Marketing Management(Project Management)

Marketing Management(Project Management)

 After reviewing Chapter 3 from the textbook, post a 500-word synopsis of your understanding of the marketing concepts. In your posting, include questions about any marketing concepts that are unclear.

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A Preface to Marketing Management

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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

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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.

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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


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.

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To Rose and Angie J. Paul Peter

To Gayla Jim Donnelly

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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.


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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.

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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.


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.


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

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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

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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.

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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


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

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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


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

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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


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

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xiv Contents


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


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

Conclusion 228


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

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Introduction APart 1 Strategic Planning and the Marketing Management Process

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Part A Introduction


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.


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.

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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.


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


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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.


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

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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



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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



The environment

Cooperative Competitive Economic Social Political Legal

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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



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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.


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.


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

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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

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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



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.

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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.

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