222 Week 2 F /For WIZARD KIM

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

by Malcolm McDonald Kogan Page. (c) 2017. Copying Prohibited.

Reprinted for Personal Account, American Public University System

[email protected]

Reprinted with permission as a subscription benefit of Skillport,

All rights reserved. Reproduction and/or distribution in whole or in part in electronic,paper or other forms without written permission is prohibited.

Chapter 7: How to Set Marketing Objectives

Overview

By the end of this chapter, you will be able to:

Select which segments to focus your resources on

Set qualified objectives for the selected segments

Introduction

The first thing to point out is that the heading of this chapter is 'How to set marketing objectives'. The reason for this, you may recall from Chapter 1, is because all the best companies set their objectives and strategies for what to sell and to whom before allocating resources to Research and Development, Production, Distribution and the like. Obviously in setting these marketing objectives and strategies, they have to be tentative initially and it is crucial to check with other functions that the necessary resources, including finance, to achieve these objectives are available. But, once these sensible checks are made, the marketing objectives and strategies can be firmed up, the strategic marketing plan can be finalized and then you can proceed to prepare all other functional plans.

Marketing objectives and strategies should be set before all other functional objectives and strategies.

As a reminder, please see Table 7.1 repeated from Chapter 2.

Table 7.1: Corporate objectives and strategies

Objective (what):

– Profit

Strategies (how):

– facilities (operations, R&D, IT, distribution, etc)

– people (personnel)

– money (finance)

– products and markets (marketing)

– other (CSR, image, etc)

Also, please look at this Strategic Marketing Plan box once more, as we are about to complete the 'Portfolio Summary of SWOTs' prior to setting marketing objectives and strategies.

The contents of a Strategic Marketing Plan (T+3, fewer than 20 pages)

Financial Summary

Market Overview

– how the market works

– key segments and their needs

SWOT Analyses of Segments

Portfolio Summary of SWOTS

Assumptions

Objectives and Strategies

Budget for Three Years

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 2 of 11

Any objective must be quantified.

What are marketing objectives?

Setting marketing objectives and strategies is the key step in the whole process of developing a plan to grow sales and profits. An objective is what you want to achieve. Strategies are how you intend to achieve your objective.

There can be objectives and strategies at all corporate levels. For example, there are corporate objectives and strategies marketing objectives and strategies, distribution objectives and strategies, advertising objectives and strategies, pricing objectives and strategies and so on. Any objective, however, must be quantified, otherwise it is not an objective, so words like 'reduce', 'improve', 'increase', etc are not acceptable.

Marketing objectives are about products and markets only.

Common sense will confirm that it is only by selling something to someone that the company's financial goals can be achieved, so this forms the basis of marketing objectives, which are about products and markets only. In essence, marketing objectives are simply about one or more of the following:

existing products in existing markets;

new products for existing markets;

existing products for new markets;

new products for new markets.

These, of course, are derived from the Ansoff Matrix, already discussed in Chapter 4 and shown again in Figure 7.1.

Figure 7.1: Ansoff Matrix

In each of these categories, the only possible objectives are:

sales revenue;

sales volume;

market share;

penetration – for example, getting a product into 50 per cent of available channels;

profit (however defined).

Marketing strategies to achieve these objectives will be dealt with in Chapter 8.

Always start your planning from the base of your current products in your current markets.

Because, by definition, all of us live and work in the first box of the Ansoff Matrix, (that is, we have our existing products that we sell in our existing markets), I am going to concentrate on how to set objectives for these, because if we can achieve our MUST objective with our existing products in our existing markets, it will not be necessary to get involved in the more risky options that require us to do new things. I will, however, cover these options in the last chapter because if you can't reach your objectives by doing more of what you are doing now, you will be forced to consider doing other things.

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 3 of 11

May I please remind you to refer to the rough and appropriate work you did on gap analysis at the end of Chapter 4, as this will guide your thinking in terms of setting objectives and strategies. Remember, however, you must always start planning from the base of your current products in your current markets.

The most useful managerial tool in my experience is the Strategic Planning Matrix.

How to allocate your resources effectively

There is a relatively sophisticated methodology for assessing your current products in their current markets prior to setting appropriate objectives and strategies. It is technically known as The Directional Policy Matrix and in my experience, it is the most useful tool I have ever come across in my long management career.

It is quite sophisticated and technically difficult to construct accurately, so I have developed a simpler version that works just as well and effectively in all environments, including SME. I call this SME version 'The Strategic Planning Matrix' (SPM). There are four boxes in this matrix and it has two very important axes, one of which, the vertical axis, is labelled 'Market Attractiveness'. The horizontal axis is labelled 'Our Relative Competitive Strengths'. A blank SPM looks as shown in Figure 7.2.

Figure 7.2: Strategic Planning Matrix

Please note that on the horizontal axis 'high' is on the left and 'low' is on the right. This is because most executives will be familiar with the Boston Matrix, in which 'high' was at the point of origin. Also, another famous management guru, Michael Porter, put 'high' on the left of his matrices.

What should be plotted on the Strategic Planning Matrix (SPM)?

For the purpose of this crucial chapter, I am going to assume that you did at least some elementary thinking about market segments (from Chapter 5) and that you identified at least three or four in each of your main markets.

However, let us look again at Table 7.2, repeated from Chapter 4. As a minimum, select the principal boxes from Table 7.2, so you may select, for example, six or seven boxes that account for at least 80 per cent of your sales. These will be your 'markets' for the vertical axis of the SPM.

1. Select a business unit, or part of the business, for which you wish to develop a partial plan. Business unit: ___________________

2. Along the top of the table below, list the principal products, product groups or services sold by the business unit, ignoring unimportant ones.

3. Down the left of the table, list the principal markets, or market segments, you sell into, ignoring unimportant ones.

4. Now choose four to six product-markets (cells) to concentrate on. For each, estimate your current revenue in the box.

If you only have one main product (or product group) into one main market, or even into two main markets, it is essential that you go back to Chapter 5 and complete the market segmentation exercise, even if it is only the 'quick' version.

Table 7.2: Product–market table

Products: 1: 2: 3: 4: 5: 6: 7:

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 4 of 11

Markets:

1:

2:

3:

4:

5:

6:

7:

If you are competing in a market in which there are only a few major customers (Key Accounts), as in the case of the car industry, or the supermarket sector in the UK, list these customers for positioning on the vertical axis of the SPM. These customers will be the equivalent of 'markets'.

To summarize, make a list here of Markets, Segments, or Key Accounts.

We are going to use current products in current markets as the unit of analysis for completing the SPM. Ideally, these should be segments.

What does 'Market Attractiveness' mean?

As I said above, the vertical axis of the SPM, labelled 'Market Attractiveness', is the most important of the two axes, because it will determine how you allocate your scarce resources. The real significant definition of 'Market Attractiveness' is 'The potential for growing profits over the next three years', as profit growth is what we are interested in. Whilst it is possible to make an assessment intuitively of which of the seven or eight markets we have listed above offers the best opportunities for profit growth, there is a more robust and 'scientific' way of doing this, which I will now explain.

Profit is the sum of market size, profit margin and potential growth.

Profit, of course, is the sum of market size (revenue), multiplied by potential growth (%), multiplied by return on sales (%). We are interest in the future (that is, prospects for the next three years) and the data you use should be realistic and should apply equally to all competitors in these markets. In other words, return on sales should be the weighted average of the margin that is available to any competitor in a market.

As an example, if a market is worth £100 million and is growing at 10 per cent a year at an ROS of 10 per cent, over three years, the profit potential for all competitors would be:

There is, however, no need to do such calculations, as the method explained in the next few paragraphs will make clear.

1. At the corporate level, decide what the MAFs are (usually three to five factors).

2. Give each MAF an importance weighting to the company (total weights should sum to 100 per cent).

3. For each MAF, define the scoring criteria (what constitutes low attractiveness, medium attractiveness, and high attractiveness).

4. Using the scoring criteria, score each product-market on a scale of 0 to 10 against each factor (where 0 is extremely low and 10 is extremely high attractiveness).

5. Multiply the importance weights by the attractiveness scores to produce a weighted attractiveness score.

6. Evaluate the total weighted scores – do they seem to make sense, intuitively?

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 5 of 11

Figure 7.3: Market Attractiveness Factors (MAFs) Process

Figure 7.3 describes the process of setting Market Attractiveness Factors (MAFs) and Figure 7.4 is a completed example for one market. This calculation, of course, will need to be carried out for all your markets in order to establish the relative attractiveness of each. A form for this is provided in Table 7.4. Although in this table there are four MAFs, it is perfectly acceptable to use only the first three.

Looking at Table 7.4, you will see that your first task is to set the parameters for each of the MAFs. For a very small company, an attractive market size might be £1 million, whereas for a bigger company it might be £10 million. An attractive ROS might be 25 per cent for one company and 15 per cent for another. You will see that the next task is to assign a weight for each MAF. This is an important step, because it depends on your circumstances; for example, if you have a factory with, say, only 40 per cent occupancy, you would give a bigger weight to size and growth. On the other hand, if you have a factory that is full to capacity, you would give a bigger weight to profitability. So this step is very important and you should give careful thought to it. Once you have done this, you can then use Table 7.5 to carry out your calculations.

Table 7.3: Example of Market Attractiveness evaluation for one market only

Factor

Scoring Criteria

Score Weighting Ranking10–7 6–4 3–0

1. Market Size (£ millions) > £250 £51–250 < £50 5 15 0.75

2. Volume Growth (Units) > 10% 5–9% < 5% 10 40 4.0

3. Industry Profitability > 15% 10–15% < 10% 8 35 2.8

4. Competitive Intensity Low Medium High 6 10 0.6

Total 8.15

This form illustrates a quantitative approach to evaluating market attractiveness. Each factor is scored, then multiplied by the percentage weighting and added up for the overall score. In this example, an overall score of 8.15 out of 10 places this market in the highly attractive category. It is necessary to calculate the relative attractiveness of ALL your markets using this method.

Table 7.4: Market Attractiveness evaluation

Factor (amend)

Scoring Criteria (amend)

Weighting (amend) Ranking (amend)10–7 6–4 3–0

1. Market Size (£ millions) > £250 £51–250 < £50 15 0.75

2. Volume Growth (Units) > 10% 5–9% < 5% 40 4.0

3. Industry Profitability > 15% 10–15% < 10% 35 2.8

4. Competitive Intensity Low Medium High 10 0.6

Total 8.15

This form illustrates a quantitative approach to evaluating market attractiveness. Each factor is scored, then multiplied by the percentage weighting and totalled for the overall score. In this example, an overall score of 8.15 out of 10 places this market in the highly attractive category. Decide on MAFs. Decide on the parameters. Decide on the weighting. Put ALL your markets/segments through this process.

Table 7.5: Market Attractiveness Factors

Attractiveness Weight (%) Product-market: Product-market: Product-market:

Score Score x weight Score Score x weight Score Score x weight

Total 100%

Please pay close attention to the weights you allocate to the MAFs.

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 6 of 11

All you have to do now is to take your markets (from Table 7.2) or your segments (identified from Chapter 5), score each one out of 10, then multiply the score by the weight to arrive at a weighted score, as in the example given in Table 7.3. You can use the proforma given in Table 7.5 for this purpose.

I am sorry about this, dear reader, but you are going to have to do this for every one of your 'markets', so it will take up a bit of your time – but it will be worth the effort – trust me! Copy the form in Table 7.5 for this purpose.

When you have done this, place each of your 'markets' on a thermometer, as shown below in Figure 7.4.

Figure 7.4: Market Attractiveness thermometer

The following is a very useful tip in completing this exercise, so please read this next section.

My experience over many years of doing this exercise with companies is that most of the weighted scores range from 3.5 for the lowest and 7.5 for the highest. For reasons that will be clear later, in this case you should start the scale on the bottom of the axis at 3.0 and the top at 8.0 so that there is a proper spread of your markets, otherwise, if you make this scale 1–10, they will all cluster around the middle of the vertical axis. As you will appreciate later, this makes this particular analysis virtually useless.

It is also important that you get a wide spread of your markets on the horizontal axis.

What does 'Our Relative Competitive Strength' mean on the horizontal axis?

This book is written for successful companies who want to be even more successful, so by now you will already have worked out for yourselves that this is the easy part of this analysis for the Strategic Planning Matrix (SPM), because you have already done a SWOT analysis for each of your markets.

So, all you have to do now is to put the weighted score from your SWOTs for each of your markets on the horizontal axis, using the same 'rule' I explained for the vertical axis.

In other words, if your lowest weighted SWOT score was, say 3.5 and your highest was, say 7.5, make the point of origin on the horizontal an 8.0 and 3.0 on the right.

This will ensure that you have a wide spread of your markets when you complete this exercise. You will soon see why this is important.

How to complete this Strategic Planning Matrix

All you have to do now is to find the coordinates from both axes, initially as dots.

Now draw a circle reflecting either:

the market size of each market, or;

your sales into each of these markets.

Ideally, do both, with your sales (a smaller circle) inside the larger one (market size) in order to appreciate your relative position in each. It is all right, however, if you just make the circle size represent your own sales.

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 7 of 11

It is important that you get a wide spread of your markets on the vertical axis.

So, let's assume that you have drawn only circles representing, proportionally, your sales into each market. Consequently, the circles should add up to about 100 per cent of your current sales. You should end up with an SPM that looks something like the matrix in Figure 7.5.

Figure 7.5: Selecting and categorizing markets by potential

Each box in the Strategic Planning Matrix requires different objectives and strategies.

How to interpret your SPM

In the example in Figure 7.5, there are 11 markets shown, each circle representing the supplier's sales value in each market rather than each circle representing the available potential.

Box 1 – bottom left – shows markets where the supplier has excellent strengths, but for reasons known to the supplier, these markets do not offer much potential for growth in their profits over the next three years. This being the case, the supplier should keep the cash flows coming as long as possible, only investing when necessary in order to keep the business coming in. Net free cash flows from these markets are what keeps the company going. You will see that I have labelled these markets 'Status'.

Markets in box 2 in the bottom right of the SPM are neither attractive, nor do we have relative strengths. Clearly, in these markets we should endeavour to minimize costs and squeeze as much net free cash flow as possible from them. I have labelled these markets 'Streamline'.

Markets in box 3, top right, are attractive to us, but we lack competitive strengths. The decision we have to make here is whether to invest in improving our competitive position or whether to just accept this. If we decide to invest in order to improve our competitiveness, under no circumstances should you set inappropriate objectives such as to maximize profitability. This would be a bit like putting a plant in the garden, expecting it to blossom in the spring, whilst pulling it up by the roots every day to see if it is growing! I have labelled these markets 'Star'.

Finally, markets in box 4, top left, represent our real future, for not only do they have great potential for us to grow our profits over the next three years, but we also have relative competitive strengths. I have labelled these markets 'Strategic'.

These guidelines are summarized in the SPM shown in Figure 7.6. Expanded guidelines are shown in Figure 7.7. Please read these guidelines carefully before thinking about setting objectives for the markets in your SPM.

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 8 of 11

Figure 7.6: Supplier business strength with segment

Figure 7.7: Objectives and strategies suggested by portfolio matrix analysis

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 9 of 11

Assumptions

Before proceeding to set objectives for your markets/segments, it is important that you specify a few crucial assumptions. These are usually related to key issues that have to be resolved or achieved if you are to achieve your objectives.

For example, you may read the financial press very carefully and make the following assumption:

The financial crisis in France will end and the market will grow by 5 per cent per annum over the next three years.

Or perhaps there is an internal issue that needs to be resolved, leading to the following assumption:

We will be able to recruit five graduates with the essential Information Systems skills that we need.

However, please be sure to make your assumptions few in number and if you can achieve an objective even if your assumption doesn't happen, the assumption is unnecessary.

We can now set objectives for each market in the SPM

Figure 7.8 shows the circles (markets) as they are and where we want them to be (objectives) in three years' time. Some are bigger, some are smaller and some remain the same size. The aggregation of the circles in three years' time should reach our MUST objectives in terms of revenue, but please note that until we have also set the strategies for achieving these revenue objectives, we will not know whether we will be able to achieve the MUST profit objectives.

I will explain how the circles move either to the left or to the right in Chapter 8, as it is the strategies that will make them move.

Figure 7.8: The Strategic Planning Matrix (SPM)

Assumptions should be few in number and if you can achieve your objectives without them, they are unnecessary.

For now, when you have drawn your SPM, the sum of all the circles (markets/segments/customers) should reach your MUST revenue objectives for the next three years. If they don't, you will need to consider either new products for existing markets, or existing products into new markets, or new products into new markets, but this will be dealt with in Chapter 8, alongside spelling out your strategies for achieving your objectives.

For now, however, let's assume that the size of the circles does indeed add up to our MUST revenue objectives in three years' time.

In the next chapter, we can proceed to determine the marketing strategies to achieve the objectives.

Actions

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 10 of 11

Please display your SPM showing the circles (markets) where they are now and where they will be in three years' time and list the revenue objective for each market, bearing in mind that some might be less than they are now. For example, please note that the market/segment in the middle/top in Figure 7.5 is, say, £5 million in three years' time, growing from its current £1 million, whereas the market/segment in the middle at the bottom of Figure 7.5 is declining from its current £10 million to £7 million in three years' time.

Malcolm McDonald on Marketing Planning: Understanding Marketing Plans and Strategy, 2nd Edition

Reprinted for ZU7S5/5693748, American Public University System Kogan Page, Malcolm McDonald (c) 2017, Copying Prohibited Page 11 of 11