on my sense of color and texture. and with free downloads available. Judgment While we hesitate to call this a forecasting method of its own. Downloaded music from Napster was free. First. which eventually convinced the courts that Napster was illegal). . sometimes forecasts are made solely on the basis of experienced judgment. can- not be discounted. First. 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. 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. I just know. . Said a footwear buyer at Nine West Group. since capable and informed judgment is required for all methods. even effective ones. in developing its now wildly successful music business. forecasters consider related product introductions with which the new product may be compared. “Trend forecasting is a visceral thing that cannot be trained. there are limitations. but Apple planned to ask consumers to pay for their tunes. whether it is used solely and intuitively or in concert with evidence-based methods. was all the rage with consumers (though not with the music publishing industry. or intuition. would customers be willing to pay anything at all? Sec- ond.

2 product will try if aware Awareness adjustment: based on 48% will be aware 26. “Chain Reaction Forecast: Trial of Fresh Pasta. have also been devel- oped.5% will try the 77. Offers to chat rooms. For more on Nestlé.7 million ! 48% 12. Source: Marie Bell and V.5% 26.8 million ! 70% 9. Other quantitative methods. Kasturi Rangan. The coming of the internet has made possible a new kind of market test: an offer di- rectly to consumers on the web. taken together. pre- dict the portion of the overall market potential that one firm or product can expect to obtain. given the introductory reaching 70% of trade promotion plan U. Other Mathematical Approaches: Chain Ratios and Indices Two additional mathematically-driven approaches to forecasting are the chain ratio calculation or the use of indices.7 a method to forecast the impact on consumer de- mand of different combinations of attributes that might be included in a new product. We explore these and other internet marketing strategies in greater detail in Chapter 11. The market potential is then multiplied by various fractional factors that. the factors reflect the appeal of the product to consumers. 9-595-035 (Boston: Harvard Business School Publishing.nestle. Both approaches begin with an estimate of market potential (the number of households in the target market in Exhibit 5. and Pizza. the national market potential for a product category in Exhibit 5. In Exhibit 5.2). are still commonly used. Use of such techniques has increased due to companies’ ability to carry out such tests quickly and at low cost.indd 122 14/12/12 2:22 PM .3 Chain Ratio Forecast: Trial of Fresh Pasta Once Nestlé’s research on fresh pasta had been completed (see Exhibit 5.3.3 and 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. See Exhibit 5. Experimental test markets.7 million households figure from Exhibit 5.4 million ! 34.S. which shows the more detailed of the two approaches. The chain ratio calculation went like this Data from Chain Ratio Research Results for: Research Calculation Result Number of households in target 77. Reprinted by permission. 12. see www. interest groups. EXHIBIT 5.8 discussed in the next section.” from Nestlé Refriger- ated Foods: Contadina Pasta. 1995).com wal28949_ch05_114-138.0 million will try the likely extent of distribution in tain distribution product supermarkets. as measured by marketing research data and the company’s planned marketing program. and methods to mathematically model the diffusion of innovation process for consumer durables. especially useful for new products. These include conjoint analysis. households Similar chain ratio logic is useful in a variety of forecasting settings. or otherwise distorting normal purchas- ing patterns in the category.3. it used the chain ratio method to calculate the total number of households who would try their fresh pasta.4 for examples apply- ing these mathematical calculations to arrive at sales forecasts. or e-mail lists of cur- rent customers are among the common approaches. on the other hand. case no.4).4 million market Concept purchase intent: adjusted 34. Copyright © 1995 by the President and Fellows of Harvard College. 122 Section Two Opportunity Analysis discounts or buy-one-get-one-free promotions.

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

are also at work. while others take years. If we use time of adoption as a basis for classify- ing individuals. Thus. even a compellingly 20 percent of the market in its first year.5 for an illustration and Exhibit 5.12 Some new products move quickly through the adoption process (a new breakfast cereal). particularly at the individual level. late majority. 124 Section Two Opportunity Analysis and behavior.13 Because each category comprises individuals who have similar characteristics and because individuals differ substantially across categories. 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. 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. while less important. well-known name in the field. People who serve as hubs in social networks may even provide clues to the future success of innovations. Thus. See Exhibit 5. For a discussion of the challenges in transition- ing marketing efforts from group to group. when they have favorable reputations. will win all of the innovators plus most of the early EXHIBIT 5. Adopter Categories Early adopters differ from later adopters. early majority. five major groups can be distinguished: innovators. these adopter groups can be considered market segments.6 for the approximate size and characteristics of each group.10 Other factors. early adopters. while others take years. They naively forecast that their innovations will managers sometimes naively forecast that capture 10 or 20 percent of the market in its first year. due to their earlier exposure to an innovation. the diffusion process may be faster when there is strong competition among competitors. attractive one. 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. People who are better connected in so- cial networks tend to adopt earlier. including the growing influence of social media. 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. Legitimacy may come from associations with the adoption process (a new breakfast established firms.5% Majority 2. and (6) the ease with which the central idea of the new product can be communicated.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) the extent to which its trial can be accomplished on a small-scale basis.7. see Exhibit 5. and laggards.indd 124 14/12/12 2:22 PM .5 Diffusion of Innovation Curve Early Majority Early Adopters Late 13.5% 34% 34% 16% Innovators Laggards wal28949_ch05_114-138. the success of historical product launches or hiring a cereal). and when they allocate substantial sums to R&D (to improve performance) and marketing (to build awareness).

leadership role. and want to be sure that a more venturesome than later adopters. 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. for which there is proof that the product will perform. Early majority lenges of crossing the “chasm. introducing a new product that delivers no real benefits or lacks competitive advantage into any market. whose benefits are clearly defined. bers of the early majority group (because of their • Laggards comprise the last 16 percent of adopters. In adopt. novators and early adopters have quite different Taking a product from the first group of buyers to the needs from early majority customers. as shown in Exhibit 5. Their HarperCollins. participate less in community matters than members • The early majority includes 34 percent of those who of the other groups and stubbornly resist change.” as he calls it. Crossing the Chasm (New York: in the product’s perhaps still-unclear potential. and the early majority. comes. do not like viduals who ultimately adopt a new product. More typically. first-year penetration levels include some but not all of the innovators. more likely to new product will prove successful before they adopt it.indd 125 14/12/12 2:22 PM . it is hoped. they are the most “local. tend to be active in community affairs already been replaced by another new product. is likely to be an unpleasant experience! wal28949_ch05_114-138.” They organizations than do later adopters. 1991). Moore. 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. were such an innovation. less than the previous groups and only rarely assume a are often opinion leaders. in. trying new products before others do. serve as vital links to mem. well under 2. For many high-tech products.8. Thus. They are to take unnecessary risks. and tend to have high in. on the other hand. • The late majority represents another 34 percent. social proximity). in the buyers. They participate in community activities who adopt. cal skill enables them to adapt such a product to their needs and resolve some of the uncertainties inherent Sources: Geoffrey A. in the early majority group. which reduces the risk of a loss arising from an Frequently. their adoption of a product is so late it has early adopters. and for which it is difficult or expensive to try or to understand its benefits is likely to face tough sledding. and participate more in community Of all the adopters. adopters in its first year on the market? History suggests that such penetration levels are rare at the outset. is complex or incom- patible with current user behavior. These individuals display less leadership than some cases. has little competitive advantage. They are more a part of the local scene. introduced in the early 1980s with great fanfare.5 percent of those who. these individuals adopt a new product be- early adoption. Their own techni. be receptive to new ideas.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. They are often second is a difficult challenge. An innovation that is risky for the prospective user to try or buy. Personal robots. cause they are forced to do so for either economic or • Early adopters represent the next 13 to 14 percent social reasons. Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 125 EXHIBIT 5. EXHIBIT 5.6 Size and Characteristics of Individual Adopter Group • Innovators represent the first 2. (thereby gaining respect from their peers). Moore explores the chal.5 percent of all indi. regardless of the attractiveness of the market. regardless of its high-tech profile.

A restaurant chain that is able to turn its tables 2. in the early days and receive phone calls from of personal computing. Ease of small-scale trial #/$ Easy to demonstrate.15 Second.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. behavior phone call at home or office. especially in new product or new venture settings.14 A solution they espouse. capacity constraints are sometimes misinterpreted as forecasts. but contracts #/$ One could visit a store for hands-on required.5 times each night.9. who agreed to one year’s usage. forecasters are subject to anchoring bias. is discussed in Exhibit 5. wal28949_ch05_114-138. 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. Bonus plans can cause man- agers to artificially inflate or deflate forecasts. for better or worse. $ Early PCs were inordinately complex to use. bytes. what the anywhere—in the car or at the advantages of a PC were in the beach! home. Put- ting similar 80-table restaurants in two trade areas with different population makeup and density. where forecasts are perhaps inappropriately “anchored” in recent historical figures. based on the systematic use of multiple analogs. thus not of benefits easy to understand. Someone plan- ning to open a car wash that can process one car every seven minutes would probably be amiss in assuming sufficient demand to actually run at that rate all the time. Key: # Favorable for rapid adoption $ Unfavorable for rapid adoption CAUTIONS AND CAVEATS IN FORECASTING Psychological Biases in Forecasting To a varying degree. with different levels of competition.” Ease of communication # “Make or receive calls anywhere” is $ Benefits were not clear. trial but couldn’t understand the “bits. Relative simplicity # Early cell phones were easy to use. Another source of error in forecasting is incentive pay. even though market conditions have markedly changed.indd 126 14/12/12 2:22 PM . Compatibility with current # Just like making or receiving a $ Lots of learning required to use. must still do local market research to ascertain how much volume a new restaurant will really generate. Forecasters often fall prey to what Dan Lovallo and Daniel Kahneman call the planning fallacy. Relative advantage # Enabled people to make $ It was not clear. on average. if given away to attract early adopters it turned out not to be useful. First. may result in vastly different sales levels. the effectiveness of all of the forecasting methods we’ve just re- viewed is often undermined by excessive optimism on the forecaster’s part. whether intentionally or otherwise. 126 Section Two Opportunity Analysis EXHIBIT 5. Common Sources of Error in Forecasting Several sources of potential error in forecasts should be recognized. communicable. and RAM.

Chapter 5 Measuring Market Opportunities: Forecasting and Market Knowledge 127 EXHIBIT 5. such as fresh pasta. 2009. For ACG. Sources: John Mullins and Randy Komisar. unstated but implicit assumptions can overstate a well-intentioned forecast. 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. and a predict and comply approach—has simply gone wrong (See Exhibit 5.3). July 2003. or ventures have undoubtedly preceded yours. But there are so many methods. an annual budget-driver schedule. While 34. the assumptions can be debated. virtu. ects from best to worst.5 percent of those surveyed (after adjustments. “Sandbagging”—setting the forecast or target at an easily achievable figure in order to earn bonuses when that figure is beaten—is common. Are there similar prod- ucts in the market already? Find some customers to observe as they use or buy them. Is your concept well defined or your prototype ready to show? Conduct a survey of buyer wal28949_ch05_114-138. useful than stating mere opinions about whether the forecast is too high or too low. Assumptions of awareness and distribution coverage at levels less than 100 percent. In their new book. Business Press. Even in is much more likely to yield realistic estimates because the theatre. these common sources of error in forecasting are only the beginning of the challenge that fore- casters must address. Steve Morlidge and Steve Player argue that. the 1950s. Finally. Boston: Harvard out the distribution of actual outcomes of those proj. The resulting conversation is far more sales and market potential. today’s forecasting culture—based on a command-and-control mind set.2) may indicate their willingness to buy a new grocery product.” Harvard Business Review. 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.9 Managing the View through Your Rose-Colored Glasses Even in new product and new venture settings. In today’s fast-changing world that is becoming harder and harder to predict. not some illusory set of certainties that are. Future Ready.” as they call it. in many companies. set in New York’s Harlem in on the project itself. How to Master Business Forecast- ing.17 There are two im- portant keys to improve the credibility and accuracy of a set of forecasts of sales and mar- ket potential. not certain at all. The first of these is to make explicit the assumptions on Strategic Issue which the forecast is based. laying Breaking Through to a Better Business Model. tend to hype the more typical “inside view” that’s based speare’s Romeo and Juliet. and data to support the the credibility and accuracy of forecasts of assumptions can be obtained. Getting to Plan B: tematically assembling a class of similar projects. in fact. as shown in Exhibit 5. if there is debate or doubt about There are two important keys to improve the forecast.18 The second key to effective forecasting is to use multiple methods. How should one choose? Do you have historical data? Use one or more statistical methods.indd 127 14/12/12 2:22 PM .10). project in that distribution. de- pending on the nature of the planned marketing program for the product. This way. 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. should be applied to such a forecast. and Dan Lovallo and Daniel Kahneman.5 million in start-up capital to get their venture off the ground. Dan Lovallo and Daniel Kahneman argue that the overoptimistic. rosy view can be mitigated by sys. using the chain ratio method (see Exhibit 5. This “outside view. The resulting forecast will be ally nothing is completely new. No such data? Find some suitable analogies.16 Keys to Good Forecasting A key goal of good forecasting is to identify the full range of possibilities about the future. and then positioning the current “Delusions of Success. Many similar products far more accurate. Their evidence-based forecast was instrumental in their obtaining US$3.

that will build your and others’ confidence in what the forecasts say.satoripartners. as shown in the table below. If the results of two or more forecasting methods converge on similar results. Contingency plans should be developed to cope with the reality that ultimately unfolds. And so on. market knowledge is generally incomplete and often ill-informed. Future Ready: How to Master Business Forecasting (Chichester. see Exhibit 5. 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.indd 128 14/12/12 2:22 PM . The world is too complex and too dynamic to do so with any confidence. West Sussex.1. UK: John Wiley and Sons. Can you produce some product or deliver the service.9. any forecast is almost certainly wrong. Ultimately. perhaps using the approach suggested in Exhibit 5. at least on a trial basis? Try an experimental market test of one kind or another. without adequate market knowledge. however. Thus. 2010). Products for which there is little demand may wal28949_ch05_114-138. It is nigh on impossible to predict the future. 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 best way to forecast. If not. we provided several approaches to forecasting.html. For more on Steve Morlidge. For an example of how Starbucks uses qualitative marketing research to systematically tap into its customers’ ideas and sugges- tions. 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. market- ing decisions are likely to be misguided. As should be clear to the reader by now. is to employ multiple methods. Ltd.11. see http://www. based perhaps on hunches or intuition that may or may not be correct. Similarly. and so far we’ve provided little discus- sion of exactly how one might best find the necessary data. 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. Without relevant and timely data. each of which requires that data be collected. So what is a forecaster to do? Morlidge and Player offer six pragmatic suggestions about what to do and how to do it.10 Mastering Forecasting Let’s face it. Do you have early adoption data? Model the diffusion process. as we saw in Exhibit 5. 128 Section Two Opportunity Analysis EXHIBIT 5.19 Obtaining market knowledge also requires data. 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. WHY DATA? WHY MARKETING RESEARCH? In the first portion of this chapter.

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

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

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

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

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

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

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

but also the design and implementation of marketing programs. no decision to be made research objectives. Some users do not really want objective information—they want to prove what they already believe to be true. 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. Tabulation errors or incorrect use or interpretation of statistical procedures may mislead the user. Design research: type of study. Quantitative data are collected without first collecting approaches (qualitative or quantitative) qualitative data. sample. faster secondary data used where possible? Is qualitative research planned to ensure that quantitative research.indd 136 14/12/12 2:22 PM . is on target? 3. ideally before implementing the research or if necessary subsequent to its completion. Are the data sources appropriate? Is cheaper. Analyze data. Are the planned analyses appropriate? They should be specified before the research is conducted. What are the objectives of the research? Will the data to be collected meet those objectives? 2. Report results to the decision maker. It is beyond the scope of this book. For those wishing to read more on this topic. 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. Collector bias: hearing what you want to hear. In the remaining chapters in this book. Collect data. numerous text- books and websites on marketing research are available. while quantitative research is better for measurement of a population’s attitudes and likely responses to products or marketing programs. 1. Determine data sources (primary or Primary data are collected when cheaper and faster secondary data secondary) and types of data and research will do. to ensure that the research is unbi- ased and the results are trustworthy. 2. 6. data These are technical issues best managed by skilled practitioners. Doing these steps poorly can generate misleading or incorrect results. 5. collection approach. 3.14 Steps in the Marketing Research Process: What Can Go Wrong? Steps What Frequently Goes Wrong? 1. etc. 4. The informed and critical user of marketing research should ask the following questions. if any. Identify managerial problem and establish Management identifies no clear objective. WHAT USERS OF MARKETING RESEARCH SHOULD ASK The steps identified in Exhibit 5. however. 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. 136 Section Two Opportunity Analysis EXHIBIT 5. 4. based on the proposed research.14 make clear where many of the potential stumbling blocks are in designing and conducting marketing research. wal28949_ch05_114-138. to instruct the reader in how to design marketing research studies. required.

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

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

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

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

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

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

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

supervisor.000. These segments’ high disposable incomes and their ability to devote time to new habits are seen as a lucrative market opportunity. 25–34. anniversaries. some college. Hispanic. whether of goods or services. what kinds of segmentation criteria. • Specify criteria that define the segment. as shown in Exhibit 6. We examine each of these approaches as follows. graduated high school.indd 144 14/12/12 2:23 PM . single Income Under $15. clerical. Vervatwala targets well-defined trading areas in placing new studios. 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. EXHIBIT 6.2 Some of the More Commonly Used Demographic Attributes* Demographic Descriptors Examples of Categories Age Under 2. For Dinaz Vervatwala. 35–49. 2–5. Italian. 12–17. Like most retailers. student. etc. The three approaches apply in both consumer and organizational markets. youngest child 6 or over. female Household life cycle Young. Some examples of demographic attributes used to segment consumer markets are as follows: • Age. home ownership. and presence and age of children. industry. 144 Section Two Opportunity Analysis Strategic Issue elements of the marketing mix—the 4 Ps (product.2. sporting events Race and ethnic origin African American. etc. Since mobile phone penetration has reached saturation levels in most of Europe and the United Kingdom.999. promotion. or based on how they behave relevant to the market in question. 6–11. blue collar. graduations. Finally. a topic we address in more detail later in this chapter. older couples without dependent children. we usually think of demographics in terms of attributes of indi- vidual consumers. or descriptors. the segmentation process should deter- mine the size and market potential of each segment for use in prioritizing which segments to pursue. 65 and over Sex Male. In most developed countries. • Determine segment size and potential. 50–64. Anglo-Saxon. some mobile service providers have focused their attention on the 55–65 and 65-plus segments to improve usage and penetration. unemployed Education Some high school. national holidays. women were targeted even though market segmentation process. older. manager. 18–24. The segmentation criteria should measure or describe the segments clearly enough so that members can be readily identified and ac- cessed. price. Given these objectives. Asian. Who They Are: Segmenting Demographically While firm demographics (age of firm. are most useful? Segmentation decisions are best made in one of three ways: based on who the cus- tomers are. sales. older couples retired.999. detailed demographic data showing what kind of people live where is readily available. graduated college Events Birthdays. most other fitness clubs in India targeted men and women. wal28949_ch06_139-161. based on where they are. no children. size of firm.000–24. Occupation Professional. $15. homemaker.) are useful in segmenting organizational markets. newly married. single. Scandinavian * Others include marital status. youngest child under 6. There are three important steps in the and place). Jewish. older couples with dependent children.000–74. $25.

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

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

We examine some of these forms next. 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. credit terms. Europe’s easyJet airline originally targeted lei- Gatorade’s simple segmentation scheme created a whole new category of “sports sure travelers. Chapter 6 Targeting Attractive Market Segments 147 consumer information available at the block and zip code or postal code levels. and. different automobile manufacturers have emphasized different benefits over the years.4. on product usage patterns. Mountain bike makers Specialized and Gary Fisher target bicyclists who wish to ride on single-track trails or Strategic Issue back-country terrain. now part of Nielsen. quickness. based not on who the target consumers are or where they live. wal28949_ch06_139-161. loyalty. In the end. They include product usage. Claritas’s PRIZM service classifies all U. Different individual customers have different needs and thus attach different degrees of importance to the benefits offered by different products.indd 147 14/12/12 2:23 PM . and research labs. spare parts availability. and training. including those based on consumer needs. Behavioral attributes can take many forms.” which grew to include entries from Coke (Powerade) and Pepsi (All Sport). Thus. customers consider relevant benefits that include product performance in different use situations. consumers often evaluate product alterna- tives on the basis of desired characteristics and how valuable each characteristic is to the con- sumer—choice criteria. and status.16 Claritas. These examples all demonstrate the power of highly specific behavioral descriptors in defining sharply focused market segments. Kevin Plank of Under Armour initially targeted college and university athletic teams. offers datasets for other countries as well. Consumer Needs Customer needs are often expressed in benefits sought from a particular product or ser- vice. there are more general product-related attributes as well. see Exhibit 6. In virtually every consumer and organizational market there are segments like these just waiting to be identified and targeted by insightful marketers. Gatorade’s original target market consisted of athletes beverages.S. each of which. For example. Since purchasing is a problem-solving process.” who needed to replenish water and salts lost through perspiration. In organizational markets. on the structure of firms’ purchasing activities and the types of buying situ- ations they encounter. though Gatorade still dominates the category. universities. including lifestyle. households into 66 demographically and behaviorally distinct clusters. Firms typically single out a limited number of benefit segments to target. in turn. 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. the product that pro- vides the best bundle of benefits—given the customer’s particular needs—is most likely to be purchased. is assigned to one of 14 social groups and 11 life stage groups. in organiza- tional markets. but based on what they do. which often cuts across demographic categories or varies within them. Other con- siderations in the purchase of industrial products/services include on-time delivery. How They Behave: Behavioral Segmentation There is no limit to the number of insightful ways successful marketers have segmented markets in behavioral terms. on more general behavioral patterns. This simple segmentation scheme created a whole new category of “sports beverages. 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. This onetime niche market has grown into a multibillion-dollar market in the United States alone. Product Usage and Purchase Influence In addition to highly specific behavioral attributes such as those just discussed. such as Volvo’s safety versus Jaguar’s styling. for example. economy.

“This stuff is a lot each customer: Are you satisfied with our service? Would more complicated than handing out keys at the airport.indd 148 14/12/12 2:23 PM . Enterprise now serves the United Kingdom. Fanta in the whose people guzzle more Coke than those anywhere else. in the U. Enterprise has 1990s. Taylor’s strategy was to serve beachhead and an impregnable foundation on which the a completely different target market than the majors. In orga- nizational markets. company was able to grow. for example. compared to 665 serv- ings in Mexico. several individuals or units with varying degrees of influence participate in buying decisions.6 billion worth of Coke in 1989. June 3.5). 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.000 vehicles and Clear targeting. purchase predisposition. and opinions—in other words. the car-replacement market. prescription drugs. the strong Hertz and Avis. Exceptional customer service. Source: Simon London. and just $2. “Driving Home the Service Ethic. Canada and Europe followed and 50 years. with a fleet of 500. what they do or believe. From such information it is possible to infer what types of products and services appeal to a particular group.S. Jack’s son and now chairman and CEO. or psychographics. Coke provides refrigerated coolers to the mom and pop dukas where Kenyans shop. no mat- The business grew steadily. as well as how best to commu- nicate with individuals in the group. Children’s products. 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. 2003. Ireland. North Americans bought $2. and provide replacement cars for peo. market.9 billion in 2009. if unexceptionally. like Kenya. differences in product usage rates provide clues to where its growth prospects are most attractive. and no one gets promoted from branches says Andy Taylor.” you come back?). Equally important. For more on Enterprise Rent-a-Car. where annual per capita consumption is just 39 servings. and even prescribes exactly how they should be stocked: half-liter bottles of Coke at the top. that have below-average customer service scores. behavioral segmentation based on lifestyle is identifying new target markets for savvy marketers (see Exhibit 6. 148 Section Two Opportunity Analysis EXHIBIT 6. It’s more than $6 billion in revenue for the privately held a combination that’s kept Enterprise rolling for nearly company. and purchase influence. 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. lynchpin of the company’s wider success. Product usage is important because in many markets a small proportion of potential customers makes a high percentage of all purchases.enterprise. So Coke is looking elsewhere for growth. the customers are better known. and gifts are clearly influenced by a variety of family members. but joint husband–wife decisions are becoming more common. until the ter how strong their financial performance. defined segment that the majors had ignored provided the tomobile leasing business. and large bottles at the bottom.” While Enterprise now serves target segments beyond Financial Times.4 Enterprise Rent-a-Car: Targeting Pays Off In 1963. Lifestyle Segmentation by lifestyle. its clear focus on a narrowly see www. interests. and heavy or large users (often called key accounts) are easier to identify. Many products used by various family members are purchased by the wife. Even among demographic groups that might at first glance seem homogeneous. Jack Taylor added car rentals to his small au.17 Market segmentation based on sources of purchase influence for the product category is relevant for both consumer and organizational markets. For Coca-Cola. as well as North America. rather than who they are in a demographic sense. wal28949_ch06_139-161. and Germany. all of which can be used to segment both consumer and industrial markets. In organizational markets. segments markets on the basis of consum- ers’ activities. for itability and customer service (two questions are asked of example—than the majors provided. Action-oriented consumers are guided by the need for social or physical activity. with more emphasis on the varied ignored. As a result. and risk-taking. this growing market simply cannot be kets its properties. Demographic lead. Claritas and similar commercial organizations identify each of the respondents as to their VALS type. and to be less cost-conscious. but this generation empty-nester spending power. is that and active lifestyles that many of tomorrow’s retirees will these aging customers aren’t all the same. while status-oriented consumers shop for products that demonstrate the consumer’s success. For more on Vespa’s and Del Webb’s marketing healthier diets and lifestyles to help them age gracefully. to baby boomers.” BusinessWeek. physical. Chapter 6 Targeting Attractive Market Segments 149 EXHIBIT 6. believers. 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. similar data. and to minimize risk. But that doesn’t mean all boomers are fantasizing about their younger days. see www. eagerness to buy.delwebb. and energy level—on a continuum from minimal to abundant. Resources include all of the psychological. strivers. Self-orientation is based on how consumers pursue and acquire products and services that provide satisfaction and shape their identities. they are motivated by the orientations of principle. Based on these two dimensions. “Love Those Boomers. formerly a division of the Stanford Research Institute (SRI) has created a U.shtml) and discover the VALS segment to which they belong. makers. With combined spending power Hardly. wrinkles Source: Louise Lee. Behavior is the key. They include education. gives you a bunch of paradoxes. G. Schreiner. “We have to keep up with residents. segmentation service (called VALS 2). Thus. they tend to buy the top. Organizational Behavioral Attributes Purchasing structure and buying situation segmentation attributes are unique to organi- zational markets. health.” says David segmentation just won’t do.indd 149 14/12/12 2:23 PM . users can determine scheme can complete a short survey on the VALS website and discover the VALS what each VALS segment bought. and material means con- sumers have to draw on. with boomers’ more predictable and con Better still for Vespa. and segment to which they belong. and strugglers. and gray hair are in among many boomers. along with October 24. Consum. 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. demographic. the retirement-community of more than $1 trillion per annum among the 50. though. In doing so. In such a structure the buyer is likely to consider all transactions with a given supplier on a companywide or global basis. Purchasing structure is the degree to which the purchasing activity is centralized. Principle- oriented consumers are motivated by abstract and idealized criteria. to emphasize product quality and fast delivery. What marketers are discovering. and action. is changing the way it mar- 60-year-olds alone. VALS 2 defines eight segments that exhibit distinctive behavior and decision making—actualizers. the buyer is apt to be more sensitive to the user’s need. In a decentralized situation. which builds on the concept of self-orientation and resources for the division of Pulte Homes and www. intelligence. vice president for active-adult business de- ers aged 50! buy a quarter of all Vespa motor scooters velopment at Del Webb. for example). Those interested in the VALS segmentation scheme can complete a short survey on the VALS website (log onto www. variety. self-confidence. status.” of-the-line models. experiencers. income.strategicbusinessinsights . wal28949_ch06_139-161. “The War Generation was far in the United States. 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. fulfillers. The VALS system has been further developed in Europe and Asia.vespa. achievers.5 Marketing to Baby Boomers: Rethinking the Rules By 2006.S. Del Webb. what their media habits are. Indeed. Strategic Business Insights.. to emphasize cost savings.

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

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

the mission of the firm.K. but separately from. Cadbury. overlooked or misunderstood consumers’ rising con- launched a “Sports for Schools” promotion. By combining the results of these analyses with other considerations. segmentation decisions to which insufficient ethical sidered to be associated with child obesity. lead to ethical concerns. Similarly. Following howls of protest in the media. Managers can as- Strategic Issue sess both dimensions on the basis of information obtained from analyses Both market and competitive perspectives of the environment.” especially when consumer vulnerability and “Cadbury’s wants children to eat 2 million kilograms product harm enter the equation.000 Role of Product Harm and Consumer Vulnerability. concerned are.000 grams of fat. Craig Smith. 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. gies.7 suggests conducting a forecast of future changes in market at- tractiveness or competitive position in addition to. had Cooper-Martin indicates that ethical concerns such as run called “Computers for Schools. 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. including risk. in which Thus. and environmental factors that may influence prof- itability. involve consuming more than 20. disquiet over the ethics of certain targeting strate- As the U. of fat (more than 4 million pounds)—to get fit. “Ethics and Target Marketing: The would. they need to E Ethical Perspective Eat” 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. Cadbury bury’s. In targeting of Marketing 61 (July 1997). and N. cerns over child obesity.1). 152 Section Two Opportunity Analysis by examining market.” According to the Food Commission’s calculations.cadbury. a netball that sold for £5 in sporting goods stores Sources: N. an assessment of the current situation. 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. a growing consideration is given. industry and competitive situation. perceived to be harmful. ing an earlier and very successful promotion that Empirical research by Craig Smith and Elizabeth but targeting and market tive for children to eat more of a product widely con. Craig Smith and Elizabeth Cooper-Martin. the British confectionery company. estimates. in turn. pp. that Exhibit 6. To make these assessments. the leading grocer in the United Kingdom. As Smith and Cooper-Martin problem in the United Kingdom and elsewhere. Get Fit? 6. too. now a division of Kraft. 1–20. Summer 2007. Note.indd 152 14/12/12 2:23 PM . The first steps in developing a market-attractiveness/competitive-position matrix. evidence-based conclusions about which markets and market segments should be pursued can be reached.1 In 2003. is perceived as vulnerable and where the products bury confectionery. in any sense. it’s not necessarily the products themselves that the program was characterized as a perverse incen. These £38 worth of products Strategy Review. market potential are necessary. “Marketing managers should be alert to public Cadbury withdrew the program. note.’s Food Commission calculated.” Journal calories and over 1. see www. competitive. wal28949_ch06_139-161. and customer needs. emulat.” Business of Cadbury products. “Out of Leftfield: Societal Issues would require consumer tokens from £38 worth as Causes of Failure of New Marketing Initiatives. 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. and ethical issues (see Ethical Perspective 6.

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

0 Industry attractiveness .” the number of people in athleti- cally active demographic groups is growing. for example. like the growing middle class in the developing world.8 are shown in Exhibit 6.2 7 1. Score: 9. and no doubt was.9. • Macro trends are largely favorable: Sports are “in.0 5. EXHIBIT 6.5 9 4. have been successful.0 wal28949_ch06_139-161.0 Total: Competitive position 1.indd 154 14/12/12 2:23 PM .4 Capabilities and resources . Score: 6. Step 3: Rate Segments on Each Factor. Macro trends are generally more favourable for Coca-Cola in emerging markets with growing middle classes. has no track record.4 5 2.. but easily identified and reached and might lead to other segments in the future. assigning a weight to each one.6 Competitive-position factors Opportunity for competitive advantage .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? . where both population growth and Soft drink consumption have been relatively flat or down. and the factors and their weights may differ across markets where a category is relatively mature versus na- scent. For Under Armour the assessment of the various factors might have looked as shown in Exhibit 6. Score: 9. for example.4 Macro trends . Some users would rate each bullet point in Exhibit 6. 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. Competitive Position Factors • Opportunity for competitive advantage is modest: Proposed garments will be differenti- ated.8 independently. and niche brands for other athletic pur- suits (e.g. Score: 7.7 Total: Market attractiveness 1. than in North America or western Europe. Weights that Under Armour’s Kevin Plank might have assigned to the major factors in Exhibit 6. Patagonia for outdoor enthusiasts).4 6 2. Both the scores and the weights placed on different factors may differ in emerging versus developed markets. gathered. While more detailed evidence than we discuss here should have been. 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.3 9 2. Under Armour.2 5 1. 154 Section Two Opportunity Analysis Step 2: Weight Each Factor Next.9. • The athletic team segment is small. but are easily imitated. 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. as a new firm.5 Segment size and growth rate .0 8. a numerical weight is assigned to each factor to indicate its relative importance in the overall assessment.

com). strategy. Strategic Issue especially with regard to their objectives. and changes in their strategies. Once these assessments have been made.18 Many 50-plus consumers have been using cell phones. Both qualitative and quantitative marketing research results competitive advantage. such as possible changes in product or process technology. Managers or entrepreneurs should first determine how the market’s attractiveness is likely to change over the next three to five years. resources. are typically used for this purpose. if not longer. the internet. For example. and other EXHIBIT 6. “They’re pumping up life. is way that can bring about sustainable called for. Managers must also address several broader issues. • Five forces are mixed: Entry barriers are very low (unfavorable).com. The starting point for this assessment is to consider possible shifts in customer needs and behavior. there is little threat of substitutes (favorable). the weighted results can be plotted on a market attractiveness/competitive position