Marketing Management(Project Management)

Revised Confirming Pages

A Preface to Marketing Management

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page i

Revised Confirming Pagespet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page ii

Revised Confirming Pages

A Preface to Marketing Management

Twelfth Edition

J. Paul Peter University of Wisconsin–Madison

James H. Donnelly, Jr. Gatton College of Business and Economics University of Kentucky

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page iii

Revised Confirming Pages

A PREFACE TO MARKETING MANAGEMENT, TWELFTH EDITION

Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Previous editions © 2008, 2006, and 2003. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 WDQ/WDQ 1 0 9 8 7 6 5 4 3 2 1 0

ISBN 978-0-07-352996-7 MHID 0-07-352996-6

Vice President & Editor-in-Chief: Brent Gordon VP EDP/Central Publishing Services: Kimberly Meriwether David Publisher: Paul Ducham Executive Editor: Douglas Hughes III Associate Marketing Manager: Jaime Halteman Editorial Coordinator: Gabriela Gonzalez Project Manager: Robin A. Reed Design Coordinator: Brenda A. Rolwes Cover Designer: Studio Montage, St. Louis, Missouri Cover Image Credit: Royalty-Free/CORBIS Production Supervisor: Nicole Baumgartner Media Project Manager: Suresh Babu Composition: Laserwords Private Limited Typeface: 10/12 Times New Roman Printer: World Color Press, Inc.

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Peter, J. Paul. A preface to marketing management / J. Paul Peter, James H. Donnelly, Jr.–Twelfth ed. p. cm.

Includes bibliographical references and index. ISBN 978-0-07-352996-7 (alk. paper) 1. Marketing–Management. I. Donnelly, James H. II. Title. HF5415.13.P388 2010 658.8–dc22

2009043316

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

www.mhhe.com

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page iv

Revised Confirming Pages

To Rose and Angie J. Paul Peter

To Gayla Jim Donnelly

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page v

Revised Confirming Pages

About the Authors J. Paul Peter has been a faculty member at the University of Wisconsin since 1981. He was a member of the faculty at Indiana State, Ohio State, and Washington University before joining the Wisconsin faculty. While at Ohio State, he was named Outstanding Marketing Professor by the students and has won the John R. Larson Teaching Award at Wisconsin. He has taught a variety of courses including Marketing Management, Marketing Strategy, Con- sumer Behavior, Marketing Research, and Marketing Theory, among others.

Professor Peter’s research has appeared in the Journal of Marketing, the Journal of Marketing Research, the Journal of Consumer Research, the Journal of Retailing, and the Academy of Management Journal, among others. His article on construct validity won the prestigious William O’Dell Award from the Journal of Marketing Research, and he was a finalist for this award on two other occasions. Recently, he was the recipient of the Churchill Award for Lifetime Achievement in Marketing Research, given by the American Marketing Association and the Gaumnitz Distinguished Faculty Award from the School of Business, University of Wisconsin–Madison. He is an author or editor of over 30 books, including A Preface to Marketing Management twelfth edition; Marketing Management: Knowledge and Skills, nineth edition; Consumer Behavior and Marketing Strategy, nineth edition; Strategic Management: Concepts and Applications, third edition; and Marketing: Creating Value for Customers, second edition. He is one of the most cited authors in the marketing literature.

Professor Peter has served on the review boards of the Journal of Marketing, Journal of Marketing Research, Journal of Consumer Research, and Journal of Business Research and was measurement editor for JMR and professional publications editor for the American Marketing Association. He has taught in a variety of executive programs and consulted for several corporations as well as the Federal Trade Commission.

James H. Donnelly, Jr. has spent his academic career in the Gatton College of Business and Economics at the University of Kentucky. In 1990 he received the first Chancellor’s Award for Outstanding Teaching given at the University. Previously, he had twice received the UK Alumni Associa- tion’s Great Teacher Award, an award one can only be eligible to receive every 10 years. He has also received two Outstanding Teacher awards from Beta Gamma Sigma, national business honorary. In 1992 he received an Acorn Award recognizing “those who shape the future” from the Kentucky Advocates for Higher Education. In 2001 and 2002 he was selected as “Best University of Kentucky Professor.” In 1995 he became one of six charter members elected to the American Bankers Association’s Bank Marketing Hall of Fame. He has also received a “Distinguished Doctoral Graduate Award” from the University of Maryland.

During his career he has published in the Journal of Marketing Research, Journal of Marketing, Journal of Retailing, Administrative Science Quarterly, Academy of Manage- ment Journal, Journal of Applied Psychology, Personnel Psychology, Journal of Business Research, and Operations Research among others. He has served on the editorial review board of the Journal of Marketing. He is the author of more than a dozen books, which include widely adopted academic texts as well as professional books.

Professor Donnelly is very active in the banking industry where he has served on the board of directors of the Institute of Certified Bankers and the ABA’s Marketing Network. He has also served as academic dean of the ABA’s School of Bank Marketing and Management.

vi

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page vi

Revised Confirming Pages

vii

Preface NOTE FROM THE AUTHORS

The original purpose of A Preface To Marketing Management—to deliver a clear and con- cise presentation of the basic principles of marketing—is as relevant today as it was in ear- lier editions. To us this means emphasizing quality content and avoiding excess verbiage, pictures, and lists. We think we have succeeded in doing so since a reviewer called our book “pound for pound the best introductory marketing text available.”

We introduce the 12th edition with a sense of accomplishment knowing that our book and its eight foreign translations have been used throughout the world whenever courses require an overview of the critical aspects of marketing management. Consequently, the book has been used successfully in a wide variety of different course settings and is the best selling book of its kind. We believe it has endured because we continuously fine tune and update it to ensure that it meets the current and evolving needs of both students and instructors. Because marketing is about figuring out how to do a superior job of satisfying customers, we simply seek to practice what we preach. We refer to out book as the Preface. Welcome to this edition which is organized into four sections.

Section I. Essentials of Marketing Management This section consists of 13 chapters that present the essentials of marketing management. Our objective is to present the “must know” content of the field useful in analyzing mar- keting problems and cases and developing marketing plans. It is divided into four sections that emphasize introducing the field, understanding target markets, understanding market- ing mix variables, and marketing in special fields. Careful study of this section should give students a clear understanding of the terminology, techniques, tools, and strategies used in effective marketing management and marketing strategy development.

Section II. Analyzing Marketing Problems and Cases This section has been widely praised as the best presentation available on the topic. In fact, it has found its way to other areas of many campuses where it is used by students in fields where case problems are used but which are unrelated to the field of marketing. It presents a comprehensive framework for analyzing, preparing, and presenting case analyses.

This section could have been placed at the beginning of the book because it is designed to be read at the start of a course using cases. However, because it is referred to throughout the semester, we placed it after the text chapters. Also, for those courses that do not utilize cases, the book may be used without reference to this section.

Section III. Financial Analysis for Marketing Decisions It is important for marketing students to appreciate that the ultimate objectives of market- ing are usually expressed in financial terms. With this in mind, this section presents impor- tant financial calculations that will be useful in evaluating the financial position of a firm and the financial impact of various marketing decisions and strategies.

Section IV. Developing Marketing Plans In keeping with the concept of our book and the needs of its users, this section helps read- ers develop practical planning skills. It contains an approach to developing a marketing plan by providing a general format for structuring and presenting one.

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page vii

Revised Confirming Pages

THE 12TH EDITION OF THE PREFACE

The content of this book is continuously revised and updated based on extensive feed- back from students and faculty members as well as our own intuitions and judgments. Whether a topic is fundamental or emerging we try to bring innovative content and ele- ments to the book. For example, in this and the previous edition we have added new or expanded discussions of the major types of marketing, branding, marketing’s role in cross-functional strategic planning, the most current psychographic and geodemographic segmentation approaches, organizing the sales force, relationship marketing in service organizations, the difference between customers and clients in service organizations, multichannel marketing, and a new section on Porter’s diamond model of national com- petitive advantage. We have also changed the title and added content to chapter 6, “Prod- uct and Brand Strategy” to better reflect current views of these topics.

We have altered two important elements in this edition. “Marketing Insights” replace our previous “Marketing Highlights” feature. This is more than a simple name change. It was done to more accurately reflect their purpose of helping students solve marketing problems, analyze marketing cases, and develop marketing plans. More than 20 Market- ing Insights have been added to this edition.

We have also added an “Additional Resources” section to the end of each chapter. Previously, each chapter ended with a selection of additional readings. This change is designed to highlight our focus on current resources which students can utilize in solv- ing marketing problems, analyzing marketing cases, and developing marketing plans, as well as assist in writing projects and case presentations. Each resource has been selected with prospective students in mind. Our goal is to provide resources accessible to stu- dents at various stages of marketing education given the wide spectrum of courses in which the book is utilized.

UTILIZING THE PREFACE

This book has been used successfully in college courses and practical training that require an overview of the critical aspects of marketing management and marketing strat- egy development. It has been used:

• As a primary introductory text primarily at the undergraduate level. • At the undergraduate and MBA level, where several AACSB core curriculum courses

are team-taught as one multidisciplinary 9-to-12 hour course. • At the advanced undergraduate and MBA level where it is used as the content foun-

dation in courses that utilize marketing cases and problems. • In short courses and executive development programs.

INSTRUCTIONAL RESOURCES

The Preface is accompanied by two expanded supplements. They were developed in response to instructors’ requests. We offer a test bank of nearly 1,300 multiple-choice, true-false, and brief essay questions. It is available in both print and EZ Test Online. We also offer Power- Point slides that highlight key text material.

viii Preface

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page viii

Revised Confirming Pages

ix

Acknowledgements Our book is based on the works of many academic researchers and marketing practitioners. We want to thank those individuals who contributed their ideas to develop the field of mar- keting throughout the years. Indeed, our book would not be possible without their contri- butions. We would also like to thank our teachers, colleagues, and students for their many contributions to our education. We would also like to publicly acknowledge those individ- uals who served as reviewers of this and previous editions. We appreciate their advice and counsel and have done our best to reflect their insightful comments.

Roger D. Absmire Sam Houston State University Catherine Axinn Syracuse University Andrew Bergstein Pennsylvania State University Robert Brock Lawes Chaminade University of Honolulu Glenn Chappell Meridith College Newell Chiesl Indiana State University Reid P. Claxton East Carolina University Mike Dailey University of Texas, Arlington Linda M. Delene Western Michigan University James A. Eckert Western Michigan University Robert Finney California State University, Hayward Stephen Goldberg Fordham University Sol Klein Northeastern University Franklyn Manu Morgan State University Edward J. Mayo Western Michigan University Donald J. Messmer College of William & Mary Johannah Jones Nolan University of Alabama, Birmingham R. Stephen Parker Southwest Missouri State University

Debu Purohit Duke University Gary K. Rhoads Brigham Young University Mike Ballif University of Utah Donald Brady Millersville University Lee Richardson University of Baltimore Matthew H. Sauber Eastern Michigan University Ronald L. Schill Brigham Young University Vernon R. Stauble California State Polytechnic University David Griffith University of Oklahoma Lawrence Hamer DePaul University Jack Healey Golden State University Betty Jean Hebel Madonna University JoAnne S. Hooper Western Carolina University David Horne Wayne State University Fred Hughes Faulkner University Benoy Joseph Cleveland State University Ann Marie Thompson Northern Illinois University John R. Thompson Memphis State University

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page ix

Revised Confirming Pages

x Acknowledgements

Gordon Urquhart Cornell College Kevin Webb Drexel University Kathleen R. Whitney Central Michigan University J. B. Wilkinson University of Akron Dale Wilson Michigan State University Eunkyu Lee Syracuse University Tina Lowrey University of Texas at San Antonio Albert Milhomme Texas State University Larry Crowson University of Central Florida Gerard DiBartolo Salisbury University Casey Donoho Northern Arizona University R. E. Evans University of Oklahoma Lawrence Feick University of Pittsburgh David Good Grand Valley State University Perry Haan Tiffin University Harry Harmon Central Missouri Catherine Holderness University of North Carolina–Greensboro Nicole Howatt UCF

Anupam Jaju GMU Chris Joiner George Mason University Chip Miller Drake University David L. Moore LeMoyne College Joan Phillips University of Notre Dame Thomas Powers University of Alabama at Birmingham John Rayburn University of Tennessee Martha Reeves Duke Henry Rodkin DePaul University Alan Sawyer University of Florida Mark Spriggs University of St. Thomas Sean Valentine University of Wyoming Stacy Vollmers University of St. Thomas Anna Andriasova University of Maryland University College Ritesh Saini George Mason University Ana Valenzuela Baruch College, CUNY Matthew Elbeck Troy University Dothan Edward Bond Bradley University

Working with professionals makes everything go smoothly. It is why being a McGraw- Hill/Irwin author is a pleasure. Thank you to Doug Hughes, our editor, and to Gabriela Gonzalez, editorial assistant, and welcome aboard. Special thanks to Robin Reed, project manager, for so many contributions to this project. We are very grateful.

We also wish to acknowledge Michael Knetter, Dean of the School of Business at the University of Wisconsin, and Devanthan Sudharshan, Dean of Gatton College of Business and Economics at the University of Kentucky who have always supported our efforts.

J. Paul Peter

James H. Donnelly Jr.

pet29966_fm_i-xiv.qxd 12/15/09 12:26 PM Page x

Revised Confirming Pages

xi

Contents SECTION I ESSENTIALS OF MARKETING MANAGEMENT 1

PART A INTRODUCTION 1

Chapter 1 Strategic Planning and the Marketing Management Process 2

The Marketing Concept 2 What Is Marketing? 3 What Is Strategic Planning? 4

Strategic Planning and Marketing Management 4 The Strategic Planning Process 5 The Complete Strategic Plan 14

The Marketing Management Process 14 Situation Analysis 14 Marketing Planning 17 Implementation and Control of the Marketing Plan 18 Marketing Information Systems and Marketing Research 19

The Strategic Plan, the Marketing Plan, and Other Functional Area Plans 19

Marketing’s Role in Cross-Functional Strategic Planning 19

Conclusion 20 Appendix Portfolio Models 23

PART B MARKETING INFORMATION, RESEARCH, AND UNDERSTANDING THE TARGET MARKET 27

Chapter 2 Marketing Research: Process and Systems for Decision Making 28

The Role of Marketing Research 28 The Marketing Research Process 29

Purpose of the Research 29 Plan of the Research 30 Performance of the Research 35 Processing of Research Data 35

Preparation of the Research Report 36 Limitations of the Research Process 36

Marketing Information Systems 38 Conclusion 39

Chapter 3 Consumer Behavior 40

Social Influences on Consumer Decision Making 41 Culture and Subculture 41 Social Class 42 Reference Groups and Families 43

Marketing Influences on Consumer Decision Making 43

Product Influences 43 Price Influences 43 Promotion Influences 44 Place Influences 44

Situational Influences on Consumer Decision Making 45 Psychological Influences on Consumer Decision Making 45

Product Knowledge 45 Product Involvement 46

Consumer Decision Making 46 Need Recognition 47 Alternative Search 48 Alternative Evaluation 49 Purchase Decision 49 Postpurchase Evaluation 50

Conclusion 52

Chapter 4 Business, Government, and Institutional Buying 53

Categories of Organizational Buyers 53 Producers 53 Intermediaries 54 Government Agencies 54 Other Institutions 54

The Organizational Buying Process 54 Purchase-Type Influences on Organizational Buying 55

Straight Rebuy 55 Modified Rebuy 55 New Task Purchase 55

Structural Influences on Organizational Buying 56

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page xi

Revised Confirming Pages

xii Contents

Purchasing Roles 56 Organization-Specific Factors 57 Purchasing Policies and Procedures 57

Behavioral Influences on Organizational Buying 58

Personal Motivations 58 Role Perceptions 58

Stages in the Organizational Buying Process 60

Organizational Need 61 Vendor Analysis 61 Purchase Activities 61 Postpurchase Evaluation 61

Conclusion 63

Chapter 5 Market Segmentation 64

Delineate the Firm’s Current Situation 64 Determine Consumer Needs and Wants 65 Divide Markets on Relevant Dimensions 65

A Priori versus Post Hoc Segmentation 66 Relevance of Segmentation Dimensions 66 Bases for Segmentation 67

Develop Product Positioning 73 Decide Segmentation Strategy 74 Design Marketing Mix Strategy 75 Conclusion 76

PART C THE MARKETING MIX 77

Chapter 6 Product and Brand Strategy 78

Basic Issues in Product Management 78 Product Definition 78 Product Classification 79 Product Quality and Value 80 Product Mix and Product Line 81 Branding and Brand Equity 82 Packaging 86

Product Life Cycle 88 Product Adoption and Diffusion 91

The Product Audit 91 Deletions 91 Product Improvement 93

Organizing for Product Management 93 Conclusion 95

Chapter 7 New Product Planning and Development 96

New Product Strategy 97 New Product Planning and Development Process 99

Idea Generation 99 Idea Screening 101 Project Planning 102 Product Development 103 Test Marketing 103 Commercialization 104 The Importance of Time 104

Some Important New Product Decisions 105 Quality Level 105 Product Features 106 Product Design 106 Product Safety 107

Causes of New Product Failure 107 Need for Research 107

Conclusion 109

Chapter 8 Integrated Marketing Communications 110

Strategic Goals of Marketing Communication 110

Create Awareness 110 Build Positive Images 110 Identify Prospects 110 Build Channel Relationships 111 Retain Customers 111

The Promotion Mix 111 Integrated Marketing Communications 112 Advertising: Planning and Strategy 114

Objectives of Advertising 114 Advertising Decisions 114

The Expenditure Question 115 The Allocation Question 118

Sales Promotion 122 Push versus Pull Marketing 122 Trade Sales Promotions 123 Consumer Promotions 124 What Sales Promotion Can and Can’t Do 124

Public Relations 126 Direct Marketing 126 Conclusion 127 Appendix Major Federal Agencies Involved in Control of Advertising 129

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page xii

Revised Confirming Pages

Contents xiii

Chapter 9 Personal Selling, Relationship Building, and Sales Management 130

Importance of Personal Selling 130 The Sales Process 131

Objectives of the Sales Force 131 The Sales Relationship-Building Process 132 People Who Support the Sales Force 138

Managing the Sales and Relationship-Building Process 139

The Sales Management Task 139 Controlling the Sales Force 140 Motivating and Compensating Performance 144

Conclusion 144

Chapter 10 Distribution Strategy 146

The Need for Marketing Intermediaries 146 Classification of Marketing Intermediaries and Functions 146 Channels of Distribution 148 Selecting Channels of Distribution 149

Specific Considerations 149 Managing a Channel of Distribution 152

Relationship Marketing in Channels 152 Vertical Marketing Systems 152

Wholesaling 155 Store and Nonstore Retailing 156

Store Retailing 156 Nonstore Retailing 157

Conclusion 160

Chapter 11 Pricing Strategy 161

Demand Influences on Pricing Decisions 161 Demographic Factors 161 Psychological Factors 161 Price Elasticity 162

Supply Influences on Pricing Decisions 163 Pricing Objectives 163 Cost Considerations in Pricing 163 Product Considerations in Pricing 165

Environmental Influences on Pricing Decisions 166

Competition 166 Government Regulations 166

A General Pricing Model 167 Set Pricing Objectives 167 Evaluate Product–Price Relationships 167

Estimate Costs and Other Price Limitations 168 Analyze Profit Potential 169 Set Initial Price Structure 169 Change Price as Needed 170

Conclusion 170

PART D MARKETING IN SPECIAL FIELDS 171

Chapter 12 The Marketing of Services 172

Important Characteristics of Services 174 Intangibility 174 Inseparability 175 Perishability and Fluctuating Demand 176 Client Relationship 176 Customer Effort 177 Uniformity 178

Providing Quality Services 178 Customer Satisfaction Measurement 180 The Importance of Internal Marketing 180

Overcoming the Obstacles in Service Marketing 182 Limited View of Marketing 182 Limited Competition 182 Noncreative Management 183 No Obsolescence 183

The Service Challenge 184 Banking 184 Health Care 184 Insurance 185 Travel 185 Implications for Service Marketers 186

Conclusion 187

Chapter 13 Global Marketing 188

The Competitive Advantage of Nations 189 Organizing for Global Marketing 190

Problems with Entering Foreign Markets 190 Organizing the Multinational Company 193

Programming for Global Marketing 195 Global Marketing Research 195 Global Product Strategy 198 Global Distribution Strategy 198 Global Pricing Strategy 199 Global Advertising and Sales Promotion Strategy 199

Entry and Growth Strategies for Global Marketing 200 Conclusion 203

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page xiii

Revised Confirming Pages

xiv Contents

SECTION II ANALYZING MARKETING PROBLEMS AND CASES 205

A Case Analysis Framework 206 1. Analyze and Record the Current Situation 207 2. Analyze and Record Problems and Their Core Elements 211 3. Formulate, Evaluate, and Record Alternative Courses of Action 212 4. Select and Record the Chosen Alternative and Implementation Details 213

Pitfalls to Avoid in Case Analysis 213 Communicating Case Analyses 216

The Written Report 216 The Oral Presentation 218

Conclusion 218

SECTION III FINANCIAL ANALYSIS FOR MARKETING DECISIONS 219

Financial Analysis 220 Break-Even Analysis 220 Net Present Value Analysis 222 Ratio Analysis 224

Conclusion 228

SECTION IV DEVELOPING MARKETING PLANS 229

A Marketing Plan Framework 230 Title Page 231 Executive Summary 231 Table of Contents 232 Introduction 232 Situational Analysis 232 Marketing Planning 232 Implementation and Control of the Marketing Plan 234 Summary 236 Appendix—Financial Analysis 236 References 239

Conclusion 239

Chapter Notes 241

Index 248

pet29966_fm_i-xiv.qxd 11/20/09 2:27 PM Page xiv

Confirming Pages

Se ct

io n

I Es

se nt

ia ls

of M

ar ke

tin g

M an

ag em

en t

Introduction APart 1 Strategic Planning and the Marketing Management Process

pet29966_ch01_001-026.qxd 11/3/09 8:49 AM Page 1

Confirming Pages

Part A Introduction

2

Chapter 1 Strategic Planning and the Marketing Management Process The purpose of this introductory chapter is to present the marketing management process and outline what marketing managers must manage if they are to be effective. In doing so, it will also present a framework around which the remaining chapters are organized. Our first task is to review the organizational philosophy known as the marketing concept, since it underlies much of the thinking presented in this book. The remainder of this chapter will focus on the process of strategic planning and its relationship to the process of marketing planning.

THE MARKETING CONCEPT

Simply stated, the marketing concept means that an organization should seek to make a profit by serving the needs of customer groups. The concept is very straightforward and has a great deal of commonsense validity. Perhaps this is why it is often misunderstood, forgotten, or overlooked.

The purpose of the marketing concept is to rivet the attention of marketing managers on serving broad classes of customer needs (customer orientation), rather than on the firm’s current products (production orientation) or on devising methods to attract customers to current products (selling orientation). Thus, effective marketing starts with the recognition of customer needs and then works backward to devise products and services to satisfy these needs. In this way, marketing managers can satisfy customers more efficiently in the present and anticipate changes in customer needs more accurately in the future. This means that organizations should focus on building long-term customer relationships in which the initial sale is viewed as a beginning step in the process, not as an end goal. As a result, the customer will be more satisfied and the firm will be more profitable.

The principal task of the marketing function operating under the marketing concept is not to manipulate customers to do what suits the interests of the firm, but rather to find effective and efficient means of making the business do what suits the interests of customers. This is not to say that all firms practice marketing in this way. Clearly, many firms still emphasize only production and sales. However, effective marketing, as defined in this text, requires that consumer needs come first in organizational decision making.

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 2

Confirming Pages

One qualification to this statement deals with the question of a conflict between con- sumer wants and societal needs and wants. For example, if society deems clean air and water as necessary for survival, this need may well take precedence over a consumer’s want for goods and services that pollute the environment.

WHAT IS MARKETING?

Everyone reading this book has been a customer for most of his or her life. Last evening you stopped into a local supermarket to graze at the salad bar, pick up some bottled water and a bag of Fritos corn chips. While you were there, you snapped a $1.00 coupon for a new flavor salad dressing out of a dispenser and tasted some new breakfast potatoes being cooked in the back of the store. As you sat down at home to eat your salad, you answered the phone and someone suggested that you need to have your carpets cleaned. Later on in the evening you saw TV commercials for tires, soft drinks, athletic shoes, and the dangers of smoking and drinking dur- ing pregnancy. Today when you enrolled in a marketing course, you found that the instructor has decided that you must purchase this book. A friend has already purchased the book on the Internet. All of these activities involve marketing. And each of us knows something about mar- keting because it has been a part of our life since we had our first dollar to spend.

Since we are all involved in marketing, it may seem strange that one of the persistent prob- lems in the field has been its definition.1 The American Marketing Association defines mar- keting as “an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.”2 This definition takes into account all parties involved in the marketing effort: members of the producing organization, resellers of goods and services, and customers or clients. While the broadness of the definition allows the inclusion of nonbusiness

1. Create customer focus throughout the business. 2. Listen to the customer. 3. Define and nurture your distinctive competence, that is, what your organization does

well, better than competitors. 4. Define marketing as market intelligence. 5. Target customers precisely. 6. Manage for profitability, not sales volume. 7. Make customer value the guiding star. 8. Let customers define quality. 9. Measure and manage customer expectations.

10. Build customer relationships and loyalty. 11. Define the business as a service business. 12. Commit to continuous improvement and innovation. 13. Manage the culture of your organization along with strategy and structure. 14. Grow with strategic partners and alliances. 15. Destroy marketing bureaucracy.

Source: See Frederick E. Webster, Jr., “Defining the New Marketing Concept,” Marketing Management 2, no. 4 (1994), pp. 22–31. For a classic discussion see Robert L. King, “The Marketing Concept: Fact or Intelligent Platitude,” The Marketing Concept in Action, Proceedings of the 47th National Conference (Chicago, American Marketing Association, 1964), p. 657. Adapted from William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 9.

MARKETING INSIGHT Some Guidelines for Executing a Marketing Philosophy 1–1

3

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 3

Confirming Pages

exchange processes, the primary emphasis in this text is on marketing in the business environ- ment. However, this emphasis is not meant to imply that marketing concepts, principles, and techniques cannot be fruitfully employed in other areas of exchange as is clearly illustrated in Figure 1.1.

WHAT IS STRATEGIC PLANNING?

Before a production manager, marketing manager, and personnel manager can develop plans for their individual departments, some larger plan or blueprint for the entire organization should exist. Otherwise, on what would the individual departmental plans be based?

In other words, there is a larger context for planning activities. Let us assume that we are dealing with a large business organization that has several business divisions and several product lines within each division (e.g., General Electric, Altria). Before individual divisions or departments can implement any marketing planning, a plan has to be developed for the entire organization.3 This means that senior managers must look toward the future and eval- uate their ability to shape their organization’s destiny in the years and decades to come. The output of this process is objectives and strategies designed to give the organization a chance to compete effectively in the future. The objectives and strategies established at the top level provide the context for planning in each of the divisions and departments by divisional and departmental managers.

Strategic Planning and Marketing Management Some of the most successful business organizations are here today because many years ago they offered the right product at the right time to a rapidly growing market. The same can also be said for nonprofit and governmental organizations. Many of the critical decisions of the past were made without the benefit of strategic thinking or planning. Whether these decisions were based on wisdom or were just luck is not important; they worked for these organizations. However, a worse fate befell countless other organizations. Over three- quarters of the 100 largest U.S. corporations of 70 years ago have fallen from the list. These corporations at one time dominated their markets, controlled vast resources, and had the best-trained workers. In the end, they all made the same critical mistake. Their manage- ments failed to recognize that business strategies need to reflect changing environments

FIGURE 1.1 Major Types of Marketing

Type Description Example

Product Marketing designed to create exchange Strategies to sell for tangible products. Gateway computers.

Service Marketing designed to create exchanges Strategies by Allstate for intangible products. to sell insurance.

Person Marketing designed to create favorable Strategies to elect actions toward persons. a political candidate.

Place Marketing designed to attract people to Strategies to get places. people to vacation

in national or state parks.

Cause Marketing designed to create support Strategies to get for ideas, causes, or issues or to get pregnant women not people to change undesirable to drink alcohol. behaviors.

Organization Marketing designed to attract donors, Strategies designed to members, participants, or attract blood donors. volunteers.

4 Part A Introduction

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 4

Confirming Pages

and emphasis must be placed on developing business systems that allow for continuous improvement. Instead, they attempted to carry on business as usual.

Present-day managers are increasingly recognizing that wisdom and innovation alone are no longer sufficient to guide the destinies of organizations, both large and small. These same managers also realize that the true mission of the organization is to provide value for three key constituencies: customers, employees, and investors. Without this type of outlook, no one, including shareholders, will profit in the long run.

Strategic planning includes all the activities that lead to the development of a clear organizational mission, organizational objectives, and appropriate strategies to achieve the objectives for the entire organization. The form of the process itself has come under criti- cism in some quarters for being too structured; however, strategic planning, if performed successfully, plays a key role in achieving an equilibrium between the short and the long term by balancing acceptable financial performance with preparation for inevitable changes in markets, technology, and competition, as well as in economic and political arenas. Managing principally for current cash flows, market share gains, and earnings trends can mortgage the firm’s future. An intense focus on the near term can produce an aversion to risk that dooms a business to stagnation. Conversely, an overemphasis on the long run is just as inappropriate. Companies that overextend themselves betting on the future may penalize short-term profitability and other operating results to such an extent that the company is vulnerable to takeover and other threatening actions.

The strategic planning process is depicted in Figure 1.2. In the strategic planning process the organization gathers information about the changing elements of its environment. Man- agers from all functional areas in the organization assist in this information-gathering process. This information is useful in aiding the organization to adapt better to these changes through the process of strategic planning. The strategic plan(s)4 and supporting plan are then implemented in the environment. The end results of this implementation are fed back as new information so that continuous adaptation and improvement can take place.

The Strategic Planning Process The output of the strategic planning process is the development of a strategic plan. Figure 1.2 indicates four components of a strategic plan: mission, objectives, strategies, and portfolio plan. Let us carefully examine each one.

Organizational Mission The organization’s environment provides the resources that sustain the organization, whether it is a business, a college or university, or a government agency. In exchange for

1. It costs a great deal more to acquire a new customer than to keep an old one. 2. Loyal customers buy more from your firm over time. 3. The longer you keep a customer, the more profitable they become over time. 4. It costs less to service loyal customers than new customers. 5. Loyal customers are often excellent referrals for new business. 6. Loyal customers are often willing to pay more for the quality and value they desire.

Source: One of the earliest works on the value of the loyal customer was Frederick F. Reichheld, The Loyalty Effect, HBS Press, 1996. Also see Roland T. Rust, Katherine N. Lemon, and Valerie A. Zeithamel, “Return on Marketing: Using Customer Equity to Focus Marketing Strategies,“ Journal of Marketing, January, 2004, pp. 76–89, William O. Bearden, Thomas N. Ingram, and Raymond W. LaForge, Marketing: Principles and Perspectives, 5th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2007), p. 8, and W. D. Perreault Jr., J. P. Cannon, and E. Jerome McCarthy. Basic Marketing: A Marketing Strategy Planning Approach, 17th ed. (Burr Ridge, IL: McGraw- Hill/Irwin, 2009, pp. 19–20.

MARKETING INSIGHT The Long-Term Value of Loyal Customers

5

1–2

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 5

Confirming Pages

these resources, the organization must supply the environment with quality goods and services at an acceptable price. In other words, every organization exists to accomplish something in the larger environment and that purpose, vision, or mission usually is clear at the organization’s inception. As time passes, however, the organization expands, and the environment and managerial personnel change. As a result, one or more things are likely to occur. First, the organization’s original purpose may become irrelevant as the organization expands into new products, new markets, and even new industries. For example, Levi Strauss began as a manufacturer of work clothes. Second, the original mission may remain relevant, but managers begin to lose interest in it. Finally, changes in the environment may make the original mission inappropriate, as occurred with the March of Dimes when a cure was found for polio. The result of any or all three of these conditions is a “drifting” organization, without a clear mission, vision, or purpose to guide critical de- cisions. When this occurs, management must search for a purpose or emphatically restate and reinforce the original purpose.

The mission statement, or purpose, of an organization is the description of its reason for existence. It is the long-run vision of what the organization strives to be, the unique aim that differentiates the organization from similar ones and the means by which this differentiation will take place. In essence, the mission statement defines the direction in which the organization is heading and how it will succeed in reaching its desired goal. While some argue that vision and mission statements differ in their purpose, the perspec- tive we will take is that both reflect the organization’s attempt to guide behavior, create a culture, and inspire commitment.5 However, it is more important that the mission statement comes from the heart and is practical, easy to identify with, and easy to remember so that it will provide direction and significance to all members of the organi- zation regardless of their organizational level.

The basic questions that must be answered when an organization decides to examine and restate its mission are, What is our business? Who is the customer? What do customers

6 Part A Introduction

FIGURE 1.2 The Strategic Planning Process

Organizational mission

Organizational objectives

Organizational strategies

Organizational portfolio plan

The organization’s strategic plan

Implementation

Information

The environment

Cooperative Competitive Economic Social Political Legal

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 6

Confirming Pages

Organization Mission

Community bank To help citizens successfully achieve and celebrate important life events with education, information, products, and services.

Skin care products We will provide luxury skin-care products with therapeutic qualities that make them worth their premium price.

Hotel chain Grow a worldwide lodging business using total-quality-management (TQM) principles to continuously improve preference and profitability. Our commitment is that every guest leaves satisfied.

Mid-size bank We will become the best bank in the state for medium-size businesses by 2015.

value? and What will our business be?6 The answers are, in a sense, the assumptions on which the organization is being run and from which future decisions will evolve. While such questions may seem simplistic, they are such difficult and critical ones that the major responsibility for answering them must lie with top management. In fact, the mission statement remains the most widely used management tool in business today. In developing a statement of mission, management must take into account three key elements: the orga- nization’s history, its distinctive competencies, and its environment.7

1. The organization’s history. Every organization—large or small, profit or nonprofit— has a history of objectives, accomplishments, mistakes, and policies. In formulating a mission, the critical characteristics and events of the past must be considered.

2. The organization’s distinctive competencies. While there are many things an organization may be able to do, it should seek to do what it can do best. Distinctive competencies are things that an organization does well—so well in fact that they give it an advantage over similar organizations. For Honeywell, it’s their ability to design, manufac- ture, and distribute a superior line of thermostats.8 Similarly, Procter & Gamble’s distinctive competency is its knowledge of the market for low-priced, repetitively purchased consumer products. No matter how appealing an opportunity may be, to gain advantage over competi- tors, the organization must formulate strategy based on distinctive competencies.

3. The organization’s environment. The organization’s environment dictates the oppor- tunities, constraints, and threats that must be identified before a mission statement is developed. For example, managers in any industry that is affected by Internet technology breakthroughs should continually be asking, How will the changes in technology affect my customers’ behavior and the means by which we need to conduct our business?

However, it is extremely difficult to write a useful and effective mission statement. It is not uncommon for an organization to spend one or two years developing a useful mission statement. When completed, an effective mission statement will be focused on markets rather than products, achievable, motivating, and specific.9

Focused on Markets Rather than Products The customers or clients of an organization are critical in determining its mission. Traditionally, many organizations defined their busi- ness in terms of what they made (“our business is glass”), and in many cases they named the organization for the product or service (e.g., American Tobacco, Hormel Meats, National Cash Register, Harbor View Savings and Loan Association). Many of these organizations have found that, when products and technologies become obsolete, their mis- sion is no longer relevant and the name of the organization may no longer describe what it does. Thus, a more enduring way of defining the mission is needed. In recent years,

MARKETING INSIGHT Some Actual Mission Statements

7

1–3

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 7

Confirming Pages

therefore, a key feature of mission statements has been an external rather than internal focus. In other words, the mission statement should focus on the broad class of needs that the organization is seeking to satisfy (external focus), not on the physical product or serv- ice that the organization is offering at present (internal focus). These market-driven firms stand out in their ability to continuously anticipate market opportunities and respond before their competitors. Peter Drucker has clearly stated this principle:

A business is not defined by the company’s name, statutes, or articles of incorporation. It is defined by the want the customer satisfies when he buys a product or service. To satisfy the customer is the mission and purpose of every business. The question “What is our business?” can, therefore, be answered only by looking at the business from the outside, from the point of view of customer and market.10

While Drucker was referring to business organizations, the same necessity exists for both nonprofit and governmental organizations. That necessity is to state the mission in terms of serving a particular group of clients or customers and meeting a particular class of need. Achievable While the mission statement should stretch the organization toward more effective performance, it should, at the same time, be realistic and achievable. In other words, it should open a vision of new opportunities but should not lead the organization into unrealistic ventures far beyond its competencies.

8

Organizational Processes

Southwest pioneered a point-to-point route system contrasting with the hub-and-spoke design used by many conventional airlines. The value proposition consists of low fares and limited services (e.g., no in-flight meals). Major emphasis throughout the organization is on building a loyal customer base. Operating costs are kept low by using a single aircraft type, minimizing the time between a plane landing and taking off, no assigned seating, and developing strong customer loyalty (lower selling costs). The business model is characterized by “keeping it simple.”

Skills and Accumulated Knowledge

Southwest has developed impressive skills in operating its business model at very low cost. Accumulated knowledge has guided management in improving its business design over time. The business model is being leveraged to drive more non-flying revenue, such as hotel booking from its Web site and charging for a broader array of services. Additional directions identified include carrying more cargo, international flights and alliances with other carriers, and in-flight Internet services.

Coordination of Activities

Coordination of activities is facilitated by the point-to-point business model. High aircraft utilization, simplification of functions, and limited passenger services enable manage- ment efficiency, and the provision of on-time, point-to-point services offered on a frequent basis.

Assets

Very low operating costs. Loyal customer base. High employee esprit de corps.

Source: Wendy Zellner, “Dressed to Kill,” Business Week, February 21, 2005, 58–59. Doug Cameron “South- west Seeks New Sources of Revenue,” Financial Times, Friday, April 20, 2007, 24. David W. Cravens and Nigel F. Piercy, Strategic Marketing, 9th ed., (Burr Ridge, IL: McGraw-Hill/Irwin, 2009), p. 5.

MARKETING INSIGHT The Distinctive Competencies of Southwest Airlines 1–4

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 8

Confirming Pages

9

Motivational One of the side (but very important) benefits of a well-defined mission is the guidance it provides employees and managers working in geographically dispersed units and on independent tasks. It provides a shared sense of purpose outside the various activities taking place within the organization. Therefore, such end results as sales, patients cared for, students graduated, and reduction in violent crimes can then be viewed as the result of careful pursuit and accomplishment of the mission and not as the mission itself. Specific As we mentioned earlier, public relations should not be the primary purpose of a statement of mission. It must be specific to provide direction and guidelines to manage- ment when they are choosing between alternative courses of action. In other words, “to pro- duce the highest-quality products at the lowest possible cost” sounds very good, but it does not provide direction for management.

Organizational Objectives Organizational objectives are the end points of an organization’s mission and are what it seeks through the ongoing, long-run operations of the organization. The organizational mis- sion is distilled into a finer set of specific and achievable organizational objectives. These objectives must be specific, measurable, action commitments by which the mission of the organization is to be achieved.

As with the statement of mission, organizational objectives are more than good inten- tions. In fact, if formulated properly, they can accomplish the following:

1. They can be converted into specific action. 2. They will provide direction. That is, they can serve as a starting point for more specific

and detailed objectives at lower levels in the organization. Each manager will then know how his or her objectives relate to those at higher levels.

3. They can establish long-run priorities for the organization. 4. They can facilitate management control because they serve as standards against which

overall organizational performance can be evaluated.

Organizational objectives are necessary in all areas that may influence the performance and long-run survival of the organization. As shown in Figure 1.3 objectives can be estab- lished in and across many areas of the organization. The list provided in Figure 1.3 is by no

1. Incomplete—not specific as to where the company is headed and what kind of company management is trying to create.

2. Vague—does not provide direction to decision makers when faced with product/market choices.

3. Not motivational—does not provide a sense of purpose or commitment to something bigger than the numbers.

4. Not distinctive—not specific to our company. 5. Too reliant on superlatives—too many superlatives such as #1, recognized leader, most

successful. 6. Too generic—does not specify the business or industry to which it applies. 7. Too broad—does not rule out any opportunity management might wish to pursue.

Source: Adapted from Arthur A. Thomson, Jr., A. J. Strickland III, and John E. Gamble, Crafting and Executing Strategy, 16th ed. (Burr Ridge, IL: McGraw-Hill/Irwin 2008), p. 21.

Examine, Marketing Insight 1–3. Do any of the above shortcomings apply to the mission statements in Marketing Highlight 1–3?

MARKETING INSIGHT Common Shortcomings in Mission Statements 1–5

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 9

Confirming Pages

means exhaustive. For example, some organizations are specifying the primary objective as the attainment of a specific level of quality, either in the marketing of a product or the providing of a service. These organizations believe that objectives should reflect an organi- zation’s commitment to the customer rather than its own finances. Obviously, during the strategic planning process conflicts are likely to occur between various functional depart- ments in the organization. The important point is that management must translate the orga- nizational mission into specific objectives that support the realization of the mission. The objectives may flow directly from the mission or be considered subordinate necessities for carrying out the mission. As discussed earlier, the objectives are specific, measurable, action commitments on the part of the organization.

What They May What Marketers May Functions Want to Deliver Want Them to Deliver

Research and development Basic research projects Products that deliver customer value Product features Customer benefits Few projects Many new products

Production/operations Long production runs Short production runs Standardized products Customized products No model changes Frequent model changes Long lead times Short lead times Standard orders Customer orders No new products Many new products

Finance Rigid budgets Flexible budgets Budgets based on return Budgets based on need to on investment increase sales Low sales commissions High sales commissions

Accounting Standardized billing Custom billing Strict payment terms Flexible payment terms Strict credit standards Flexible credit standards

Human resources Trainable employees Skilled employees Low salaries High salaries

MARKETING INSIGHT Potential Sources of Cross-Functional Conflict for Marketers

10

1–6

FIGURE 1.3 Sample Organizational Objectives (manufacturing firm)

Area of Performance Possible Objective

1. Market standing To make our brands number one in their field in terms of market share.

2. Innovations To be a leader in introducing new products by spending no less than 7 percent of sales for research and development.

3. Productivity To manufacture all products efficiently as measured by the productivity of the workforce.

4. Physical and financial resources To protect and maintain all resources—equipment, build- ings, inventory, and funds.

5. Profitability To achieve an annual rate of return on investment of at least 15 percent.

6. Manager performance To identify critical areas of management depth and and responsibility succession.

7. Worker performance and attitude To maintain levels of employee satisfaction consistent with our own and similar industries.

8. Social responsibility To respond appropriately whenever possible to societal expectations and environmental needs.

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 10

Confirming Pages

Chapter One Strategic Planning and the Marketing Management Process 11

Organizational Strategies Hopefully, when an organization has formulated its mission and developed its objectives, it knows where it wants to go. The next managerial task is to develop a “grand design” to get there. This grand design constitutes the organizational strategies. Strategy involves the choice of major directions the organization will take in pursuing its objectives. Toward this end, it is critical that strategies are consistent with goals and objectives and that top man- agement ensures strategies are implemented effectively. As many as 60 percent of strategic plans have failed because the strategies in them were not well defined and, thus, could not be implemented effectively.11 What follows is a discussion of various strategies organiza- tions can pursue. We discuss three approaches: (1) strategies based on products and mar- kets, (2) strategies based on competitive advantage, and (3) strategies based on value. Organizational Strategies Based on Products and Markets One means to developing organizational strategies is to focus on the directions the organization can take in order to grow. Figure 1.4, which presents the available strategic choices, is a product–market matrix.12 It indicates that an organization can grow by better managing what it is presently doing or by finding new things to do. In choosing one or both of these paths, it must also decide whether to concentrate on present customers or to seek new ones. Thus, according to Figure 1.4, there are only four paths an organization can take in order to grow. Market Penetration Strategies These strategies focus primarily on increasing the sale of present products to present customers. For example:

• Encouraging present customers to use more of the product: “Orange Juice Isn’t Just for Breakfast Anymore.”

• Encouraging present customers to purchase more of the product: multiple packages of Pringles, instant winner sweepstakes at a fast-food restaurant.

• Directing programs at current participants: A university directs a fund-raising program at those graduates who already give the most money.

Tactics used to implement a market penetration strategy might include price reductions, ad- vertising that stresses the many benefits of the product (e.g., “Milk Is a Natural”), packaging the product in different-sized packages, or making it available at more locations. Other functional areas of the business could also be involved in implementing the strategy in addition to mar- keting. A production plan might be developed to produce the product more efficiently. This plan might include increased production runs, the substitution of preassembled components for in- dividual product parts, or the automation of a process that previously was performed manually. Market Development Strategies Pursuing growth through market development, an organization would seek to find new customers for its present products. For example:

• Arm & Hammer continues to seek new uses for its baking soda. • McDonald’s continually seeks expansion into overseas markets. • As the consumption of salt declined, the book 101 Things You Can Do with Salt Besides

Eat It appeared.

Products Present Products New Products

Markets

Present customers Market penetration Product development

New customers Market development Diversification

FIGURE 1.4 Organizational Growth Strategies

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 11

Confirming Pages

Market development strategies involve much, much more than simply getting the prod- uct to a new market. Before deciding on marketing techniques such as advertising and packaging, companies often find they must establish a clear position in the market, some- times spending large sums of money simply to educate consumers as to why they should consider buying the product. Product Development Strategies Selecting one of the remaining two strategies means the organization will seek new things to do. With this particular strategy, the new products developed would be directed primarily to present customers. For example:

• Offering a different version of an existing product: mini-Oreos, Ritz with cheese. • Offering a new and improved version of their product: Gillette’s latest improvement in

shaving technology. • Offering a new way to use an existing product: Vaseline’s Lip Therapy.

Diversification This strategy can lead the organization into entirely new and even unre- lated businesses. It involves seeking new products (often through acquisitions) for cus- tomers not currently being served. For example:

• Altria, originally a manufacturer of cigarettes, is widely diversified in financial services, Post cereals, Sealtest dairy, and Kraft cheese, among others.

• Brown Foreman Distillers acquired Hartmann Luggage, and Sara Lee acquired Coach Leather Products.

• Some universities are establishing corporations to find commercial uses for faculty research.

Organizational Strategies Based on Competitive Advantage Michael Porter developed a model for formulating organizational strategy that is applicable across a wide variety of industries.13 The focus of the model is on devising means to gain competitive advantage. Competitive advantage is an ability to outperform competitors in providing something that the market values. Porter suggests that firms should first analyze their industry and then develop either a cost leadership strategy or a strategy based on differentiation. These general strategies can be used on marketwide bases or in a niche (segment) within the total market.

Using a cost leadership strategy, a firm would focus on being the low-cost company in its industry. They would stress efficiency and offer a standard, no-frills product. They could achieve this through efficiencies in production, product design, manufacturing, distribution, technology, or some other means. The important point is that to succeed, the organization must continually strive to be the cost leader in the industry or market segment it competes in. It must also offer products or services that are acceptable to customers when compared to the competition. Walmart, Southwest Airlines, and Timex Group Ltd. are com- panies that have succeeded in using a cost leadership strategy.

Using a strategy based on differentiation, a firm seeks to be unique in its industry or market segment along particular dimensions that the customers value. These dimensions might pertain to design, quality, service, variety of offerings, brand name, or some other factor. The important point is that because of uniqueness of the product or service along one or more of these dimensions, the firm can charge a premium price. L. L. Bean, Rolex, Coca- Cola, and Microsoft are companies that have succeeded using a differentiation strategy.

Organizational Strategies Based on Value As competition increases, the concept of “customer value” has become critical for marketers as well as customers. It can be thought of as an extension of the marketing concept philosophy that focuses on developing and delivering superior value to customers as a way to achieve organizational objectives. Thus, it focuses not only on customer needs, but also on the question, How can we create value for them and still achieve our objectives?

12 Part A Introduction

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 12

Confirming Pages

Chapter One Strategic Planning and the Marketing Management Process 13

It has become pretty clear that in today’s competitive environment it is unlikely that a firm will succeed by trying to be all things to all people.14 Thus, to succeed firms must seek to build long-term relationships with their customers by offering a unique value that only they can offer. It seems that many firms have succeeded by choosing to deliver superior customer value using one of three value strategies—best price, best product, or best service.

Dell Computers, Costco, and Southwest Airlines are among the success stories in offer- ing customers the best price. Rubbermaid, Nike, Starbucks, and Microsoft believe they offer the best products on the market. Airborne Express, Roadway, Cott Corporation, and Lands’ End provide superior customer value by providing outstanding service.

Choosing an Appropriate Strategy On what basis does an organization choose one (or all) of its strategies? Of extreme importance are the directions set by the mission statement. Management should select those strategies consistent with its mission and capitalize on the organization’s distinctive com- petencies that will lead to a sustainable competitive advantage. A sustainable competitive advantage can be based on either the assets or skills of the organization. Technical superi- ority, low-cost production, customer service/product support, location, financial resources, continuing product innovation, and overall marketing skills are all examples of distinctive competencies that can lead to a sustainable competitive advantage. For example, Honda is known for providing quality automobiles at a reasonable price. Each succeeding generation of Honda automobiles has shown marked quality improvements over previous generations. Likewise, VF Corporation, manufacturer of Wrangler and Lee jeans, has formed “quick response” partnerships with both discounters and department stores to ensure the effi- ciency of product flow. The key to sustaining a competitive advantage is to continually focus and build on the assets and skills that will lead to long-term performance gains.

Organizational Portfolio Plan The final phase of the strategic planning process is the formulation of the organizational portfolio plan. In reality, most organizations at a particular time are a portfolio of businesses, that is, product lines, divisions, and schools. To illustrate, an appliance manufacturer may have several product lines (e.g., televisions, washers and dryers, refrigerators, stereos) as well as two divisions, consumer appliances and industrial appliances. A college or university will have numerous schools (e.g., education, business, law, architecture) and several pro- grams within each school. Some widely diversified organizations such as Altria are in nu- merous unrelated businesses, such as cigarettes, food products, land development, and industrial paper products.

Managing such groups of businesses is made a little easier if resources are plentiful, cash is plentiful, and each is experiencing growth and profits. Unfortunately, providing larger and larger budgets each year to all businesses is seldom feasible. Many are not experiencing growth, and profits and resources (financial and nonfinancial) are becoming more and more scarce. In such a situation, choices must be made, and some method is nec- essary to help management make the choices. Management must decide which businesses to build, maintain, or eliminate, or which new businesses to add. Indeed, much of the recent activity in corporate restructuring has centered on decisions relating to which groups of businesses management should focus on.

Obviously, the first step in this approach is to identify the various divisions, product lines, and so on that can be considered a “business.” When identified, these are referred to as strategic business units (SBUs) and have the following characteristics:

• They have a distinct mission. • They have their own competitors.

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 13

Confirming Pages

14 Part A Introduction

• They are a single business or collection of related businesses. • They can be planned independently of the other businesses of the total organization.

Thus, depending on the type of organization, an SBU could be a single product, product line, or division; a college of business administration; or a state mental health agency. Once the organization has identified and classified all of its SBUs, some method must be established to determine how resources should be allocated among the various SBUs. These methods are known as portfolio models. For those readers interested, the appendix of this chapter presents two of the most popular portfolio models, the Boston Consulting Group model and the General Electric model.

The Complete Strategic Plan Figure 1.2 indicates that at this point the strategic planning process is complete, and the organization has a time-phased blueprint that outlines its mission, objectives, and strategies. Completion of the strategic plan facilitates the development of marketing plans for each product, product line, or division of the organization. The marketing plan serves as a sub- set of the strategic plan in that it allows for detailed planning at a target market level. This important relationship between strategic planning and marketing planning is the subject of the final section of this chapter.

THE MARKETING MANAGEMENT PROCESS

Marketing management can be defined as “the process of planning and executing the conception, pricing, promotion, and distribution of goods, services, and ideas to create exchanges with target groups that satisfy customer and organizational objectives.”15 It should be noted that this definition is entirely consistent with the marketing concept, since it emphasizes serving target market needs as the key to achieving organizational objectives. The remainder of this section will be devoted to a discussion of the marketing management process according to the model in Figure 1.5.

Situation Analysis With a clear understanding of organizational objectives and mission, the marketing manager must then analyze and monitor the position of the firm and, specifically, the marketing department, in terms of its past, present, and future situation. Of course, the future situation is of primary concern. However, analyses of past trends and the current situation are most useful for predicting the future situation.

The situation analysis can be divided into six major areas of concern: (1) the coopera- tive environment; (2) the competitive environment; (3) the economic environment; (4) the social environment; (5) the political environment; and (6) the legal environment. In ana- lyzing each of these environments, the marketing executive must search both for opportu- nities and for constraints or threats to achieving objectives. Opportunities for profitable marketing often arise from changes in these environments that bring about new sets of needs to be satisfied. Constraints on marketing activities, such as limited supplies of scarce resources, also arise from these environments.

The Cooperative Environment The cooperative environment includes all firms and indi- viduals who have a vested interest in the firm’s accomplishing its objectives. Parties of pri- mary interest to the marketing executive in this environment are (1) suppliers, (2) resellers, (3) other departments in the firm, and (4) subdepartments and employees of the marketing department. Opportunities in this environment are primarily related to methods of increas- ing efficiency. For example, a company might decide to switch from a competitive bid process of obtaining materials to a single source that is located near the company’s plant.

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 14

Confirming Pages

Likewise, members of the marketing, engineering, and manufacturing functions may use a teamwork approach to developing new products versus a sequential approach. Constraints consist of such things as unresolved conflicts and shortages of materials. For example, a company manager may believe that a distributor is doing an insufficient job of promoting and selling the product, or a marketing manager may feel that manufacturing is not taking the steps needed to produce a quality product.

The Competitive Environment The competitive environment includes primarily other firms in the industry that rival the organization for both resources and sales. Opportunities in this environment include such things as (1) acquiring competing firms; (2) offering demonstrably better value to consumers and attracting them away from competitors; and (3) in some cases, driving competitors out of the industry. For example, one airline pur- chases another airline, a bank offers depositors a free checking account with no minimum balance requirements, or a grocery chain engages in an everyday low-price strategy that competitors can’t meet. The primary constraints in these environments are the demand stimulation activities of competing firms and the number of consumers who cannot be lured away from competition.

The Economic Environment The state of the macroeconomy and changes in it also bring about marketing opportunities and constraints. For example, such factors as high inflation and unemployment levels can limit the size of the market that can afford to purchase a firm’s top-of-the-line product. At the same time, these factors may offer a profitable opportunity to develop rental services for such products or to develop less- expensive models of the product. In addition, changes in technology can provide signifi- cant threats and opportunities. For example, in the communications industry, when technology was developed to a level where it was possible to provide cable television using phone lines, such a system posed a severe threat to the cable industry.

Chapter One Strategic Planning and the Marketing Management Process 15

The strategic plan Organizational mission Organizational objectives Organizational strategies Organizational portfolio plan

Implementation and control

Marketing information system and marketing research

The marketing plan Situation analysis Marketing objectives Target market selection Marketing mix Product strategy Promotion strategy Pricing strategy Distribution strategy

FIGURE 1.5 Strategic Planning and Marketing Planning

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 15

Confirming Pages

The Social Environment This environment includes general cultural and social tradi- tions, norms, and attitudes. While these values change slowly, such changes often bring about the need for new products and services. For example, a change in values concerning the desirability of large families brought about an opportunity to market better methods of birth control. On the other hand, cultural and social values also place constraints on marketing activities. As a rule, business practices that are contrary to social values become political issues, which are often resolved by legal constraints. For example, public demand for a cleaner environment has caused the government to require that automobile manu- facturers’ products meet certain average gas mileage and emission standards.

The Political Environment The political environment includes the attitudes and reactions of the general public, social and business critics, and other organizations, such as the Bet- ter Business Bureau. Dissatisfaction with such business and marketing practices as unsafe products, products that waste resources, and unethical sales procedures can have adverse effects on corporation image and customer loyalty. However, adapting business and mar- keting practices to these attitudes can be an opportunity. For example, these attitudes have

16

Speed of the Process. There is the problem of either being so slow that the process seems to go on forever or so fast that there is an extreme burst of activity to rush out a plan. Amount of Data Collected. Sufficient data are needed to properly estimate customer needs and competitive trends. However, the law of diminishing returns quickly sets in on the data-collection process. Responsibility for Developing the Plan. If planning is delegated to professional planners, valuable line management input may be ignored. If the process is left to line man- agers, planning may be relegated to secondary status. Structure. Many executives believe the most important part of planning is not the plan itself but the structure of thought about the strategic issues facing the business. However, the structure should not take precedence over the content so that planning becomes merely filling out forms or crunching numbers. Length of the Plan. The length of a marketing plan must be balanced between being so long that both staff and line managers ignore it and so brief that it ignores key details. Frequency of Planning. Too frequent reevaluation of strategies can lead to erratic firm behavior. However, when plans are not revised frequently enough, the business may not adapt quickly enough to environmental changes and thus suffer a deterioration in its competitive position. Number of Alternative Strategies Considered. Discussing too few alternatives raises the likelihood of failure, whereas discussing too many increases the time and cost of the planning effort. Cross-Functional Acceptance. A common mistake is to view the plan as the proprietary possession of marketing. Successful implementation requires a broad consensus, in- cluding other functional areas. Using the Plan as a Sales Document. A major but often overlooked purpose of a plan and its presentation is to generate funds from either internal or external sources. Therefore, the better the plan, the better the chance of gaining desired funding. Senior Management Leadership. Commitment from senior management is essential to the success of a marketing planning effort. Tying Compensation to Successful Planning Efforts. Management compensation should be oriented toward the achievement of objectives stated in the plan.

Source: Donald R. Lehmann and Russell S. Winer, Analysis for Marketing Planning, 6th ed. (Burr Ridge, IL: McGraw-Hill//Irwin, 2008), chap. 1.

MARKETING INSIGHT Key Issues in the Marketing Planning Process That Need to Be Addressed 1–7

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 16

Confirming Pages

brought about markets for such products as unbreakable children’s toys, high-efficiency air conditioners, and more economical automobiles.

The Legal Environment This environment includes a host of federal, state, and local legislation directed at protecting both business competition and consumer rights. In past years, legislation reflected social and political attitudes and has been primarily directed at constraining business practices. Such legislation usually acts as a constraint on business behavior, but again can be viewed as providing opportunities for marketing safer and more efficient products. In recent years, there has been less emphasis on creating new laws for constraining business practices. As an example, deregulation has become more common, as evidenced by events in the airlines, financial services, and telecommunications industries.

Marketing Planning The previous sections emphasized that (1) marketing activities must be aligned with organizational objectives and (2) marketing opportunities are often found by systematically analyzing situational environments. Once an opportunity is recognized, the marketing execu- tive must then plan an appropriate strategy for taking advantage of the opportunity. This process can be viewed in terms of three interrelated tasks: (1) establishing marketing objec- tives, (2) selecting the target market, and (3) developing the marketing mix. Establishing Objectives Marketing objectives usually are derived from organizational objectives; in some cases where the firm is totally marketing oriented, the two are identical. In either case, objectives must be specified and performance in achieving them should be measurable. Marketing objectives are usually stated as standards of performance (e.g., a certain percentage of market share or sales volume) or as tasks to be achieved by given dates. While such objectives are useful, the marketing concept emphasizes that profits rather than sales should be the overriding objective of the firm and marketing department. In any case, these objectives provide the framework for the marketing plan. Selecting the Target Market The success of any marketing plan hinges on how well it can identify customer needs and organize its resources to satisfy them profitably. Thus, a crucial element of the marketing plan is selecting the groups or segments of potential customers the firm is going to serve with each of its products. Four important questions must be answered:

1. What do customers want or need? 2. What must be done to satisfy these wants or needs? 3. What is the size of the market? 4. What is its growth profile?

Present target markets and potential target markets are then ranked according to (1) prof- itability; (2) present and future sales volume; and (3) the match between what it takes to appeal successfully to the segment and the organization’s capabilities. Those that appear to offer the greatest potential are selected. One cautionary note on this process involves the importance of not neglecting present customers when developing market share and sales strategies. A recent study found that for every 10 companies that develop strategies aimed at increasing the number of first-time customers, only 4 made any serious effort to develop strategies geared toward retaining present customers and increasing their purchases.16

Chapters 3, 4, and 5 are devoted to discussing consumer behavior, industrial buyers, and market segmentation.

Developing the Marketing Mix The marketing mix is the set of controllable variables that must be managed to satisfy the target market and achieve organizational objectives.

Chapter One Strategic Planning and the Marketing Management Process 17

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 17

Confirming Pages

These controllable variables are usually classified according to four major decision areas: product, price, promotion, and place (or channels of distribution). The importance of these decision areas cannot be overstated, and in fact, the major portion of this text is devoted to analyzing them. Chapters 6 and 7 are devoted to product and new product strategies, Chapters 8 and 9 to promotion strategies in terms of both nonpersonal and per- sonal selling, Chapter 10 to distribution strategies, and Chapter 11 to pricing strategies. In addition, marketing mix variables are the focus of analysis in two chapters on market- ing in special fields, that is, the marketing of services (Chapter 12) and international marketing (Chapter 13). Thus, it should be clear that the marketing mix is the core of the marketing management process.

The output of the foregoing process is the marketing plan. It is a formal statement of decisions that have been made on marketing activities; it is a blueprint of the objectives, strategies, and tasks to be performed.

Implementation and Control of the Marketing Plan Implementing the marketing plan involves putting the plan into action and performing marketing tasks according to the predefined schedule. Even the most carefully developed plans often cannot be executed with perfect timing. Thus, the marketing executive must closely monitor and coordinate implementation of the plan. In some cases, adjustments may have to be made in the basic plan because of changes in any of the situational environments. For example, competitors may introduce a new product. In this event, it may be desirable to speed up or delay implementation of the plan. In almost all cases, some minor adjustments or fine tuning will be necessary in implementation.

Controlling the marketing plan involves three basic steps. First, the results of the implemented marketing plan are measured. Second, these results are compared with objectives. Third, decisions are made on whether the plan is achieving objectives. If serious deviations exist between actual and planned results, adjustments may have to be made to redirect the plan toward achieving objectives.

18

Poorly Stated Objectives Well-Stated Objectives

Our objective is to be a leader in the Our objective is to spend 12 percent of sales industry in terms of new product revenue between 2010 and 2011 on research and development. development in an effort to introduce at least five

new products in 2012. Our objective is to maximize profits. Our objective is to achieve a 10 percent return on

investment during 2010, with a payback on new investments of no longer than four years.

Our objective is to better serve Our objective is to obtain customer satisfaction customers. ratings of at least 90 percent on the 2010 annual

customer satisfaction survey, and to retain at least 85 percent of our 2010 customers as repeat purchasers in 2011.

Our objective is to be the best that we Our objective is to increase market share from can be. 30 percent to 40 percent in 2010 by increasing

promotional expenditures by 14 percent.

Source: Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, Marketing, 10th ed. (Mason, OH: Thom- son South-Western Publishing Co., 2008), Chapter 2.

MARKETING INSIGHT Examples of Marketing Objectives 1–8

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 18

Confirming Pages

Chapter One Strategic Planning and the Marketing Management Process 19

Marketing Information Systems and Marketing Research Throughout the marketing management process, current, reliable, and valid information is needed to make effective marketing decisions. Providing this information is the task of the marketing information system and marketing research. These topics are discussed in detail in Chapter 2.

THE STRATEGIC PLAN, THE MARKETING PLAN, AND OTHER FUNCTIONAL AREA PLANS

Strategic planning is clearly a top-management responsibility. In recent years, however, there has been an increasing shift toward more active participation by marketing managers in strategic analysis and planning. This is because, in reality, nearly all strategic planning questions have marketing implications. In fact, the two major strategic planning questions— What products should we make? and What markets should we serve?—are clearly market- ing questions. Thus, marketing executives are involved in the strategic planning process in at least two important ways: (1) They influence the process by providing important inputs in the form of information and suggestions relating to customers, products, and middlemen; and (2) they must always be aware of what the process of stategic planning involves as well as the results because everything they do—the marketing objectives and strategies they develop—must be derived from the strategic plan. In fact, the planning done in all functional areas of the organization should be derived from the strategic plan.

Marketing’s Role in Cross-Functional Strategic Planning More and more organizations are rethinking the traditional role of marketing. Rather than di- viding work according to function (e.g., production, finance, technology, human resources), they are bringing managers and employees together to participate in cross-functional teams. These teams might have responsibility for a particular product, line of products, or group of customers.

Because team members are responsible for all activities involving their products and/or customers, they are responsible for strategic planning. This means that all personnel work- ing in a cross-functional team will participate in creating a strategic plan to serve customers. Rather than making decisions independently, marketing managers work closely with team members from production, finance, human resources, and other areas to devise plans that address all concerns. Thus, if a team member from production says, “That product will be too difficult to produce,” or if a team member from finance says, “We’ll never make a profit at that price,” the team members from marketing must help resolve the problems. This approach requires a high degree of skill at problem solving and gaining cooperation.

Clearly the greatest advantage of strategic planning with a cross-functional team is the ability of team members to consider a situation from a number of viewpoints. The re- sulting insights can help the team avoid costly mistakes and poor solutions. Japanese manufacturers are noted for using cross-functional teams to figure out ways to make desir- able products at given target costs. In contrast, U.S. manufacturers traditionally have devel- oped products by having one group decide what to make, another calculate production costs, and yet another predict whether enough of the product will sell at a high enough price.

Thus, in well-managed organizations, a direct relationship exists between strategic planning and the planning done by managers at all levels. The focus and time perspectives will, of course, differ. Figure 1.6 illustrates the cross-functional perspective of strategic planning. It indicates very clearly that all functional area plans should be derived from the strategic plan while at the same time contributing to the achievement of it.

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 19

Confirming Pages

If done properly, strategic planning results in a clearly defined blueprint for management action in all functional areas of the organization. Figure 1.7 clearly illustrates this blueprint using only one organizational objective and two strategies from the strategic plan (above the dotted line) and illustrating how these are translated into elements of the marketing department plan and the production department plan (below the dotted line). Note that in Figure 1.7, all objectives and strategies are related to other objectives and strategies at higher and lower levels in the organization: That is, a hierarchy of objectives and strategies exists. We have illustrated only two possible marketing objectives and two possible pro- duction objectives. Obviously, many others could be developed, but our purpose is to illus- trate the cross-functional nature of strategic planning and how objectives and strategies from the strategic plan must be translated into objectives and strategies for all functional areas including marketing.

CONCLUSION

This chapter has described the marketing management process in the context of the organization’s overall strategic plan. Clearly, marketers must understand their cross- functional role in joining the marketing vision for the organization with the financial goals and manufacturing capabilities of the organization. The greater this ability, the better the likelihood is that the organization will be able to achieve and sustain a competitive advan- tage, the ultimate purpose of the strategic planning process.

At this point it would be useful to review Figures 1.5, 1.6, and 1.7 as well as the book’s Table of Contents. This review will enable you to better relate the content and progression of the material to follow to the marketing management process.

20 Part A Introduction

FIGURE 1.6 The Cross-Functional Perspective in Planning

Production plan

Objectives Forecast Budgets Strategies and programs Policies

Marketing plan

Objectives Forecast Budgets Strategies and programs Policies

Human resource plan

Objectives Forecast Budgets Strategies and programs Policies

Finance plan

Objectives Forecast Budgets Strategies and programs Policies

Technology plan

Objectives Forecast Budgets Strategies and programs Policies

Functional area plans derived from strategic plan

The strategic plan

Mission Objectives Strategies Portfolio plan

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 20

Revised Confirming Pages

Chapter One Strategic Planning and the Marketing Management Process 21

Additional Resources

Charan, Ram. Leadership in The Era of Economic Uncertainty. NY: McGraw-Hill, 2009. Christensen, Clayton, M., Scott Cook, and Tandy Hall. “Marketing Malpractice: The Cause and The Cure.” Harvard Business Review, December 2005, pp. 74–75. Dixit, Avinash, K., and Barry J. Noblebuff. The Art of Strategy. NY: W.W. Norton and Co., 2009. Kaplan, Robert S., and David Norton. “How To Implement a New Strategy without Disrupting Your Organization.” Harvard Business Review, March 2006, pp. 100–109. Levitt, Ted. On Marketing. Boston: HBS Press, 2006. Markower, Jack. Strategies For a Green Economy. NY: McGraw-Hill, 2009. O’Sullivan, Don, and Andrew W. Abdela. “Marketing Performance Measurement Ability and Performance.” Journal of Marketing, April 2007, pp. 79–93. Seiders, Kathleen, and Leonard L. Berry. “Should Business Care about Obesity?” Sloan Manage- ment Review, Winter 2007, pp. 15–17.

FIGURE 1.7 A Blueprint for Management Action: Relating the Marketing Plan to the Strategic Plan and the Production Plan

1. Market penetration

Achieve an annual rate of return on investment of at least 15 percent

One organizational objective (the profitability objective) from Figure 1.3

Two possible organizational strategies from the product-market matrix, Figure 1.4

Two possible marketing objectives and two possible production objectives derived from the strategic plan

Specific course of action of the marketing and production departments designed to achieve the objective

Improve position of present products with present customers

2. Market development

Find new customers for present products

1. Marketing department objective

Increase rate of purchase by existing customers by 10 percent by year-end

2. Production department objective

Design additional features into product that will induce new uses by existing buyers.

3. Marketing department objective

Increase market share by 5 percent by attracting new market segments for existing use by year-end.

4. Production department objective

Design additional features into product that will open additional markets with new uses.

Marketing strategies and programs

Production strategies and programs

Marketing strategies and programs

Production strategies and programs

pet29966_ch01_001-026.qxd 12/15/09 12:21 PM Page 21

Confirming Pagespet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 22

Revised Confirming Pages

Portfolio Models

Portfolio models remain a valuable aid to marketing man- agers in their efforts to develop effective marketing plans. The use of these models can aid managers who face situations that can best be described as “more products, less time, and less money.” More specifically, (1) as the number of products a firm produces expands, the time available for developing marketing plans for each product decreases; (2) at a strategic level, management must make resource allocation decisions across lines of products and, in diversified organizations, across different lines of business; and (3) when resources are limited (which they usually are), the process of deciding which strategic business units (SBUs) to emphasize becomes very complex. In such situations, portfolio models can be very useful.

Portfolio analysis is not a new idea. Banks manage loan portfolios seeking to balance risks and yields. Individuals who are serious investors usually have a portfolio of various kinds of investments (common stocks, preferred stocks, bank ac- counts, and the like), each with different characteristics of risk, growth, and rate of return. The investor seeks to manage the portfolio to maximize whatever objectives he or she might have. Applying this same idea, most organizations have a wide range of products, product lines, and businesses, each with dif- ferent growth rates and returns. Similar to the investor, man- agers should seek a desirable balance among alternative SBUs. Specifically, management should seek to develop a business portfolio that will ensure long-run profits and cash flow.

Portfolio models can be used to classify SBUs to deter- mine the future cash contributions that can be expected from each SBU as well as the future resources that each will require. Remember, depending on the organization, an SBU could be a single product, product line, division, or distinct business. While there are many different types of portfolio models, they generally examine the competitive position of the SBU and the chances for improving the SBU’s contribu- tion to profitability and cash flow.

There are several portfolio analysis techniques. Two of the most widely used are discussed in this appendix. To truly appreciate the concept of portfolio analysis, however, we must briefly review the development of portfolio theory.

A REVIEW OF PORTFOLIO THEORY

The interest in developing aids for managers in the selection of strategy was spurred by an organization known as the Boston Consulting Group (BCG) over 25 years ago. Its ideas, which will be discussed shortly, and many of those that followed were based on the concept of experience curves.

Experience curves are similar in concept to learning curves. Learning curves were developed to express the idea that the number of labor hours it takes to produce one unit of a particu- lar product declines in a predictable manner as the number of units produced increases. Hence, an accurate estimation of how long it takes to produce the 100th unit is possible if the produc- tion times for the 1st and 10th units are known. The concept of experience curves was based on this model.

Experience curves were first widely discussed in the Strate- gic Planning Institute’s ongoing Profit Impact of Marketing Strategies (PIMS) study. The PIMS project studies 150 firms with more than 1,000 individual business units. Its major focus is on determining which environmental and internal firm vari- ables influence the firm’s return on investment (ROI) and cash flow. The researchers have concluded that seven categories of variables appear to influence the return on investment: (1) competitive position, (2) industry/market environment, (3) budget allocation, (4) capital structure, (5) production processes, (6) company characteristics, and (7) “change action” factors.17

The experience curve includes all costs associated with a product and implies that the per-unit costs of a product should fall, due to cumulative experience, as production volume increases. In a given industry, therefore, the producer with the largest volume and corresponding market share should have the lowest marginal cost. This leader in market share should be able to underprice competitors, discourage entry into the market by potential competitors, and, as a result, achieve an acceptable return on investment. The linkage of experience to cost to price to market share to ROI is exhibited in Figure A.1. The Boston Consulting Group’s

Appendix

Pa rt

A In

tro du

ct io

n

23

pet29966_ch01_001-026.qxd 12/15/09 12:20 PM Page 23

Confirming Pages

24 Part A Introduction

view of the experience curve led the members to develop what has become known as the BCG Portfolio Model.

THE BCG MODEL

The BCG is based on the assumption that profitability and cash flow will be closely related to sales volume. Thus, in this model, SBUs are classified according to their relative market share and the growth rate of the market the SBU is in. Using these dimensions, products are either classified as stars, cash cows, dogs, or question marks. The BCG model is presented in Figure A.2.

• Stars are SBUs with a high share of a high-growth mar- ket. Because high-growth markets attract competition, such SBUs are usually cash users because they are growing

and because the firm needs to protect their market share position.

• Cash cows are often market leaders, but the market they are in is not growing rapidly. Because these SBUs have a high share of a low-growth market, they are cash generators for the firm.

• Dogs are SBUs that have a low share of a low-growth market. If the SBU has a very loyal group of customers, it may be a source of profits and cash. Usually, dogs are not large sources of cash.

• Question marks are SBUs with a low share of a high- growth market. They have great potential but require great resources if the firm is to successfully build market share.

As you can see, a firm with 10 SBUs will usually have a portfolio that includes some of each of the above. Having

Experience curve

Market share

Cost

Profit curve based on experience curve

Market share

ROI

FIGURE A.1 Experience Curve and Resulting Profit

Relative Market Share

High Low

Market Growth Rate

High

Low

Stars Question marks

Cash cows

Dogs

FIGURE A.2 The Boston Consulting Group Portfolio Model

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 24

Confirming Pages

Chapter One Strategic Planning and the Marketing Management Process 25

developed this analysis, management must determine what role each SBU should assume. Four basic objectives are possible:

1. Build share. This objective sacrifices immediate earnings to improve market share. It is appropriate for promising question marks whose share has to grow if they are ever to become stars.

2. Hold share. This objective seeks to preserve the SBU’s market share. It is very appropriate for strong cash cows to ensure that they can continue to yield a large cash flow.

3. Harvest. Here, the objective seeks to increase the product’s short-term cash flow without concern for the long-run impact. It allows market share to decline in order to maximize earnings and cash flow. It is an appropriate objective for weak cash cows, weak question marks, and dogs.

4. Divest. This objective involves selling or divesting the SBU because better investment opportunities exist else- where. It is very appropriate for dogs and those question marks the firm cannot afford to finance for growth.

There have been several major criticisms of the BCG Portfolio Model, revolving around its focus on market share and market growth as the primary indicators of pref- erence. First, the BCG model assumes market growth is uncontrollable.18 As a result, managers can become preoc- cupied with setting market share objectives instead of trying to grow the market. Second, assumptions regarding market share as a critical factor affecting firm performance may not hold true, especially in international markets.19

Third, the BCG model assumes that the major source of

SBU financing comes from internal means. Fourth, the BCG matrix does not take into account any interdependen- cies that may exist between SBUs, such as shared distribu- tion.20 Fifth, the BCG matrix does not take into account any measures of profits and customer satisfaction.21 Sixth, and perhaps most important, the thrust of the BCG matrix is based on the underlying assumption that corporate strategy begins with an analysis of competitive position. By its very nature, a strategy developed entirely on competitive analy- sis will always be a reactive one.22 While the above criti- cisms are certainly valid ones, managers (especially of large firms) across all industries continue to find the BCG matrix useful in assessing the strategic position of SBUs.23

THE GENERAL ELECTRIC MODEL

Although the BCG model can be useful, it does assume that market share is the sole determinant of an SBU’s profitability. Also, in projecting market growth rates, a manager should carefully analyze the factors that influence sales and any opportunities for influencing industry sales.

Some firms have developed alternative portfolio models to incorporate more information about market opportunities and competitive positions. The GE model is one of these. The GE model emphasizes all the potential sources of strength, not just market share, and all of the factors that influence the long-term attractiveness of a market, not just its growth rate. As Figure A.3 indicates, all SBUs are classified according to business strength and industry attractiveness. Figure A.4 presents a list of items that can be used to position SBUs in the matrix.

Business Strength

Strong Average Weak

Industry Attractiveness

High

Medium

Low

A A

A

B

B

B

C

CC

FIGURE A.3 The General Electric Portfolio Model

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 25

Confirming Pages

Industry attractiveness is a composite index made up of such factors as those listed in Figure A.4. For example: market size—the larger the market, the more attractive it will be; market growth—high-growth markets are more attractive than low-growth markets; profitability—high-profit-margin markets are more attractive than low-profit-margin industries.

Business strength is a composite index made up of such fac- tors as those listed in Figure A.4. Such as market share—the higher the SBU’s share of market, the greater its business strength; quality leadership—the higher the SBU’s quality compared to competitors, the greater its business strength; share compared with leading competitor—the closer the SBU’s share to the market leader, the greater its business strength.

Once the SBUs are classified, they are placed on the grid (Figure A.3). Priority “A” SBUs (often called the green zone)

26 Part A Introduction

are those in the three cells at the upper left, indicating that these are SBUs high in both industry attractiveness and busi- ness strength, and that the firm should “build share.” Priority “B” SBUs (often called the yellow zone) are those medium in both industry attractiveness and business strength. The firm will usually decide to “hold share” on these SBUs. Priority “C” SBUs are those in the three cells at the lower right (often called the red zone). These SBUs are low in both industry attractiveness and business strength. The firm will usually decide to harvest or divest these SBUs.

Whether the BCG model, the GE model, or a variation of these models is used, some analyses must be made of the firm’s current portfolio of SBUs as part of any strategic plan- ning effort. Marketing must get its direction from the organi- zation’s strategic plan.

FIGURE A.4 Components of Industry Attractiveness and Business Strength at GE

Industry Attractiveness Business Strength

Market position Market size Domestic market share Market growth World market share Profitability Share growth Cyclicality Share compared with leading competitor Ability to recover from inflation World scope Competitive strengths

Quality leadership Technology Marketing Relative profitability

pet29966_ch01_001-026.qxd 10/27/09 10:16 AM Page 26

Confirming Pages

Se ct

io n

I Es

se nt

ia ls

of M

ar ke

tin g

M an

ag em

en t

BMarketing Information, Research, and Understanding the Target Market Part 2 Marketing Research: Process and Systems for Decision Making

3 Consumer Behavior

4 Business, Government, and Institutional Buying

5 Market Segmentation

pet29966_ch02_027-039.qxd 10/27/09 10:27 AM Page 27

Confirming Pages

28

Part B M

arketing Inform ation,Research,

and Understanding the Target M arket

Chapter 2 Marketing Research: Process and Systems for Decision Making Marketing managers require current, reliable, useful information to make effective decisions. In today’s highly competitive global economy, marketers need to exploit opportunities and avoid mistakes if they are to survive and be profitable. Not only is sound marketing research needed, but also a system that gets current, valid information to the marketing decision maker in a timely manner.

This chapter is concerned with the marketing research process and information systems for decision making. It begins by discussing the marketing research process that is used to develop useful information for decision making. Then, marketing information systems are briefly discussed. The chapter is intended to provide a detailed introduction to many of the important topics in the area, but it does not provide a complete explanation of the plethora of marketing research topics.

THE ROLE OF MARKETING RESEARCH

Marketing research is the process by which information about the environment is generated, analyzed, and interpreted for use in marketing decision making.1 It cannot be overstated that marketing research is an aid to decision making and not a substitute for it. In other words, marketing research does not make decisions, but it can substantially increase the chances that good decisions are made. Unfortunately, too many marketing managers view research reports as the final answer to their problems; whatever the research indicates is taken as the appropriate course of action. Instead, marketing managers should recognize that (1) even the most carefully executed research can be fraught with errors; (2) marketing research does not forecast with certainty what will happen in the future; and (3) they should make decisions in light of their own knowledge and experience, since no marketing research study includes all of the factors that could influence the success of a strategy.

Although marketing research does not make decisions, it can reduce the risks associated with managing marketing strategies. For example, it can reduce the risk of introducing new products by evaluating consumer acceptance of them prior to full-scale introduction. Marketing research is also vital for investigating the effects of various marketing strategies

pet29966_ch02_027-039.qxd 10/27/09 10:27 AM Page 28

Confirming Pages

after they have been implemented. For example, marketing research can examine the effects of a change in any element of the marketing mix on customer perception and behavior.

At one time, marketing researchers were primarily engaged in the technical aspects of research, but were not heavily involved in the strategic use of research findings. Today, how- ever, many marketing researchers work hand-in-hand with marketing managers throughout the research process and have responsibility for making strategic recommendations based on the research.

THE MARKETING RESEARCH PROCESS

Marketing research can be viewed as systematic processes for obtaining information to aid in decision making. There are many types of marketing research, and the framework illus- trated in Figure 2.1 represents a general approach to the process. Each element of this process is discussed next.

Purpose of the Research The first step in the research process is to determine explicitly why the research is needed and what it is to accomplish. This may be much more difficult than it sounds. Quite often a situation or problem is recognized as needing research, yet the nature of the problem is not clear or well defined nor is the appropriate type of research evident. Thus, managers and researchers need to discuss and clarify the current situation and develop a clear understanding of the problem. At the end of this stage, managers and researchers should agree on (1) the current situation involving the problem to be researched, (2) the nature of the problem, and (3) the specific question or questions the research is designed to investigate. This step is crucial since it influences the type of research to be conducted and the research design.