Business and Marketing Strategies

Chapter 2Business andMarketing StrategiesThe competitive and market challenges confronting businesses in a wide range of indus-tries worldwide are unusually complex, and the propensity for failure has never beengreater. The economic slowdown at the beginning of the 21st century affected a wide rangeof new economy and old economy companies. Developing effective strategies in this envi-ronment of constant change is a key requirement for corporate success. Market-driven organizations develop closely coordinated business and marketing strategies.

Executives in many companies are reinventing their business models with the objectiveof improving their competitive advantage. These changes include altering market focus, ex-panding product scope, partnering with other organizations, outsourcing manufacturing,and modifying internal structure. The strategic initiatives pursued by Siemens, the Germanelectronics giant, with the objective of becoming Germany’s first new economy conglom-erate are illustrative.1 The product portfolio ranges from gas-turbine generators to lightbulbs. Management’s product innovation, cross-functional, and cost reduction initiativesmoved Siemens from the ninth to the third position in the cell phone market in Europe be-hind Nokia and Motorola. Production time for a mobile phone has been reduced from 13hours to 5 minutes. Industry analysts are positive concerning Siemens’ strategies, but somequestion whether management will be able to hold a strong competitive position. An eval-uation of the company’s performance is described in the Global Feature.

Corporate strategy consists of deciding on the scope and purpose of the business, its ob-jectives, and the initiatives and resources necessary to achieve the objectives. Marketingstrategy is guided by the decisions top management makes about how, when, and where tocompete. Because of this close relationship, it is important to examine the major aspects ofdesigning and implementing business strategy.

The chapter begins with a look at the nature and scope of corporate strategy. A discus-sion of business and marketing strategy relationships follows. Next, the marketing strategyprocess is described and illustrated. A discussion of Internet strategy follows. Finally, weexamine the steps in preparing the strategic marketing plan.

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Corporate Strategy

We describe the characteristics of corporate strategy and consider how organizations are changing. The section concludes with a discussion of the major dimensions of corporatestrategy.

What Is Corporate Strategy?It is important to reach a reasonable consensus concerning the nature and scope of corpo-rate strategy. One authority, Michael Porter, indicates that an effective strategy should dis-play the following characteristics:

• Unique competitive position for the company.

• Activities tailored to strategy.

Global Feature Siemens’ Turnaround Plan: A Report Card

In July, 1998, Siemens CEO Heinrich von Pierer set out a 10-point plan to rescue the com-pany from plummeting profits. Here are some highlights:

GOAL PERFORMANCE

• Turn around the semi- • EXCELLENT Per-share earnings rose sixfoldconductor division in the last quarter. The April IPO of minority

stake in Infineon semiconductors unit raised$5.4 billion.

• Set clear goals for management, • GOOD Top managers must explain resultswith consequences if bench- to peers quarterly; some have eased out. marks are not met Executive pay is now tied closely to performance.

But no one talks about “Chainsaw Heinrich.”

• Rigorously prune problem areas • FAIR Medical Engineering unit transformed frommoney-loser to profit driver within two years, butpower-generation and transportation units stillhave uncomfortably slim profit margins.

• Strengthen businesses through • GOOD April purchase of Mannesmann acquisitions to achieve world auto-electronics unit will create a leader in leadership burgeoning market for onboard IT. But Siemens

may have paid too much. And it still must proveit can keep pace long-term in competitivebusinesses such as telecommunications.

• Reorganize existing businesses • FAIR Created profitable business-services arm,bundled mobile-phone businesses, and boostedmarket share. However, insiders complain thatSiemens’ internal decision-making is still tooslow.

• Become more transparent by • VERY GOOD Siemens on track to converting to U.S. GAAP report results according to GAAP in the accounting standard quarter ending Dec. 31, 2000.

• List shares in the U.S. • GOOD Listing on track for early 2001.

Source: Jack Ewing, “Siemens Climbs Back,” Business Week, June 5, 2000, 80.

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• Clear trade-offs and choices vis-à-vis competitors.

• Competitive advantage arises from fit across activities.

• Sustainability comes from the activity system, not the parts.

• Operational effectiveness is a given.2

This view of strategy points to distinctive capabilities that are made up of business activitieswhich form processes. An example is Wal-Mart’s distribution system comprised of various ac-tivities, such as tracking each item in inventory. Other examples are Dell Computer’s directsales, built-to-order process and Southwest Airlines’ city-to-city business design coupled withvery efficient performance of the activities needed to transport passengers from point to point.

Corporate strategy consists of the decisions made by top management and the resultingactions taken to achieve the objectives set for the business. The major strategy componentsand several key issues related to each component are shown in Exhibit 2–1. The issueshighlight important questions that management must answer in charting the course of theenterprise. Management’s skills and vision in addressing these issues are critical to the per-formance of the corporation. Essential to corporate success is matching the capabilities ofthe organization with opportunities to achieve long-term customer satisfaction.

EXHIBIT 2–1CorporateStrategyComponents and Issues

Source: Orville C. Walker,Jr., Harper W. Boyd, Jr., andJean-Claude Larréché,Marketing Strategy (BurrRidge, IL: Richard D. Irwin,1992), 38.

Chapter 2 Business and Marketing Strategies 23

Strategy Component Key Issues

Scope, mission, and • What business(es) should the firm be in?intent • What customer needs, market segments, and/or

technologies should be focused on?• What is the firm’s enduring strategic purpose or intent?

Objectives • What performance dimensions should the firm’s businessunits and employees focus on?

• What is the target level of performance to be achievedon each dimension?

• What is the time frame in which each target should beattained?

Development strategy • How can the firm achieve a desired level of growth overtime?

• Can the desired growth be attained by expanding thefirm’s current businesses?

• Will the company have to diversify into new businessesor product-markets to achieve its future growthobjectives?

Resource allocation • How should the firm’s limited financial resources beallocated across its businesses to produce the highestreturns?

• Of the alternative strategies that each business mightpursue, which will produce the greatest returns for thedollars invested?

Sources of synergy • What competencies, knowledge, and customer-basedintangibles (e.g., brand recognition, reputation) mightbe developed and shared across the firm’s businesses?

• What operational resources, facilities, or functions (e.g.,plants, R&D sales force) might the firm’s businesses shareto increase their efficiency?

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It is apparent early in the 21st century that companies are drastically altering their busi-ness and marketing strategies to get closer to their customers, counter competitive threats,and strengthen competitive advantages. Siemens’ strategic initiatives are illustrative. Thechallenges to management include escalating international competition, political and eco-nomic upheaval, dominance by the customer, and increasing marketing complexity.

Organizational ChangeDuring the last decade massive changes were made in the size and structure of many busi-ness firms. These changes are described as rightsizing, reengineering, and reinventing theorganization. The renewal (reforming) of the traditional organization typically movesthrough three phases: vertical disaggregation, internal redesign, and network formation.3

Vertical Disaggregation

Disaggregation reduces the size of the organization by eliminating jobs and layers of mid-dle managers and leveling the hierarchy. The Conference Board, Inc., reports that 90 per-cent of its members downsized during the 1990s, and about two-thirds of the executivesrepresenting a broad cross-section of business say downsizing will continue.4

The resulting flat corporation may organize its activities into a small number of keyprocesses (e.g., new product planning, sales generation, and customer service).5 Alterna-tively, organizations may retain functional departments, overlaying them with processes.Cross-functional teams manage the processes, and providing superior customer value is akey objective and measure of performance. Employees are encouraged to make regularcontact with suppliers and customers.

Internal Redesign

Organizational renewal is more than just reducing staff, eliminating layers of management,and adopting worker empowerment processes. The second phase alters the internal designof the organization. The new organization forms are lean, flexible, adaptive, and responsiveto customer needs and market requirements.6 The altered business designs involve innova-tion in designing products to meet customer needs, arranging supply and distribution net-works, and constantly staying in touch with the marketplace. A priority of theseorganizations is understanding customer needs, offering value to customers, and retainingcustomers.

New Organization Forms

The third phase of organizational change involves the formation of relationships with otherorganizations and the use of processes as the basic organizing concept. Although interor-ganizational relationships are often present in the traditional organization, companies areexpanding these relationships with suppliers, customers, and even competitors. These neworganization forms are called networks since they involve several collaborative arrange-ments. Networks are more likely to be launched by entrepreneurs, since the traditional ver-tically integrated, hierarchically organized company finds it difficult to shift to the networkparadigm. Transformation means fewer people on the corporate payroll, different manage-ment challenges, drastic cultural changes, and complex collaborative relationships withother organizations. Nevertheless, traditional companies such as International BusinessMachines are successfully transforming themselves to more flexible and adaptive networkforms. The Technology Feature describes how IBM is using software alliances to competewith Oracle Corp.

24 Part One Market-Driven Strategy

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Tightly Integrated Software versus SoftwareAlliances—Oracle versus IBMTechnology Feature

• Oracle’s strategy is to develop and offer corporate customers a complete and integratedpackage of software for managing financial operations, manufacturing, sales force,logistics, e-commerce, and suppliers.

• International Business Machines’ strategy is to assemble and apply the best package ofsoftware from more than 50 software partners, leveraging the distinctive capabilities ofeach partner.

• The corporate software market for databases and applications (e.g., sales forceautomation, supply-chain management) is an estimated $50 billion.

• Oracle’s management indicates that IBM’s objective is to market its consulting servicesfor applying corporate software packages.

• IBM’s software is about one-fifth the price of Oracle’s software, but IBM also chargesconsulting fees to install and integrate software packages from 59 partners such as SAP,Siebel Systems, Ariba, and PeopleSoft.

• The customer value issue is a combination of software price and software performance.Some corporate buyers are finding that IBM’s total price is below Oracle’s. Theperformance of the two firms’ software packages appears to be comparable.

• Industry authorities are split concerning which software system will win the competitivebattle. IBM and Oracle are expected to remain the strongest firms in the market.

Source: “IBM vs. Oracle: It Could Get Bloody,” Business Week, May 28, 2001, 65–66.

Components of StrategyRecognizing that there are several definitions of corporate strategy, we utilize this definition:

Corporate strategy is the way a company creates value through the configuration and coordi-nation of its multimarket activities.7

This definition emphasizes value creation, considers the multimarket scope of the cor-poration (product, geographic, and vertical value chain boundaries), and points to how theorganization manages its activities and businesses that fall under the corporate umbrella. Akey premise of this view of strategy is that the multibusiness corporation must contributeto the competitive advantage of its units.8 Thus, there needs to be a close relationship be-tween the corporation and the businesses that are parts of the firm.

A useful framework for examining corporate strategy which is consistent with the earlierdefinition consists of (1) management’s long-term vision for the corporation, (2) objectiveswhich serve as milestones toward the vision, (3) assets, skills, and capabilities, (4) busi-nesses in which the corporation competes, (5) structure, systems, and processes, and (6)creation of value through multimarket activity.9 Let us examine each strategy component.

Deciding Corporate Vision

Management’s vision defines what the corporation is and what it does and provides impor-tant guidelines for managing and improving the corporation. The founder initially has a vi-sion about the firm’s mission, and management may alter the mission over time. Strategic

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choices about where the firm is going in the future—choices that take into account companycapabilities, resources, opportunities, and problems—establish the vision of the enterprise.Developing strategies for sustainable competitive advantage, implementing them, and adjusting the strategies to respond to new environmental requirements is a continuingprocess. Managers monitor the market and the competitive environment. The corporate vision may, over time, be changed because of problems or opportunities identified by man-agement’s monitoring activities. For example, IBM’s management is placing major empha-sis on consulting services as a direction of future growth.

An interesting insight into the vision underpinning the Internet pioneer Amazon.comcomes from Jeff Bezos’ reply to a shareholder asking what she actually owned: “You owna piece of the leading e-commerce platform. . . . The Amazon.com platform is comprised ofbrand, customers, distribution capability, deep e-commerce expertise, and a great team witha passion for innovation and a passion for serving customers well.” This vision goes far beyond simply being the biggest Internet book retailer.

Early in the strategy-development process management needs to define the vision ofthe corporation. It is reviewed and updated as shifts in the strategic direction of the enter-prise occur over time. The vision statement sets several important guidelines for businessoperations:10

1. The reason for the company’s existence and its responsibilities to stockholders, employees, society, and other stakeholders.

2. The firm’s customers and the needs (benefits) that are to be met by the firm’s goods orservices (areas of product and market involvement).

3. The extent of specialization within each product-market area and the geographicalscope of operations.

4. The amount and types of product-market diversification desired by management.

5. The stage(s) in the value-added chain where the business competes from raw materialsto the end-user.

6. Management’s performance expectations for the company.

7. Other general guidelines for overall business strategy, such as technologies to be usedand the role of research and development in the corporation.

Objectives

Objectives need to be set so that the performance of the enterprise can be gauged. Corpo-rate objectives may be established in the following areas: marketing, innovation, resources,productivity, social responsibility, and finance.11 Examples include growth and market-share expectations, improvement in product quality, employee training and development,new product targets, return on invested capital, earnings growth rates, debt limits, energyreduction objectives, and pollution standards. Objectives are set at several levels in an or-ganization, beginning with those indicating the enterprise’s overall objectives.

The time frame necessary for strategic change often goes beyond short-term financial re-porting requirements. Companies are using more than financial measures to evaluate longer-term strategic objectives and nonfinancial measures for short-term budgets. The “balancedscorecard” approach provides an expanded basis for tracking organizational performance.12

It considers both long-term and short-term performance metrics. This method of keepingscore includes objectives, measures, targets, and initiatives regarding financial, customer,


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internal business processes, and learning and growth perspectives. This concept of perfor-mance offers a promising basis for managing and evaluating market-driven strategies.

Capabilities

As we discussed in Chapter 1, it is important to place a company’s strategic focus on its dis-tinctive capabilities.13 These capabilities may offer the organization the potential to competein different markets, provide significant value to end-user customers, and create barriers tocompetitor duplication. For example, Sony has a distinctive capability in the miniaturizationof electronic products, seen in the worldwide success of the Sony Walkman. However, theminiaturization capability has also led to the development of the lightweight Sony Vaio per-sonal computers meeting customer demands for lighter machines. The Internet links thecomputer user to Sony’s music and entertainment businesses. Interestingly, Sony has nowregistered as a bank, and may leverage its computer and Internet customer base for financialservices.

We know that distinctive capabilities are important in shaping the organization’s strat-egy. In contrast to the diversification wave of the 1970s, many companies are deciding whatthey do best and concentrating their efforts on those distinctive capabilities. A key strategyissue is matching capabilities to market opportunities. Capabilities that can be leveragedinto different markets and applications are particularly valuable. For example, the GoreTexhigh-performance fabric is used in many applications from apparel to dental floss.

Even though capabilities, resources, opportunities, and problems create constraints,management has a lot of flexibility in selecting the mission as well as changing it in the fu-ture. Sometimes the priorities and preferences of the CEO or the board of directors mayoverride factual evidence in selecting the business mission. For example, many of the di-versifications pursued by companies in the 1980s did not work very well and resulted in therestructuring and downsizing of many companies during the last decade.

Business Composition

Defining the composition of the business provides direction for both corporate and market-ing strategy design. In single-product firms that serve one market, it is easy to determine thecomposition of the business. In many other firms, it is necessary to separate the businessinto parts to facilitate strategic analyses and planning. When firms are serving multiple mar-kets with different products, grouping similar business areas together aids decision making.

Business segment, group, or division designations are used to identify the major areasof business of a diversified corporation. Each segment, group, or division often contains amix of related goods (or services), though a single product can be assigned such a desig-nation. The term segment does not correspond to a market segment (subgroup of end-usersin a product-market), which we discuss throughout the book. Most large corporations breakout their financial reports into business or industry segments according to the guidelines ofthe Financial Accounting Standards Board. Some firms may establish subgroups of relatedproducts within a business segment that are targeted to different customer groups.

A business segment, group, or division is often too large in terms of product and marketcomposition to use in strategic analysis and planning, and so it is divided into more specificstrategic units. A popular name for these units is the strategic business unit (SBU). Typi-cally, SBUs display product and customer group similarities. A strategic business unit is asingle product or brand, a line of products, or a mix of related products that meets a com-mon market need or a group of related needs, and the unit’s management is responsible forall (or most) of the basic business functions. The characteristics of the ideal SBU are described in Exhibit 2–2. Typically, the SBU has a specific strategy rather than a shared


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EXHIBIT 2–2Characteristicsof the IdealStrategicBusiness Unit

Source: Orville C. Walker,Jr., Harper W. Boyd, Jr.,and Jean-Claud Larréché,Marketing Strategy (BurrRidge, IL: Richard D.Irwin, 1992), 76.

strategy with another business area. It is a cohesive organizational unit that is separately managed and produces sales and profit results.

Virgin Group is an interesting example of the formation of a large and diverse portfolioof business enterprises. The founder, Richard Branson, was knighted in the United King-dom in 2000 for his entrepreneurship initiatives in launching an array of businesses underthe Virgin Group corporate umbrella. The Virgin brand identifies hundreds of productsfrom travel to financial services to entertainment.14 Not all of the Virgin Group’s initiativeshave been successful, and some observers indicate that Branson may have overleveragedthe brand. Nonetheless, those ventures have made him a very wealthy entrepreneur.

In a business that has two or more strategic business units, decisions must be made attwo levels. Corporate management must first decide what business areas to pursue and setpriorities for allocating resources to each SBU. The decision makers for each SBU must se-lect the strategies for implementing the corporate strategy and producing the results thatcorporate management expects. Corporate-level management is often involved in helpingSBUs achieve their objectives.

Corporate strategy and resources should help the SBU compete more effectively than itwould if the unit operated on a completely independent basis. “To remain competitive, cor-porations must provide their business units with low-cost capital, outstanding executives,

Characteristic Rationale

• Serves a homogeneous set of markets Minimizing the diversity of a business with a limited number of related unit’s product-market entries enables technologies the unit’s manager to do a better job of

formulating and implementing acoherent and internally consistentbusiness strategy.

• Serves a unique set of product- No other SBU within the firm should markets compete for the same set of customers

with similar products. This enables thefirm to avoid duplication of effort andhelps maximize economies of scalewithin its SBUs.

• Has control over the factors necessary This is not to say that an SBU should for successful performance, such as never share resources, such as a R&D, production, marketing, and manufacturing plant or a sales force, distribution with one or more business units, but

the SBU should have authority todetermine how its share of the jointresource will be used to effectivelycarry out its strategy.

• Has responsibility for its own Because top management cannot keep profitability an eye on every decision and action

taken by all its SBUs, the success of anSBU and its managers must be judgedby monitoring its performance overtime. Thus, the SBU’s managers shouldhave control over the factors that affectperformance and then be heldaccountable for the outcomes.

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corporate R&D, centralized marketing where appropriate and other resources in the corpo-rate arsenal.”15 Corporate resources and synergies help the SBU establish its competitiveadvantage. The strategic focus and priorities of corporate strategy guide SBU strategies. Fi-nally, top management’s expectations for the corporation indicate the results expected froman SBU, including both financial and nonfinancial objectives. When viewed in this context,the SBUs become the action centers of the corporation. One criticism of the SBU conceptis that distinctive competencies are not leveraged across a corporation’s businesses. How-ever, the successful vertical movement of the retailer Gap into the higher quality/price ap-parel segment with Banana Republic and that of Old Navy into the lower quality/pricesegment suggest just the opposite. Both initiatives leveraged Gap’s competencies in design,outsourcing, and retail operations and merchandising.

Structure, Systems, and Processes

This aspect of strategy considers how the organization controls and coordinates the activi-ties of its various business units and staff functions.16 Structure determines the compositionof the corporation. Systems are the formal policies and procedures that enable the organi-zation to operate. Processes consider the informal aspects of the organization’s activities:

In establishing a firm’s infrastructure, corporate managers have a wide array of organiza-tional mechanisms at their disposal, from the formal boxes in an organization chart to themore subtle elements of corporate culture and style. Because every corporate strategy is dif-ferent, there is not one optimal set of structures, systems, and processes.17

The logic of how the business is designed is receiving considerable attention because of thethreat of customers being attracted by designs that better satisfy their needs and require-ments. “A business design is the totality of how a company selects its customers, definesand differentiates its offerings, defines the tasks it will perform itself and those it will out-source, configures its resources, goes to market, creates utility for customers, and capturesprofit.”18 The business design (or business model) provides a focus on more than the prod-uct and/or technology, instead looking at the processes and relationships that comprise thedesign. For example, Dell Computer’s direct, built-to-order business design is viewed bymany business buyers as offering superior value.

The “no-frills” business design of very successful airlines like easyJet in Europe providesvery low air fares, but is based on systems and processes completely different to those ofconventional airlines (and extremely difficult for them to imitate). The strength of this modelis underlined by easyJet’s expansion into “no-frills” automobile rental and other services.

Corporate Competitive Advantage

This part of corporate strategy looks at whether the strategy components create valuethrough multimarket activity.19 The strategic issues include evaluating the extent to whicha business contributes positive benefits somewhere in the corporation and whether thecorporation creates more value for the business than might be created by another owner.

Business and Marketing Strategy

During the 1990s many strategy guidelines were offered by consultants, executives, andacademics to guide business strategy formulation. These strategy paradigms propose arange of actions, including reengineering the corporation, total quality management, build-ing distinctive competencies, reinventing the organization, and strategic partnering. It is notfeasible to review here the various strategy concepts and methods that are available in many


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books, seminars, and consulting services. The corporate strategy framework presented inthis chapter offers a basis for incorporating relevant strategy perspectives and guidelines.

An important issue is whether selecting a successful strategy has an impact on results.Does the uncontrollable environment largely determine business performance or, instead,will the organization’s strategy have a major impact on its performance? Successful busi-nesses can be found operating in very demanding market and competitive environments.Examples include Southwest Airlines (air travel), General Electric (electronics), and Wal-Mart (discount retailing). Of course, favorable environments would further enhance theperformance of these companies.

The evidence suggests that strategic choices matter.20 While environmental factors suchas market demand, intensity of competition, government, and social change influence cor-porate performance, the strategic choices made by specific companies also have a signifi-cant impact on their performance. Importantly, the impact may be positive or negative. Forexample, Kmart held the leading market position over Wal-Mart in 1980, yet Wal-Mart over-took Kmart by investing heavily in information systems and distribution to develop a pow-erful customer-driven, low-cost retail network. Kmart declared bankruptcy in early 2002.

Developing the Strategic Plan for Each BusinessStrategic analysis is conducted to (1) diagnose business units’ strengths and limitations and(2) select strategies for maintaining or improving performance. Management decides whatpriority to place on each business regarding resource allocation and implements a strategyto meet the objectives for the SBU. The strategic plan indicates the action agenda for thebusiness. An example of a business plan outline is shown in Exhibit 2–3. The “major strate-gies” shown in Part VI of the plan include the strategic actions planned for business devel-


I. Management SummaryII. Business Definition

—Mission—Purpose—Role

III. Progress Report—Comparison of key financial and market indicators—Progress made on major strategies

IV. Market and Customer Analysis—Potential versus served market—Market segmentation

V. Competitive Analysis—Description of three major competitors—Analysis of competitors’ strategies

VI. Objectives, Strategies, and Programs—Key objectives—Major strategies to accomplish the objectives—Action programs to implement strategies—Major assumptions and contingency programs—Market share matrix

VII. Financial Projections—Financial projections statement—Personnel projections

EXHIBIT 2–3Plan Outline—A High-TechnologyProductsManufacturer

Source: Rochelle O’Connor,Facing Strategic Issues: NewPlanning Guides and Practices,Report No. 87 (New York: TheConference Board, 1985), 32.

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opment, marketing, quality, product and technology, human resources, manufacturing/fa-cilities, and finance.

The situation assessment provides a guide for establishing the SBU’s mission, setting ob-jectives, and determining the strategy to use to meet those objectives. The SBU’s strategy in-dicates market target priorities, available resources, financial constraints, and other strategicguidelines needed to develop marketing plans. Depending on the size and diversity of theSBU, marketing plans may be included in the SBU plan or developed separately. If they arecombined, the marketing portion of the business plan will represent a substantial part of thebusiness plan. In a small business (e.g., retail store, restaurant) the marketing portion of theplan will account for most of the plan. Plans may be developed to obtain financial supportfor a new venture or to spell out internal business and marketing strategies.

Business Strategy and Marketing StrategyAn understanding of a business’s purpose, scope, objectives, capabilities, and strategy is es-sential in designing and implementing marketing strategies that are consistent with the cor-porate and business unit plan of action.

The chief marketing executive’s business strategy responsibilities include (1) participat-ing in strategy formulation and (2) developing marketing strategies that are consistent withbusiness strategy priorities and integrated with other functional strategies. Since these twoareas are closely interrelated, it is important to examine marketing’s role and functions inboth areas to gain insight into marketing’s responsibilities and contributions. Peter F.Drucker describes this role:

Marketing is so basic that it cannot be considered a separate function (i.e., a separate skill orwork) within the business, on a par with others such as manufacturing or personnel. Market-ing requires separate work, and a distinct group of activities. But it is, first, a central dimen-sion of the entire business. It is the whole business seen from the point of view of its finalresult, that is, from the customer’s point of view.21

Frederick E. Webster describes the role of the marketing manager: “At the corporatelevel, marketing managers have a critical role to play as advocates for the customer and fora set of values and beliefs that put the customer first in the firm’s decision making, and tocommunicate the value proposition as part of that culture throughout the organization, bothinternally and in its multiple relationships and alliances.”22 This role includes assessingmarket attractiveness in the markets available to the firm, providing a customer orientation,and communicating the firm’s specific value advantages.

Strategic MarketingMarketing strategy consists of the analysis, strategy development, and implementation activities in:

Developing a vision about the market(s) of interest to the organization, selecting market tar-get strategies, setting objectives, and developing, implementing, and managing the marketingprogram positioning strategies designed to meet the value requirements of the customers ineach market target.

Strategic marketing is a market-driven process of strategy development that takes intoaccount a constantly changing business environment and the need to deliver superiorcustomer value. The focus of strategic marketing is on organizational performance ratherthan on increasing sales. Marketing strategy seeks to deliver superior customer value bycombining the customer-influencing strategies of the business into a coordinated set


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of market-driven actions. Strategic marketing links the organization with the environmentand views marketing as a responsibility of the entire business rather than a specializedfunction.

Because of marketing’s boundary orientation between the organization and its cus-tomers, channel members, and competition, marketing processes are central to the businessstrategy planning process.23 Strategic marketing provides the expertise for environmentalmonitoring, for deciding what customer groups to serve, for guiding product specifications,and for choosing which competitors to position against. Successfully integrating cross-functional strategies is critical to providing superior customer value. Customer value re-quirements must be transformed into product design and production guidelines. Success inachieving high-quality products and services requires finding out which attributes of prod-uct and service quality drive customer value.

Marketing Strategy Process

The marketing strategy process that we follow is described in Exhibit 2–4. The strategystages shown are examined and applied in Parts II through V of this book. The strategic sit-uation analysis considers market and competitor analysis, market segmentation, and con-tinuous learning about markets. Designing marketing strategy examines customer targetingand positioning strategies, relationship strategies, and planning for new products. Market-ing program development consists of product, distribution, price, and promotion strategiesdesigned and implemented to meet the value requirements of targeted buyers. Strategy im-plementation and management consider organizational design and marketing strategy im-plementation and control. We provide an overview of each part of the strategy process inthe rest of this chapter.

Strategic Situation AnalysisMarketing management uses the information provided by the situation analysis to guide thedesign of a new strategy or change an existing strategy. The situation analysis should beconducted on a continuing basis after the strategy is under way to guide strategy changes.


Strategicsituationanalysis

Marketingprogram

development

Designingmarketingstrategy

Implementingand managing

marketing strategy

EXHIBIT 2–4MarketingStrategy Process

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Market Vision, Structure, and Analysis

Markets need to be defined so that buyers and competition can be analyzed. For a marketto exist, (1) there must be people with particular needs and wants and one or more productsthat can satisfy buyers’ needs, and (2) buyers must be willing and able to purchase a prod-uct that satisfies their needs and wants. A product-market consists of a specific product (orline of related products) that can satisfy a set of needs and wants for the people (or organi-zations) willing and able to purchase it. We use the term product to indicate either a physi-cal good or an intangible service.

Analyzing product-markets and forecasting how they will change in the future are vitalto business and marketing planning. Decisions to enter new product-markets, how to serveexisting product-markets, and when to exit unattractive product-markets are critical strate-gic choices. The objective is to identify and describe the buyers, understand their prefer-ences for products, estimate the size and rate of growth of the market, and find out whatcompanies and products are competing in the market.

Evaluation of competitors’ strategies, strengths, limitations, and plans is also a key aspect of the situation analysis. It is important to identify both existing and potential com-petitors. Competitor analysis includes evaluating each key competitor. The analyses high-light the competition’s important strengths and weaknesses. A key issue is trying to figureout what each competitor is likely to do in the future.

Oracle Corporation provides an interesting example of how management has developeda vision about the Internet software market and how it is likely to change in the future. (Seeaccompanying photograph of Oracle Corporation CEO). Oracle’s 2001 sales were nearly$11 billion, double 1997 sales. Database software is the core business. As was discussed inthe earlier Technology Feature, management wants to offer a suite of business applicationswhich will allow users to run everything from accounting to customer management to Websales. The software package is intended to provide users a simpler approach, since customers will need to purchase only one package from one company that suits all theirneeds. However, analysts contend that the launch might come too late and that Oracle willflounder if it really tries to create all the components of the suite itself. Oracle’s proposedstrategic initiatives are described in Exhibit 2–5.

Segmenting Markets

Market segmentation looks at the nature and extent of diversity of buyers’ needs and wantsin a market. It offers an opportunity for an organization to focus its business capabilities on the requirements of one or more groups of buyers. The objective of segmentation is toexamine differences in needs and wants and identify the segments (subgroups) within theproduct-market of interest. Each segment contains buyers with similar needs and wants forthe product category of interest to management. The segments are described using the var-ious characteristics of people, the reasons they buy or use certain products, and their pref-erences for certain brands of products. Likewise, segments of industrial product-marketsmay be formed according to the type of industry, the uses for the product, the frequency ofproduct purchase, and various other factors.

Each segment may vary quite a bit from the average characteristics of the entireproduct-market. The similarities of buyers’ needs within a segment enable better tar-geting of the organization’s value proposition to buyers with corresponding value re-quirements. For example, active individuals comprise an important market segment forGatorade, the popular thirst-quenching sports drink. Teenagers are an important mar-ket segment for carbonated beverages since they have not yet developed strong brandpreferences.


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Continuous Learning about Markets

One of the major realities of achieving business success today is the need to understandmarkets and competition. Sensing what is happening and is likely to occur in the future iscomplicated by competitive threats that may exist beyond traditional industry boundaries.For example, microwave dinners compete with McDonald’s fast food, CD-ROMs competewith books, and fax transmission competes with overnight letter delivery.

Market-driven firms are able to sense what is happening in their markets, develop busi-ness and marketing strategies to seize opportunities and counter threats, and anticipate whatthe market will be like in the future.24 Several market sensing methods are available toguide the collection and analysis of information. For example, company databases on cus-tomers offer valuable data mining opportunities.

Designing Market-Driven StrategiesThe strategic situation analysis phase of the marketing strategy process identifies marketopportunities, defines market segments, evaluates competition, and assesses the organiza-tion’s strengths and weaknesses. Market sensing information plays a key role in designingmarketing strategy, which includes market targeting and positioning strategies, buildingmarketing relationships, and developing and introducing new products. The Strategy


Chairman of the Oracle Corporation Larry Ellison speaks during a keynote presentation at the COMDEX technology conven-tion November 13, 2000 in Las Vegas. Many corporations were in attendance at one of the largest annual computer conven-tions in the nation. Djamel E. Ramoul/Liaison.

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Feature describes the market targeting and positioning strategies employed for the success-ful soap brand Lever 2000.

Market Targeting and Strategic Positioning

Marketing advantage is influenced by several situational factors, including industry char-acteristics, type of firm (e.g., size), extent of differentiation in buyers’ needs, and the spe-cific competitive advantage(s) of the company designing the marketing strategy. The coreissue is deciding how, when, and where to compete, given a firm’s market and competitiveenvironment.

The purpose of the market targeting strategy is to select the people (or organizations)that management wishes to serve in the product-market. When buyers’ needs and wantsvary, the market target is usually one or more segments of the product-market. Once the


EXHIBIT 2–5Assembling an E-BusinessPowerhouse

Source: Steve Hamm,“Oracle: Why It’s CoolAgain,” Business Week, May8, 2000, 120.

Oracle Corp.’s software is the foundation for websites, e-commerce, andcorporate networks. Here are its most crucial markets:

Data Storehouses Business Applications E-Marketplaces

Database software for For running everything from Website and internal software storing and analyzing accounting to customer for transactions between corporate data, inventories, management to Web sales. companies, including

auctions.and customer info.

MARKET SIZE $10.5 MARKET SIZE $26 MARKET SIZE $3.9 billionbillion in 1999 for software billion in 1999; heading in 1999; heading for $18.6 and maintenance; for $33 billion this year. billion in 2003.heading for $16.6 billion in 2003.

ORACLE’S THIRD- ORACLE’S THIRD- ORACLE’S THIRD-QUARTER SALES QUARTER SALES QUARTER SALESSoftware-license sales Up 35%, to $199 million. $26 million for supply-chain grew 32%, to $778 and procurement software.million.

MARKET SHARE MARKET POSITION MARKET POSITION The 40%, compared with Oracle is a distant second procurement market is 18% for IBM, 5.7% for behind SAP in the market expanding into e-exchanges, Informix, and 5.1% for core corporate and Oracle is an early leader for Microsoft. applications. Siebel Sys- along with Commerce One,

tems leads in customer- Ariba, and i2.management software.

PROSPECTS Oracle PROSPECTS In May, PROSPECTS Oracle has dominates the database- Oracle plans to release deals to power exchanges software realm on both the most comprehensive for Ford, Sears, and Chevron Unix and Windows NT package of business and is expected to have operating systems. applications available. It staying power, thanks to its Analysts predict it will has a good chance to gain army of 7,000 software hold off the competition market share because its programmers.indefinitely, thanks to its applications are integrated, strong technology and while others offer pieces new cachet with dot-coms. that have to be stitched

together.

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Strategy Feature Lever’s All-in-One-Brand—Lever 2000

Lever Brothers, a New York unit of the Anglo-Dutch Unilever Group, has been competingwith Procter & Gamble in the soap market for 100 years. In 1991, for the first time, Lever’stoilet-soap market share ($) exceeded P&G’s share (see insert). The Lever 2000 brand wasa major contributor to Lever’s share gain. It accounted for $113 million in sales out of a mar-ket total of $1.6 billion. The targeting and positioning of Lever 2000 were major factors inthe brand’s successful performance.

TARGETING STRATEGY

• Entire family rather than different soaps for men, women, and children.

POSITIONING STRATEGY

• Positioned as “the mildest antibacterial soap ever created,” “a soap for 2000 bodyparts.” Heavy use of advertising ($25 million), sampling, and coupons to convincehouseholds that one soap will meet all of their needs. Premium priced compared to Ivoryand Dove.

Source: Valerie Reilman, “Buoyant Sales of Lever 2000 Soap Bring Sinking Sensation to Procter & Gamble,”The Wall Street Journal, March 19, 1992, B1 and B8. Copyright 1992 by Dow Jones & Company, Inc. Repro-duced with permission of Dow Jones & Company, Inc., in the format textbook via Copyright Clearance Center.

Comparison of 1983 and 1991 market share of major toilet-soap manufacturers,based on dollar volume

Lever Brothers

24%

31.5%

37.1%

30.5%

15%

19%

6.5% 8%4.7% 5.5%

Market share

1983 1991

Procter & Gamble Dial Colgate-Palmolive Jergens

Source: Packaged Facts Inc.

segments are identified and their relative importance to the firm is determined, the target-ing strategy is selected. The objective is to find the best match between the value require-ments of each segment and the organization’s distinctive capabilities. The targeting decisionis the focal point of marketing strategy since targeting guides the setting of objectives andthe development of a positioning strategy. The options range from targeting most of thesegments to targeting one or a few segments in a product-market. The targeting strategy

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may be influenced by the market’s maturity, the diversity of buyers’ needs and preferences,the firm’s size compared to the competition, corporate resources and priorities, and the vol-ume of sales required to achieve favorable financial results. Deciding the objectives foreach market target spells out the results expected by management. Examples of market tar-get objectives are sales, market share, customer retention, profit contribution, and customersatisfaction. Marketing objectives may also be set for the entire business unit and for spe-cific marketing activities such as advertising and personal selling.

The targeting and positioning strategies used by ConAgra Inc. for the Healthy Choicefrozen food line helped the new brand successfully enter the market in the early 1990s. Thelow-calorie, low-cholesterol, low-sodium frozen food line quickly gained a strong market po-sition.25 Frozen food is a very competitive supermarket category because freezer space instores is limited. Healthy Choice was introduced into the stagnant male-oriented frozen din-ner segment of the market. It was positioned as a “health product.” This positioning was suc-cessful even though it conflicts with conventional marketing guidelines: the female-orientedfrozen food is the rapid growth segment, and “health” positioning had been used to describepoor-tasting, low-calorie brands. Health is an issue of great concern to men, and the taste ofHealthy Choice is appealing to consumers who try the brand. The new line of frozen foodsgained an impressive 25 percent market share in the $700 million frozen dinner market.Healthy Choice extended its brand in the early 1990s to include breakfast items, deli meats,and soups. By 1992 intense price competition, new products, and the promotion actions of thecompetition eroded Healthy Choice’s share of the frozen dinner market, demonstrating the re-alities of competing against experienced food marketers. Nonetheless, during the 1990sHealthy Choice built a strong brand position across several food categories.

The marketing program positioning strategy is the combination of product, value chain,price, and promotion strategies a firm uses to position itself against its key competitors inmeeting the needs and wants of the market target. The strategies and tactics used to gain afavorable position are called the marketing mix or the marketing program.

The positioning strategy seeks to position the brand in the eyes and mind of the buyer anddistinguish the product from the competition. The product, distribution, price, and promo-tion strategy components make up a bundle of actions that are used to influence buyers’positioning of a brand. General Motors Corp.’s (GMC) positioning problems with its auto-mobile brands illustrate the strategic importance of positioning. In 1995 GMC launched amajor marketing effort to reposition its brands. The objective was to identify the market seg-ment targeted by each brand and develop a unique positioning strategy appropriate for thetarget. The problem is that GM’s car brands are perceived by many buyers to be very simi-lar. The objective of GM’s new strategy is to give each brand a distinct identity geared to thepreferences of the brand’s market target. GM’s management decided to drop the Oldsmobilebrand in 2000, apparently unable to sustain a competitive position for that brand.

Marketing Relationship Strategies

Marketing relationship partners may include end-user customers, marketing channel mem-bers, suppliers, competitor alliances, and internal teams. The driving force underlying theserelationships is that a company may enhance its ability to satisfy customers and cope witha rapidly changing business environment through the collaboration of the parties involved.Relationship strategies gained new importance in the 1990s as customers became more de-manding and competition became more intense. Building long-term relationships with cus-tomers and value-chain partners offers companies a way to provide superior customervalue. Although building collaborative relationships may not always be the best course ofaction, this avenue for gaining a competitive edge is increasing in popularity.

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Strategic partnering is an important strategic initiative for many well-known companiesand brands. Many firms outsource the manufacturing of their products. Examples includeMotorola cell phones, Baskin-Robbins ice cream, Calvin Klein jeans, Pepsi beverages, and Nike footwear. Strong relationships with outsourcing partners are vital to the successof these powerful brands. The trend in the 21st century is partnering rather than verticalintegration.

Planning for New Products

New products are needed to replace old products because of declining sales and profits.Strategies for developing and positioning new market entries involve all the functions of thebusiness. Closely coordinated new product planning is essential to satisfy customer require-ments and produce products with high quality at competitive prices. New product decisionsinclude finding and evaluating ideas, selecting the most promising for development, design-ing marketing programs, market testing the products, and introducing them to the market.

The new product planning process starts by identifying gaps in customer satisfaction.The differences between existing product attributes and those desired by customers offeropportunities for new and improved products. One of the leaders in product innovation isMinnesota Mining and Manufacturing (3M). It has a reputation for developing productsfaster and better than most companies can.26 The new product success guidelines that 3Mfollows include (1) keeping business units small, (2) encouraging experimentation and risktaking, (3) motivating and rewarding innovators, (4) staying close to the customer, (5) shar-ing technology with other firms, and (6) avoiding killing the projects of staff advocates.

Market-Focused Program DevelopmentMarket targeting and positioning strategies for new and existing products guide the choice ofstrategies for the marketing program components. Product, distribution, price, and promotionstrategies are combined to form the positioning strategy selected for each market target. Therelationship of the positioning components to the market target is shown in Exhibit 2–6.

EXHIBIT 2–6Positioning StrategyDevelopment


Productstrategy

Positioningstrategy

Pricestrategy

Markettarget

Distributionstrategy

Promotionstrategy

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The marketing program (mix) strategies implement the positioning strategy.27 The ob-jective is to achieve favorable positioning while allocating financial, human, and produc-tion resources to markets, customers, and products as effectively and efficiently as possible.

Strategic Brand Management

Products (goods and services) often are the focal point of positioning strategy, particularlywhen companies or business units adopt organizational approaches that emphasize productor brand management. Product strategy includes (1) developing plans for new products, (2)managing programs for successful products, and (3) deciding what to do about problemproducts (e.g., reduce costs or improve the product). Strategic brand management consistsof building brand value (equity) and managing the organization’s system of brands for over-all performance.

Nestlé, the Swiss food company, has a successful product and brand management strat-egy for competing in world markets. As described in the Global Feature, the company’sbrand strategy includes responding to local preferences, providing career tracks to keep

How Nestlé Builds Its Brands Throughout the WorldGlobal Feature

• Global brand strategy.

Largest branded food company in Mexico, Brazil, Chile, and Thailand—building rapidlyin Vietnam and China.

Builds both a manufacturing and a political presence.

Negotiated over a decade to get into China.

• Owns nearly 8,000 brands worldwide—but only 750 are registered in more than onecountry—only 80 in 10 countries.

The ingredients or processing technology are adapted for local conditions—often usingthe local brand name.

• Moves into a new market with a handful of labels—from its 11 strategic brand groups.

Nestlé is the market leader in instant coffee in Australia (71%), France (67%), Japan(74%), and Mexico (85%).

• Nestlé’s Thailand manager has worked there for 30 years.

The 100 managers worldwide stay in only one region of the world (a key competitiveadvantage because they know local markets, competition, and governmentalrequirements).

Coffee sales in Thailand were $25 million (1987) to $100 million (1994).

• Developed an entire milk distribution system in China from the farmer to the factory—produced 10,000 tons of powdered milk in 1994 ($700 million in sales by 2000).

• Nestlé is importing sales team and brand management techniques to supermarketchains in Thailand and other countries in the region.

Source: Carla Rapoport, “Nestlé’s Brand Building Machine,” Fortune, September 19, 1994, 147–8, 150, 154, 156.

39

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managers in the same regional areas, and applying global food processing technology togain cost and quality advantages.

Value Chain, Price, and Promotion Strategies

One of the major issues in managing the marketing program is deciding how to integratethe components of the mix. Product, distribution, price, and promotion strategies areshaped into a coordinated plan of action. Each component helps influence buyers in theirpositioning of products. If the activities of these mix components are not coordinated, theactions may conflict and resources may be wasted. For example, if the advertising messagesfor a company’s brand stress quality and performance but salespeople emphasize low price,buyers will be confused and brand damage may occur.

Market target buyers may be contacted on a direct basis using the firm’s sales force orby direct marketing contact (e.g., Internet) or, instead, through a value-added chain (distri-bution channel) of marketing intermediaries (e.g., wholesalers, retailers, or dealers). Dis-tribution channels are often used in linking producers with end-user household andbusiness markets. Decisions that need to be made include the type of channel organizationto use, the extent of channel management performed by the firm, and the intensity of dis-tribution appropriate for the product or service. The choice of distribution channels influ-ences buyers’ positioning of the brand. For example, expensive watches such as the Rolexbrand are available from a limited number of retailers with prestigious images. These retailers help reinforce the brand’s image.

Price also plays an important role in positioning a product or service. Customer reactionto alternative prices, the cost of the product, the prices of the competition, and various le-gal and ethical factors establish the extent of the flexibility management has in settingprices. Price strategy involves choosing the role of price in the positioning strategy, includ-ing the desired positioning of the product or brand as well as the margins necessary to sat-isfy and motivate distribution channel participants. Price may be used as an active (visible)component of marketing strategy or, instead, marketing emphasis may be on other market-ing mix components (e.g., product quality).

Advertising, sales promotion, the sales force, direct marketing, and public relations helpthe organization communicate with its customers, value-chain partners, the public, and othertarget audiences. These activities make up the promotion strategy, which performs an essen-tial role in communicating the positioning strategy to buyers and other relevant parties. Pro-motion informs, reminds, and persuades buyers and others who influence the purchasingprocess. Hundreds of billions of dollars are spent annually on promotion activities. This man-dates planning and executing promotion decisions as effectively and efficiently as possible.

Implementing and Managing Market-Driven StrategySelecting the customers to target and the positioning strategy for each target moves mar-keting strategy development to the action stage (Exhibit 2–4), which involves designing themarketing organization and implementing and managing the strategy.

Designing Effective Market-Driven Organizations

An effective organization design matches people and work responsibilities in a way that isbest for accomplishing the firm’s marketing strategy. Deciding how to assemble people intoorganizational units and assigning responsibility to the various mix components that makeup the marketing strategy are important influences on performance. Organizational struc-tures and processes must be matched to the business and marketing strategies that are de-veloped and implemented. Organizational design needs to be evaluated on a regular basisto assess its adequacy and identify necessary changes. Restructuring and reengineering of


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many organizations in the 1990s led to many changes in the structures of marketing units.Organizational change continues to be an important initiative in the 21st century.

Strategy Implementation and Control

Marketing strategy implementation and control consists of (1) preparing the marketing planand budget, (2) implementing the plan, and (3) using the plan in managing and controllingthe strategy on an ongoing basis. The marketing plan includes details concerning targeting,positioning, and marketing mix activities. The plan spells out what is going to happen overthe planning period, who is responsible, how much it will cost, and the expected results(e.g., sales forecasts). We discuss the preparation of the marketing plan in the last sectionof the chapter.

The marketing plan includes action guidelines for the activities to be implemented, whodoes what, the dates and location of implementation, and how implementation will be accomplished. Several factors contribute to implementation effectiveness, including theskills of the people involved, organizational design, incentives, and the effectiveness ofcommunication within the organization and externally.

Marketing strategy is an ongoing process of making decisions, implementing them, andgauging their effectiveness over time. In terms of its time requirements, strategic evaluationis far more demanding than planning is. Evaluation and control are concerned with track-ing performance and, when necessary, altering plans to keep performance on track. Evalu-ation also includes looking for new opportunities and potential threats in the future. It is theconnecting link in the strategic marketing planning process shown in Exhibit 2–4. By serv-ing as both the last stage and the first stage (evaluation before taking action) in the planningprocess, strategic evaluation assures that strategy is an ongoing activity.

Rubbermaid Inc. offers an interesting insight into evaluation and control. After morethan a decade of superior performance, the company experienced problems in 1995.28 Salesslowed down, and profits declined. Increases in the cost of the resin used in plastic prod-ucts triggered price increases to retailers. This irritated retailers, who reduced Rubbermaid’sshelf space. The already slow consumer demand for housewares was further affected byhigher retail prices. Rubbermaid’s management implemented cost reductions, speeded upnew product introductions, and increased promotions to consumers to move results closerto expectations.

Internet Strategy

The explosive growth of Internet initiatives has resulted in a variety of Web strategieswhich may affect the business and marketing strategies of existing firms and lead to the for-mation of new business designs. We consider the reasons why the Internet is a major forcefor change and discuss alternative Internet strategies for existing companies and new busi-ness ventures.

Major Force for ChangeThe Internet era provides a new way of developing relationships between end-user cus-tomers, value-chain members, and alliance partners.29 The Web offers a compelling oppor-tunity to enhance one-on-one relationships. Such impressive knowledge systems enableorganizations to link pricing, product, design, and promotion information with suppliers andcustomers. These new capabilities are not restricted to large organizations. Shirtmaker.comis a small Seoul-based tailoring business employing eleven tailors to produce bespoke shirts,where the Web page has allowed the customer to select the fabric, pocket type, cuff design,


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and monogram, if required. In 1999, the DaimlerChrysler Smart car (a two-seat city auto)became the first automobile that could be configured and ordered online.

Various strategic initiatives are altering the basic processes that underlie business trans-actions. The reverse auction is illustrative. The reverse results from prices being bid down-ward rather than upward. Suppliers of business-to-business companies have the opportunityvia the Internet to offer competing bids to the customer. At the end of the process the lowbid obtains the sale. Other Web-based initiatives are affecting buying processes. The effectscan be dramatic. Major corporate buyers like Boeing and Motorola have warned that sup-pliers not making the transition to Web-based commerce may find themselves locked outof their businesses. The Covisint online exchange, formed by General Motors, Daimler-Chrysler and Ford and now including other auto manufacturers, already links tens of thousands of suppliers to these major customers, and is seen as a prototype for other “industry-led” online exchanges.

It is apparent that the Internet has a pervasive potential for change that is likely to affecta wide range of products and businesses. The challenge for existing businesses is to find away to capture the advantages of the Internet without damaging important existing rela-tionships. Avon Products Corp.’s challenge in sustaining its direct sales model while pursu-ing an Internet strategy is illustrative. In 2000, after 115 years of selling to the consumer athome, Avon changed strategy and took its products into department stores and shoppingmalls for the first time.

Strategy and the InternetWhile some authorities argue that the Internet will make conventional strategies obsolete,a more compelling logic is that the Internet is a powerful complement to traditional busi-ness and marketing strategies.30 Nonetheless, competitive boundaries are likely to be al-tered and competition will become more intense. Tesco, the leading British supermarketretailer, illustrates both points. Tesco has adopted a “bricks and clicks” strategy for its TescoDirect online business, combining the strength of its chain of stores with Internet-based or-dering. Groceries are selected on a Web page reflecting the customer’s local store, and arepicked manually from the shelves of that same store for delivery to the customer. No addi-tional warehousing or picking facilities are required. Tesco is now leveraging its online cus-tomer base to sell a growing range of high margin nonfood products, from fresh flowers toapparel, as well as financial services. They may even sell automobiles by this route.

While there are many specific strategy initiatives regarding the Internet, they correspondto one of the following:

• Formation of a separate business model as an independent venture or an initiative by anexisting company.

Book retailer Amazon.Com Inc. is an example of the former, whereas Sabre’s Traveloc-ity.Com venture was initiated by an existing company.

• Creation of a separate value-chain channel direct from the producer to the end-user.

Dell computer uses this Internet strategy.

• Using the Internet as an information resource.

This initiative is used by various organizations, such as Business Week.

• Using the Web for advertising and sales promotion activities.

These activities may be provided for one or more sponsors by a Web-based enterprisethat offers users information at no charge. Ad revenues support the enterprise.


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Webvan Left the Basics on the ShelfE-Business Feature

Despite some clear advantages—backing from such savvy financiers as Goldman Sachs andSequoia Capital, a well-respected management team led until April by former AndersenConsulting chief George Shaheen, and more than $1 billion in cash—Webvan’s businessmodel was fundamentally untenable. It simply made little sense to pour huge amounts ofcapital into the grocery business—which ekes out net margins averaging barely over 1%—without evidence that enough shoppers would change their habits.

But Webvan built a huge infrastructure that could only work if droves of consumersquickly embraced buying their peaches and plenty more online. That never happened.What’s more, Webvan depended too much on technology as the driver of its business whileoverlooking the basics of the grocery industry. “We made the assumption that capital wasendless, and demand was endless,” new CEO Robert Swan said in a June interview.

Bad assumptions both. In its short life, Webvan burned through more than $1 billionbuilding automated warehouses and pricey tech gear. Never was the overspending clearerthan when Webvan merged with rival HomeGrocer.com last year. Its go-for-broke approachstood in stark contrast to HomeGrocer’s slower moving, more conservative strategy.

Webvan shelled out more than $25 million for each of its massive facilities vs. Home-Grocer’s $5 million or so for smaller, lower-tech operations. Webvan’s warehouses neededsome 1,000 servers and 16 employees to run the back end, but HomeGrocer’s got by withjust 100 servers and two employees, insiders say. And while Webvan needed about 4,000orders a day to break even per facility, HomeGrocer required just 1,500. . . .

So does Webvan’s failure mean that online grocers’ prospects are no better than that ofa carton of milk past the sell-by date? Not necessarily. Some believe it can still be a solidbusiness, though one that will likely mature more slowly than anything Webvan anticipated.A soon-to-be-released study from IBM’s consulting arm predicts that by 2004, enough de-mand will exist in some metropolitan areas to support at least three profitable grocers inthose markets. “There is demand, and there are profitable ways of servicing these markets,”says IBM’s Ming Tsai.

Source: Linda Himelstein, “Commentary,” Business Week, July 23, 2001, 43.

43

An organization may pursue more than one of these initiatives, and the strategies may beinterrelated. Also, alliances may be formed between traditional companies and Internetventures. The strategic alliance between Toys-R-Us and Amazon.com is an example.

Independent Internet business models have experienced several failures. In more than afew cases the failures have been due to management’s optimistic estimation of patronage andfailure to consider basic business and marketing strategy guidelines. The analysis of Web-van’s lack of success in the Internet groceries market is described in the E-Business Feature.

Internet strategy is further considered in Chapters 10 and 13. E-Business and Technol-ogy Features are included in many chapters.

Preparing the Marketing Plan

Marketing plans vary widely in scope and detail. Nevertheless, all plans need to be basedon analyses of the product-market and segments, the industry and competitive structure,

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and the organization’s value proposition. We look at several important planning considera-tions that provide a checklist for plan preparation.

Planning Relationships and FrequencyMarketing plans are developed, implemented, evaluated, and adjusted to keep the strategyon target. Since the marketing strategy normally extends beyond one year, it is useful to de-velop a three-year strategic plan and an annual plan to manage marketing activities duringthe year. Budgets for marketing activities (e.g., advertising) are set annually. Planning is re-ally a series of annual plans guided by the marketing strategic plan.

The frequency of planning activities varies by company and marketing activity. Markettargeting and positioning strategies are not changed significantly during the year. Tacticalchanges in product, distribution, price, and promotion strategies may be included in the an-nual plan. For example, the aggressive response of competitors to Healthy Choice’s suc-cessful market entry required changes in ConAgra’s pricing and promotion tactics for thefrozen food line.

Planning ConsiderationsSuppose you need to develop a plan for a new product to be introduced into the nationalmarket next year. The plan for the introduction should include the expected results (objec-tives), market targets, actions, responsibilities, schedules, and dates. The plan indicates de-tails and deadlines, product plans, a market introduction program, advertising and salespromotion actions, employee training, and other information necessary to launch the prod-uct. The plan needs to answer a series of questions—what, when, where, who, how, andwhy—for each action targeted for completion during the planning period.

Responsibility for Preparing Plans

A marketing executive or team is responsible for preparing the marketing plan. Some com-panies combine the business plan and the marketing plan into a single planning activity.Regardless of the format used, the marketing plan is developed in close coordination withthe strategic plan for the business. There is also much greater emphasis today on involvingall business functions in the marketing planning process. A product or marketing managermay draft the formal plan for his or her area of responsibility, coordinating and receivinginputs from advertising, marketing research, sales, and other marketing specialists. Coor-dination with other business functions (R&D, finance, operations) is also essential.

Planning Unit

The choice of the planning unit may vary due to the product-market portfolio of the orga-nization. Some firms plan and manage by individual products or brands. Others work withproduct lines, markets, or specific customers. The planning unit may reflect how marketingactivities and responsibilities are organized. The market target is a useful focus for planningregardless of how the plan is aggregated. Using the target as the basis for planning helpsplace the customer in the center of the planning process and keeps the positioning strategylinked to the market target.

Preparing the Marketing PlanThe Conference Board offers several examples of plan formats in its excellent reports onmarketing planning.31 Format and content depend on the size of the organization, manage-rial responsibility for planning, product and market scope, and other situational factors. Anoutline for a typical marketing plan is shown in Exhibit 2–7. We take a brief look at the


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major parts of the planning outline to illustrate the nature and scope of the planningprocess. In this discussion the market target serves as the planning unit.

The Situation Summary

This part of the plan describes the market and its important characteristics, size estimates,and growth projections. Market segmentation analysis indicates the segments to be targetedand their relative importance. The competitor analysis indicates the key competitors (actualand potential), their strengths and weaknesses, probable future actions, and the organiza-tion’s competitive advantage(s) in each segment of interest. The summary should be verybrief. Supporting information for the summary can be placed in an appendix or in a sepa-rate analysis.

Describe the Market Target

A description of each market target, size and growth rate, end-users’ characteristics,positioning strategy guidelines, and other available information useful in planning and


Strategic Situation SummaryA summary of the strategic situation for the planning unit (business unit, marketsegment, product line, etc.).

Market Target(s) DescriptionDefine and describe each market target, including customer profiles, customerpreferences and buying habits, size and growth estimates, distribution channels, analysisof key competitors, and guidelines for positioning strategy.

Objectives for the Market Target(s)Set objectives for the market target (such as market position, sales, and profits). Alsostate objectives for each component of the marketing program. Indicate how eachobjective will be measured.

Marketing Program Positioning StrategyState how management wants the firm to be positioned relative to the competition inthe eyes and mind of the buyer.

A. Product StrategySet strategy for new products, product improvements, and product deletions.

B. Distribution StrategyIndicate the strategy to be used for each distribution channel, including role ofmiddlemen, assistance and support provided, and specific activities planned.

C. Price StrategySpecify the role of price in the marketing strategy and the planned actionsregarding price.

D. Promotion StrategyIndicate the planned strategy and actions for advertising, publicity, Internet,personal selling, and sales promotion.

E. Marketing ResearchIdentify information needs and planned projects, objectives, estimated costs, and timetable.

F. Coordination with Other Business FunctionsSpecify the responsibilities and activities of other departments that have animportant influence on the planned marketing strategy.

Forecasts and BudgetsForecast sales and profit for the marketing plan and prepare the budget foraccomplishing the forecast.

EXHIBIT 2–7Outline forPreparing anAnnual Marketing Plan

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implementation are essential parts of the plan. When two or more targets are involved, it ishelpful to indicate priorities for guiding resource allocation.

Objectives for the Market Target(s)

Here we spell out what the marketing strategy is expected to accomplish during the plan-ning period. Objectives are needed for each market target, indicating financial perfor-mance, sales, market position, customer satisfaction, and other desired results. Objectivesare usually included for each marketing program component.

Marketing Program Positioning Strategy

The positioning statement indicates how management wants the targeted customers andprospects to perceive the brand. Specific strategies and tactics for product, distribution,price, and promotion are explained in this part of the plan. Actions to be taken, responsi-bilities, time schedules, and other implementation information are included at this point inthe plan.

Planning and implementation responsibilities often involve more than one person or department. One approach is to assign a planning team the responsibility for each markettarget and marketing mix component. Product and geographical responsibilities are some-times allocated to individuals or teams. The responsibilities and coordination requirementsneed to be indicated for marketing units and other business functions. Importantly, the plan-ning process should encourage participation from all the areas responsible for implement-ing the plan. Contingency plans may be included in the plan. The contingencies considerpossible actions if the anticipated planning environment is different from what actually occurs.

Forecasting and Budgeting

Financial planning includes forecasting revenues and profits and estimating the costs nec-essary to carry out the marketing plan (see the Appendix to Chapter 2 for financial analy-sis details). The people responsible for market target, product, geographical area, or otherunits should prepare the forecasts and budgets. Comparative data on sales, profits, and ex-penses for prior years are useful to link the plan to previous results.

International Planning Process

The major phases of planning for a multinational firm operating in several countries areshown in Exhibit 2–8. The first step in the planning process is the market opportunityanalysis. This may represent a major activity for a company that is entering a foreign mar-ket for the first time. Several applications are discussed in subsequent chapters. Because ofthe risks and uncertainties in international markets, the market assessment is very impor-tant for both new market entrants and experienced firms.

Phase 1 determines which targets to pursue and establishes relative priorities for re-source allocation. Phase 2 fits the positioning strategy to each target market. The objectiveis to match the mix requirements to the needs identified and the positioning concept man-agement selects. Phase 3 consists of the preparation of the marketing plan. Included are thesituation assessment, objectives, strategy and tactics, budgets and forecasts, and action pro-grams. Finally, in Phase 4, the plan is implemented and managed. Results are evaluated andstrategies are adjusted when necessary to improve results. Although the international mar-keting planning process is similar to planning domestic marketing strategies, the environ-ment is far more complex and uncertain in international markets.


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Summary Strategy formulation for the corporation includes (1) defining the corporate mission andsetting objectives, (2) determining strategic business units, and (3) establishing strategyguidelines for long-term strategic planning of the corporation and its business units. Topmanagement must select the corporate strategy to move the firm toward its objectives. Af-ter implementing the strategy, management considers how the strategy is progressing andwhat adjustments are needed. Successfully executing these steps requires penetrating andinsightful analyses.

The corporate vision or mission statement spells out the nature and scope of the busi-ness and provides strategic direction for the corporation. The firm’s objectives indicate theperformance desired by management. If management decides to move away from the corebusiness, several paths of corporate development are possible, including expansion intonew products and/or markets as well as diversification.

The available evidence indicates that well-formulated and well-executed business strate-gies lead to superior performance. While there are several approaches to strategy develop-ment, they have common features, including the objective of superior customer value,achieving a market orientation, and competing with distinctive capabilities.

Business unit strategies are guided by corporate strategy guidelines. The process beginsby considering each business unit’s market opportunity, position against the competition,financial situation and projections, and strengths and weaknesses. The situation analysis


Information derived from each phase, market research, and evaluation of program performance

Phase 1Preliminary analysis and screening:Matching company/country needs

Phase 2Adapting the marketingmix to target markets

Phase 3Developing themarketing plan

Phase 4Implementation

and control

Environmental uncontrollables,company character, and

screening criteria

Company character

• Philosophy• Objectives• Resources• Management style• Organization• Financial limitations• Management and marketing skills• Products• Other

Home country constraints

• Political• Legal• Economic• Other

Host country(s) constraints

• Economic• Political• Competitive• Level of technology• Culture• Structures of distribution• Geography

Product

• Adaptation• Brand name• Features• Packaging• Service• Warranty• Style

• Situation analysis

• Objectives and goals

• Strategy and tactics

• Budgets

• Action programs

• Objectives

• Standards

• Assign responsibility

• Measure performance

• Correct for errorPrice

• Credit• Discounts

Promotion

• Advertising• Personal selling• Media• Message• Sales promotion

Distribution

• Logistics• Channels

Matching mixrequirements

Marketing plandevelopment

Implementation,evaluation,and control

EXHIBIT 2–8InternationalPlanning Process

Source: Philip R. Cateora,International Marketing, 9thed. (Burr Ridge, IL: Richard D.Irwin, 1996), 335.

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spells out the strategy alternatives for the business unit. Management selects a strategy anddevelops a strategic plan which is then implemented and managed.

Marketing strategy is an analysis, planning, implementation, and control process de-signed to satisfy customer needs and wants by providing superior customer value. The firstpart of the process includes product-market analysis, market segmentation, competitionanalysis, and continuous learning about markets. These analyses guide the choice of mar-keting strategy. Market definition establishes the overall competitive arena. Market seg-mentation describes possible customer groups for targeting by businesses. Competitoranalysis looks at the strengths, weaknesses, and strategies of key competitors. Continuouslearning about markets supplies information for analysis and decision making.

Designing the marketing strategy is the second stage in strategy development. The se-lection of the people (or organizations) to be targeted is guided by the situation analysis.The market target decision indicates the buyer groups whose needs are to be satisfied bythe marketing program positioning strategy. The positioning strategy indicates how the firmwill position itself against its key competitors in meeting the needs of the buyers in the mar-ket target. The relationship strategy spells out the extent of collaboration with consumers,other organizations, and company personnel. New product strategies are essential to gener-ate a continuing stream of new entries to replace mature products that are eliminated.

The third phase of the strategy process consists of market-focused program develop-ment. Specific marketing mix strategies for products, distribution, price, and promotionmust be developed to implement the positioning strategy management has selected. The ob-jective is to combine the marketing mix components to accomplish market target objectivesin a cost-effective manner.

The last phase of the process consists of marketing strategy implementation and man-agement. These activities focus on the marketing organizational design and marketing strat-egy implementation and control. This is the action phase of marketing strategy.

The marketing plan indicates the actions to be taken, who is responsible, deadlines to bemet, and the sales forecast and budget. The plan describes the marketing decisions andguides the implementation of the decisions and the evaluation and management of the mar-keting strategy.

A. Examine the websites of Borders (www.borders.com) and Amazon (www.amazon.com).Discuss the joint venture’s approach to using a website as part of each company’s compet-itive strategy.

B. Examine the websites of ebay.com (www.ebay.com) and uBid.com (www.uBid.com).Compare and contrast the two approaches to using a website as part of each company’scompetitive strategy. Analyze the differences and similarities and suggest improvements aswell as a marketing strategy for the two companies (i.e., solely Internet-based).

1. Top management of companies probably devoted more time to reviewing (and some-times changing) the corporate vision (mission) in the last decade than in any other period. Discuss the major reasons for this increased concern with the vision for thecorporation.

2. Discuss the role of organizational capabilities in corporate strategy.

3. What is the relationship between the corporate strategy and the strategies for the busi-nesses that comprise the corporate portfolio?

4. Discuss the major issues that top management should consider when decidingwhether to expand business operations into new business areas.


InternetApplications

Questions forReview andDiscussion

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5. Discuss the environmental factors that should be assessed on a regular basis by a largeretail corporation such as Target Corp.

6. Discuss what you consider to be the major issues in trying to divide a corporation intostrategic business units, indicating for each problem suggestions for overcoming it.

7. Develop an outline of how you would explain the marketing strategy process to an in-ventor who is forming a new business to develop, produce, and market a new product.

8. Discuss the role of market targeting and positioning in an organization’s marketingstrategy.

9. What is the relationship between the strategic plan for a business in the corporateportfolio and the marketing plan for the business?

10. You have been asked to develop a marketing plan for a metropolitan bank that has sixbranch offices. How would you approach this assignment?

Notes 1. Jack Ewing, “Siemens Climbs Back,” Business Week, June 5, 2000, 79, 80, 82.2. Michael E. Porter, “What Is Strategy?,” Harvard Business Review, November–

December 1996, 74.3. Raymond Miles and Charles Snow, “Fit, Failure, and the Hall of Fame,” California

Management Review, Spring 1984, 10–28; and James Brian Quinn, Intelligent Enter-prise (New York: Free Press, 1992), chap. 5.

4. Preston Townley, Comments made by the Conference Board CEO during an addressat Texas Christian University in Fort Worth, Texas, February 15, 1994.

5. David W. Cravens, Shannon H. Shipp, and Karen S. Cravens, “Reforming the Tradi-tional Organization: The Mandate for Developing Networks,” Business Horizons,July–August 1994, 19–28.

6. “The Virtual Corporation,” Business Week, February 8, 1993, 98–102.7. David J. Collis and Cynthia A. Montgomery, Corporate Strategy (Chicago: Irwin,

1997), 5.8. Ibid., 7–8.9. Ibid., 7–12.

10. Based in part on George S. Day, Strategic Market Planning (St. Paul, MN: West Pub-lishing, 1984), 18–22.

11. Peter F. Drucker, Management: Tasks, Responsibility, Practices (New York: Harper &Row, 1974), 100.

12. Robert S. Kaplan and David P. Norton, The Balanced Scorecard (Boston: HarvardBusiness School Press, 1996).

13. C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Har-vard Business Review, May–June 1990, 79–91; George S. Day, “The Capabilities ofMarket-Driven Organizations,” Journal of Marketing, October 1994, 37–52.

14. Melanie Wells, “Red Baron,” Forbes, July 3, 2000, 151–60.15. This discussion is based on Boris Yavitz and William H. Newman, “What the Corpo-

ration Should Provide Its Business Units,” Journal of Business Strategy, 3, no. 1,Summer 1982, 14.

16. Collis and Montgomery, Corporate Strategy, 10–11.17. Ibid., 11.18. Adrian J. Slywotzky, Value Migration (Boston: Harvard Business School Press, 1996), 4.19. Collis and Montgomery, Corporate Strategy, 11–12.20. Shelby D. Hunt and Robert M. Morgan, “The Comparative Advantage Theory of

Competition,” Journal of Marketing, April 1995, 1–15.21. Peter F. Drucker, Management: Tasks, Responsibilities, Practices (New York: Harper

& Row, 1974), 63.


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22. Frederick E. Webster, “The Changing Role of Marketing in the Organization,” Jour-nal of Marketing, October 1992, 11.

23. Day, Strategic Market Planning, 3.24. George S. Day, “Continuous Learning about Markets,” California Management

Review, Summer 1994, 9–31.25. This example is based on D. John Loden, Megabrands (Homewood, IL: Business One

Irwin, 1992), 184–5.26. “Masters of Innovation,” Business Week, April 10, 1989, 58–63.27. Webster, “The Changing Role of Marketing,” 13.28. Paulette Thomas, “Rubbermaid Stock Plunges Over 12% on Projected Weak 2nd-

Quarter Profit,” The Wall Street Journal, June 12, 1995, B6.29. The following discussion is based on material developed by Dr. John R. Nevin,

Granger Wisconsin Distinguished Professor, University of Wisconsin.30. Michael E. Porter, “Strategy and the Internet,” Harvard Business Review, March 2001,

63–78.31. David S. Hopkins, The Marketing Plan (New York: The Conference Board, 1981). See

also Howard Sutton, The Marketing Plan in the 1990s (New York: The ConferenceBoard, 1990).

Appendix 2A

Financial Analysis for Marketing Planning and ControlSeveral kinds of financial analyses are needed for mar-keting analysis, planning, and control activities. Suchanalyses represent an important part of case preparationactivities. In some instances it will be necessary to re-view and interpret the financial information provided inthe cases. In other instances, analyses may be prepared

to support specific recommendations. The methods cov-ered in this appendix represent a group of tools andtechniques for use in marketing financial analysis.Throughout the discussion, it is assumed that account-ing and finance fundamentals are understood.

Unit of Financial Analysis

Various units of analysis that can be used in marketingfinancial analysis are shown in Exhibit 2A–1. Twofactors often influence the choice of a unit of analysis:

(1) the purpose of the analysis and (2) the costs andavailability of the information needed to perform theanalysis.

EXHIBIT 2A–1 Alternative Units for Financial Analysis

Market Product/Service Organization

Market Industry CompanyMarket niche(s) Product mix Segment/division/unitGeographic area(s) Product line Marketing departmentCustomer groups Specific product Sales unit:Individual customers Brand Region

Model District branchOffice/store

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Salesperson

Financial Situation Analysis

Financial measures can be used to help assess the pre-sent situation. One of the most common and best waysto quantify the financial situation of a firm is throughratio analysis. These ratios should be analyzed over a pe-riod of at least three years to discern trends.

Key Financial RatiosFinancial information will be more useful to manage-ment if it is prepared so that comparisons can be made.James Van Horne comments upon this need.

To evaluate a firm’s financial condition and perfor-mance, the financial analyst needs certain yardsticks.The yardstick frequently used is a ratio or index, relat-ing two pieces of financial data to each other. Analysisand interpretation of various ratios should give an expe-rienced and skilled analyst a better understanding of thefinancial condition and performance of the firm than hewould obtain from analysis of the financial data alone.1

As we examine the financial analysis model in thenext section, note how the ratio or index provides a usefulframe of reference. Typically, ratios are used to comparehistorical and/or future trends within the firm or to com-pare a firm or business unit with an industry or otherfirms.

Several financial ratios often used to measure businessperformance are shown in Exhibit 2A–2. Note that theseratios are primarily useful as a means of comparing:

1. Ratio values for several time periods for a particular business.

2. A firm to its key competitors.

3. A firm to an industry or business standard.

There are several sources of ratio data.2 These in-clude data services such as Dun & Bradstreet, RobertMorris Associates’ Annual Statement Studies, industryand trade associations, government agencies, and in-vestment advisory services.

Other ways to gauge the productivity of marketingactivities include sales per square feet of retail floorspace, occupancy rates of hotels and office buildings,and sales per salesperson.

Contribution AnalysisWhen the performance of products, market segments,and other marketing units is being analyzed, manage-ment should examine the unit’s profit contribution. Con-tribution margin is equal to sales (revenue) less variablecosts. Thus, contribution margin represents the amountof money available to cover fixed costs, and contribu-tion margin less fixed costs is net income. An illustra-tion of contribution margin analysis is given in Exhibit2A–3. In this example, product X is generating a posi-tive contribution margin. If product X were eliminated,$50,000 of product net income would be lost, and theremaining products would have to cover fixed costs notdirectly traceable to them. If the product is retained, the$50,000 can be used to contribute to other fixed costsand/or net income.

1James C. Van Horne, Fundamentals of Financial Management, 4thed. (Englewood Cliffs, NJ: Prentice-Hall, 1980), 103–4.

2A useful guide to ratio analysis is provided in Richard Sanzo, RatioAnalysis for Small Business (Washington, DC: Small Business Ad-ministration, 1977).

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EXHIBIT 2A–2 Summary of Key Financial Ratios

Ratio How Calculated What It Shows

Profitability ratios:

1. Gross profit margin Sales � Cost of goods sold An indication of the total margin available to cover operatingSales expenses and yield a profit.

2. Operating profit margin Profits before taxes and An indication of the firm’s profitability from current operationsbefore interest without regard to the interest charges accruing from the

Sales capital structure.

3. Net profit margin Profits after taxes Shows after-tax profits per dollar of sales. Subpar profit margins(or return on sales) Sales indicate that the firm’s sales prices are relatively low, its costs are

relatively high, or both.

4. Return on total assets Profits after taxes A measure of the return on total investment in the enterprise. ItTotal assets is sometimes desirable to add interest to after-tax profits to form

orthe numerator of the ratio, since total assets are financed by creditors as well as by stockholders; hence, it is accurate to

Profits after taxes � Interest measure the productivity of assets by the returns provided to Total assets both classes of investors.

5. Return on stockholders’ equity Profits after taxes A measure of the rate on stockholders’ investment in the (or return on net worth) Total stockholders’ equity enterprise.

6. Return on common equity Profits after taxes A measure of the rate of return on the investment which the�Preferred stock dividends owners of common stock have made in the enterprise.Total stockholders’ equity

�Par value of preferred stock

7. Earnings per share Profits after taxes Shows the earnings available to the owners of common stock.�Preferred stock dividends

Number of shares of common stock outstanding

Liquidity ratios:

1. Current ratio Current assets Indicates the extent to which the claims of short-term creditors Current liabilities are covered by assets that are expected to be converted to cash in

a period roughly corresponding to the maturity of the liabilities.

2. Quick ratio (or acid-test ratio) Current assets � Inventory A measure of the firm’s ability to pay off short-term obligationsCurrent liabilities without relying on the sale of its inventories.

3. Cash ratio Cash & Marketable securities An indicator of how long the company can go without furtherCurrent liabilities inflow of funds.

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4. Inventory to net working Inventory A measure of the extent to which the firm’scapital Current assets working capital is tied up in inventory.

�Current liabilities

Leverage ratios:

1. Debt to assets ratio Total debt Measures the extent to which borrowed funds have been used Total assets to finance the firm’s operations.

2. Debt to equity ratio Total debt Provides another measure of the funds provided the creditorsTotal stockholders’ equity versus the funds provided by owners.

3. Long-term debt to equity ratio Long-term debt A widely used measure of the balance between debt and equity.Total stockholders’ equity in the firm’s overall capital structure.

4. Times-interest-earned Profits before interest and taxes Measures the extent to which earnings can decline without the(or coverage ratios) Total interest charges firm’s becoming unable to meet its annual interest costs.

5. Fixed-charge coverage Profits before taxes and A more inclusive indication of the firm’s ability to meet all of itsinterest � Lease obligations fixed-charge obligations.

Total interest charges � Lease obligations

Activity ratios:

1. Inventory turnover Cost of goods sold When compared to industry averages, it provides an indication Inventory of whether a company has excessive inventory or perhaps

inadequate inventory.

2. Fixed-assets turnover* Sales A measure of the sales productivity and utilization of plant and Fixed assets equipment.

3. Total-assets turnover Sales A measure of the utilization of all the firm’s assets; a ratio below Total assets the industry average indicates the company is not generating a

sufficient volume of business given the size of its asset investment.

4. Accounts receivable turnover Annual credit sales A measure of the average length of time it takes the firm to Accounts receivable collect on the sales made on credit.

5. Average collection period Accounts receivable Indicates the average length of time the firm must wait afterTotal sales � 365 making a sale before it receives payment.

or Accounts receivableAverage daily sales

*The manager should also keep in mind the fixed charges associated with noncapitalized lease obligations.Source: Adapted from Arthur A. Thompson, Jr., and A. J. Strickland III, Strategy and Policy, 4th ed. (Burr Ridge, IL: Richard D. Irwin, 1987), 270–1.

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The model shown in Exhibit 2A–4 provides a usefulguide for examining financial performance and identi-fying possible problem areas. The model combines sev-eral important financial ratios into one equation. Let’sexamine the model, moving from left to right. Profitmargin multiplied by asset turnover yields return on as-sets. Moreover, assuming that the performance target isreturn on net worth (or return on equity), the product ofreturn on assets and financial leverage determines per-formance. Increasing either ratio will increase net

worth. The values of these ratios will vary considerablyfrom one industry to another. For example, in grocerywholesaling, profit margins are typically very low,whereas asset turnover is very high. Through efficientmanagement and high turnover, a wholesaler can stackup impressive returns on net worth. Furthermore, spaceproductivity measures are obtained for individual de-partments in retail stores that offer more than one line,such as department stores. The measures selected de-pend on the particular characteristics of the business.

Financial Analysis Model

EXHIBIT 2A–3 Illustrative Contribution Margin Analysis for Product X ($000)

Sales $300

Less: Variable manufacturing costs 100

Other variable costs traceable to product X 50

Equals: Contribution margin 150

Less: Fixed costs directly traceable to product X 100

Equals: Product net income $ 50

EXHIBIT 2A–4 Financial Analysis Model

Profit Asset Return Financial Return on margin turnover on assets leverage net worth

↓ ↓ ↓ ↓ ↓Net Net Netprofits Net profits Total profits(after taxes) × sales (after taxes) × assets = (after taxes)

Net sales Total Total Net Netassets assets worth worth

Evaluating Alternatives

As we move through the discussion of financial analy-sis, it is important to recognize the type of costs beingused in the analysis. Using accounting terminology,costs can be designated as fixed or variable. A cost isfixed if it remains constant over the observation period,even though the volume of activity varies. In contrast, avariable cost is an expense that varies with sales overthe observation period. Costs are designated as mixed orsemivariable in instances when they contain both fixedand variable components.

Break-Even AnalysisThis technique is used to examine the relationship be-tween sales and costs. An illustration is given in Exhibit2A–5. Using sales and costs information, it is easy todetermine from a break-even analysis how many unitsof a product must be sold in order to break even, orcover total costs. In this example 65,000 units at sales of$120,000 are equal to total costs of $120,000. Any addi-tional units sold will produce a profit. The break-evenpoint can be calculated in this manner:

↓

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Fixed costsBreak-even units �Price per unit � Variable cost per unit

Price in the illustration shown in Exhibit 2A–5 is $1.846 per unit, and variable cost is $0.769 per unit. With fixedcosts of $70,000, this results in the break-even calculation:

$70,000 BE units � � 65,000 units

$1,846 � $0.769

To determine how many units must be sold to achieve a target profit (expressed in before-tax dollars), the formula is amended as follows:

Target profit units �Fixed costs � Target profit (before tax) Price per unit � Variable cost per unit

Using the same illustration as above and including a target before-tax profit of $37,700, the target profit calcu-lation becomes:

Target profit units �$70,000 � $37,700

� 100,000 units$1.846 � $0.769

Net profit

Total costs

Loss

Break-even point

Fixed costs

Number of units (000s)

Sal

es a

nd c

osts

($0

00s)

Variable costs

Fixed costs

25 50 7565 100 125

250

200

150

120

100

50

0

Sales

Profit

EXHIBIT 2A–5 Illustrative Break-Even Analysis

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EXHIBIT 2A–6 Cash Flow Comparison ($000s)

Project X Project Y

Start-Up Costs �1,000� �1,000�Year 1 500 300Year 2 500 400Year 3 200 600

EXHIBIT 2A–7 Present Value of Cash Flows

Time Cash Flow PV Factor NPV of Cash Flow

Project X0 �1,000� 1 / (1 � .12)0 � 1 �1,000�1 500 1 / (1 � .12)1 � 0.8929 � 446.452 500 1 / (1 � .12)2 � 0.7972 � 398.603 300 1 / (1 � .12)3 � 0.7118 � 213.54

Present value � 58.59Project Y

0 �1,000� 1 / (1 � .12)0 � 1 �1,000�1 300 1 / (1 � .12)1 � 0.8929 � 267.872 400 1 / (1 � .12)2 � 0.7972 � 318.883 600 1 / (1 � .12)3 � 0.7118 � 427.08

Net present value � 13.83


This analysis is not a forecast. Rather, it indicateshow many units of a product at a given price and costmust be sold in order to break even or achieve a targetprofit. Some important assumptions that underlie theabove break-even analysis include the use of constantfixed and variable costs, a constant price, and a singleproduct.

In addition to break-even analysis, several other financial tools are used to evaluate alternatives. Net pre-sent value of cash flow analysis and return on invest-ment are among the most useful. For example, assumethere are two projects with the cash flows shown in Exhibit 2A–6.

Though return on investment is widely used, it islimited by its inability to consider the time value ofmoney. This is pointed out in Exhibit 2A–7. Return oninvestment for both projects X and Y is 10 percent.However, a dollar today is worth more than a dollargiven in three years. Therefore, in assessing cash flows

of a project or investment, future cash flows must bediscounted back to the present at a rate comparable tothe risk of the project.

Discounting cash flows is a simple process. Assumethat the firm is considering projects X and Y and that itscost of capital is 12 percent. Additionally, assume thatboth projects carry risk comparable to the normal busi-ness risk. Under these circumstances, the analyst shoulddiscount the cash flows back to the present at the cost ofcapital, 12 percent. Present value factors can be lookedup or computed using the formula 1/(1 � i)n, where iequals our discounting rate per time period and n equalsthe number of compounding periods. In this example,the present value of cash flows would be as shown inExhibit 2A–7.

Because both projects have a positive net presentvalue, both are good. However, if they are mutually ex-clusive, the project with the highest net present valueshould be selected.

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Financial planning involves two major activities:(1) forecasting revenues and (2) budgeting (estimating future expenses). The actual financial analyses andforecasts included in the strategic marketing plan varyconsiderably from firm to firm. In addition, internalfinancial reporting and budgeting procedures varywidely among companies. Therefore, consider this approach as one example rather than the norm.

The choice of the financial information to be usedfor marketing planning and control will depend on itsrelationship with the corporate or business unit strategicplan. Another important consideration is the selection ofperformance measures to be used in gauging marketingperformance. The objective is to indicate the range ofpossibilities and suggest some of the more frequentlyused financial analysis.

Pro forma income statements can be very usefulwhen one is projecting performance and budgeting.Usually, this is done on a spreadsheet so that assump-tions can be altered rapidly. Usually, only a few assump-tions need be made. For example, sales growth rates canbe projected from past trends and adjusted for new in-formation. From this starting point, cost of goods can bedetermined as a percentage of sales. Operating expensescan also be determined as a percentage of sales based on past relationships, and the effective tax rate as a percentage of earnings before taxes. However, past rela-tionships may not hold in the future. It may be necessaryto analyze possible divergence from past relationships.

In addition, pro forma income statements can be usedto generate pro forma cash flow statements. It is thenpossible to compare alternative courses of action by employing a uniformly comparable standard cash flow.

Financial Planning

Supplemental Financial AnalysesThe preceding sections of this appendix detailed the var-ious forms of traditional financial analysis useful inmarketing decision making. There are supplementalforms of analysis that can also be helpful in differenttypes of marketing decisions. These supplemental tech-niques draw mainly from the management accountingdiscipline and rely on data that are available only to in-ternal decision makers. Many of the financial analysesin the earlier sections employed data from published financial statements.

Only recently have marketing decision makers beenable to look to management accounting to provide an addi-tional set of quantitative tools to aid in the decisionprocess.3 These tools may be referred to collectively asstrategic management accounting practices. Simmonds isgenerally credited with originating the term strategic man-agement accounting, which he defines as “the provisionand analysis of management accounting data about a busi-ness and its competitors for use in developing and moni-toring the business strategy.”4 Although academicresearchers may disagree about the specific techniqueswhich constitute strategic management accounting, there

are a wide selection of management accounting practicesavailable for use in marketing decision making. Thesepractices are described in Exhibit 2A–8 and includeactivity-based costing, attribute costing, benchmarking,brand valuation budgeting and monitoring, competitor costassessment, competitive position monitoring, competitorperformance appraisal, integrated performance measure-ment, life cycle costing, quality costing, strategic costing,strategic pricing, target costing, and value-chain costing.5

Exhibit 2A–8 also provides a description of the vari-ous marketing applications of strategic management ac-counting practices in terms of specific decision makingsituations. Most of these practices require the marketingdecision maker to gather information additional to thatnormally used for the preparation of external financialstatements. In most cases, this information is alreadyavailable in the accounting information system of thefirm. However, it may be necessary to compile datafrom outside the firm in a more formalized manner toperform analysis using some of these strategic manage-ment accounting practices.

3George Foster and Mahendra Gupta, “Marketing, Cost Managementand Management Accounting,” Journal of Management AccountingResearch, vol. 6 (1994), 43–77.4K. Simmonds, “Strategic Management Accounting,” ManagementAccounting (UK), 59 no. 4 (1981), 26–29.

5For a comprehensive description of strategic management account-ing techniques and differences in attitudes toward the use of thesetechniques between accounting and marketing managers, see KarenS. Cravens and Chris Guilding, “An Empirical Study of the Applica-tion of Strategic Management Accounting Techniques,” Advances inManagement Accounting, 10 (2001), 95–124.

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EXHIBIT 2A–8 Supplemental Financial Analyses Using Management Accounting Practices

Strategic Management Accounting Practice Description of the Practice Description of Marketing Application

Activity-based costing Indirect costs are assigned to a product or This technique is particularly useful in determining theservice in relation to the activities used costs of customization or the provision of additionalto produce the product or provide the services to customers. Since the activities are the service. Decision making focuses on the central focus for costing, decision makers can evaluatecollection of activities necessary to product customers and markets in terms of the activities required the product or service rather than the to serve their needs.costs in a specific category.

Attribute costing Products or services are costed in terms of The nature of the cost object can be modified to supportattributes that appeal to customers. Thus, the different strategic decision-making situations. As cost object is not the entire product but a customers modify their preferences, decision makers collection of features that respond to can consider how particular product attributes satisfy theircustomer needs. needs relative to marketing positioning strategies.

Benchmarking Benchmarking is improving existing processes Benchmarking provides an opportunity to assess processesby looking to an ideal standard. The standard for improvement and strategic advantage in termsmay be established from an external source of operational effectiveness. Critical lapses in customersuch as a competitor, a partner, or an unrelated service or customer contact situations can be remedied.industry or company or by another areaof the same firm.

Brand valuation— Brand valuation assesses the current and future Current spending on brand promotion activities can be budgeting and monitoring potential of a brand in quantitative terms. A evaluated in terms of future benefits. This can assist with

“capitalized” value for internally developed budgeting decisions relative to a portfolio of brands or brands can be created even though in the United products and in monitoring the mix and potential of States this value may not be included on a existing products.balance sheet.

Competitive position This type of analysis is used in evaluating the Since this technique requires an external focus, it allows monitoring market strategy of a competitor. Overall decision makers to assess the position of a product in

competitor positions in the market and industry terms of existing and future strategy relative to are assessed, including sales and trend information, competitors. Situations allowing a firm to improve along with market share and cost estimates. competitive position can be identified and acted upon.

Competitor performance This form of analysis is a detailed part of Decision makers can identify the key areas of a appraisal competitive position monitoring and focuses competitor’s market advantage and relate areas of

on preparing a quantitative analysis of the advantage to strategic decisions.competitor’s external financial statements.

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Integrated performance This form of analysis uses performance appraisal Measures focusing on the customer can be linked tomeasurement based on measures that are developed in terms overall strategic objectives throughout the organization.

of a customer focus. Integrated measures may Decision makers can get a clear picture of how their be linked to customer satisfaction and may decisions (and performance) affect overall corporate include nonfinancial measures monitored at the performance.individual and departmental levels.

Life cycle costing A product or service is costed based on stages Decision makers can adopt a longer-term perspectivein the life of a product rather than financial to evaluate the performance of a product without the reporting periods. constraints of annual reporting periods.

Quality costing Accounting measures support determining the Decision makers can evaluate the impact on customers cost of quality and the cost of a quality failure. and market position when choices are made regarding

quality issues.

Strategic costing Strategic costing involves recognizing that the Long-term strategy and strategic objectives considering ultimate objective of expenditures related to product positioning and market penetration can be a product or service may be more long-term in evaluated more completely. The long-term implications of perspective. Thus, cost minimization is not the a decision receive precedence over the short-term effect.prime objective. Choices involving costs are evaluated in terms of long-term issues and the future potential of strategies.

Strategic pricing Strategic pricing adopts a more long-term Pricing decisions can be evaluated more in terms of and demand-focused approach to pricing competitive and market choices.rather than considering a cost-based and historical foundation.

Target costing A market-based approach is used to Since the product is designed to meet the target cost,determine the target cost for a future decision makers know that the product will be able toproduct. The target cost is the remainder enter the market at a price that allows an adequate level after a desired profit margin is subtracted of profits. External rather than internal factors determine from the estimated market price of a the price.new product.

Value-chain costing The cost of a product is evaluated over Operational efficiencies and competitive positioningthe entire value chain of production from can be evaluated at all stages of the value chain, not research and development to customer merely from the costs incurred during production. Links service. This value chain may include to suppliers, customers, and competitors can be multiple functional areas within the considered at all points of the value chain.organization and cover different financial accounting reporting periods.

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Business and Marketing Strategies

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