AT&T and DirectTV merger case study

Chapter 02 Minilecture - Strategic Marketing Planning

Whether your background is in Finance, Accounting, Human Resources, Marketing, or Computer Information Systems, I think we can all agree that nothing happens in business, in the words of GE's much-admired former CEO, Jack Welch,  until a sale is made . That's the reason that a lot of your marketing professors, myself included, tend to go on and on about the importance of a  marketing orientation : finding out what customers want, and putting their needs at the very top of our corporate to-do list.  After all, the whole point of any business is finding, satisfying, and keeping our very best customers.

This is where Strategic Marketing Planning basically begins and ends.  In the  middle  of all this, though, is where your text devotes the discussion of Chapter 02, and where this mini-lecture will focus its attention.

One way of looking at what marketing actually does is to ask: How do we create superior customer value? In a hyper-competitive economy with increasingly rational, time-squeezed, multi-tasking consumers (recall your readings from Chapter 01) facing abundant choices, a company can win only by fine-tuning the value delivery process and by  choosing, providing,  and  communicating superior value . You know from your reading of Chapter 01 that value comes from what economists call "utility:" something available here and now is far more valuable to consumers than something they must wait for. World-class marketers know that creation and delivery of superior customer value - of utility - depends on planning for and creating better  Value Delivery Networks.

The Value Delivery Network

Here's an example of a Value Delivery Network that continues to lead markets, build shareholder wealth, and generally point the way forward:

If you order a laptop from  Dell  computers, Dell sells you a computer, but behind the scenes, they instantaneously activate their value delivery network: The Intel microprocessor is requisitioned from a factory in the Philippines, Costa Rica, Malaysia, or China.  The memory comes from Samsung (Korea), Germany, or Japan, The graphics card from China, the motherboard from a Korean-owned factory in China, the keyboard from Indonesia or Taiwan, the LCD display from Korea, China, or Taiwan, the hard-disk drive from an American-owned factory in in Singapore (Seagate), the carrying case from China, etc. And the whole thing is assembled in Malaysia and shipped to Cape Girardeau, Missouri.  A supply-chain symphony.

And when you order your Dell by telephone, the sales rep on the line who has instantaneous communication with all the suppliers just listed may be able to tell you "I'm sorry, but all our 780-gig hard drives are temporarily out of stock, but I can offer you a 2.0 terabyte hard drive for just $12 more." 

Auto makers, do it; everyone involved in global marketing does it.  Global marketing, briefly, is the process of procuring parts and services from anywhere on the globe to create the lowest possible cost structure, and greatest value for consumers, and then selling products and services to markets around the globe.  Like when you're up in an airplane, looking down - geographic boundaries disappear.

In other words, companies aren't just making and selling stuff, they're part of a value delivery process. Put very simply, the value delivery process can be boiled down to:

1. Choosing the Value : This comes down to segmenting markets, selecting markets to compete in, and staking out a position (e.g., "most reliable," "best customer support," "lowest operating cost," etc.) within the selected target markets. More on this in Chapter 05.

2. Providing the Value : This is about the development of products and support services, pricing, sourcing, manufacturing, distributing, and servicing -  always with the contributions of partners (what Dell might call its "resource advantage" and we refer to as "partners").

3. Communicating the Value : In which sales force, advertising, and sales promotion carry the message: Dell provides superior performance and value for your computing needs. More on these three in Chapters 05, 06 and 07.

Choosing the value (step 01 above) is a strategic, big-picture decision, and Providing and Communicating the Value (steps 02 and 03) are tactical, day-to-day activities that effectively begin with marketing plans and end - hopefully -  with satisfied, loyal customers. That first step - choosing the value - isn't really the beginning of strategic planning.  To understand how Dell and others make strategic decisions about where to compete and what position to claim, it's necessary to understand  Core Competencies.

Core Competencies

Owning and nurturing the resources and competencies that make up the essence of the business is the way that business strategists capitalize on core competencies.  A core competency has three basic characteristics:

1. It is a source of competitive advantage in that it makes a significant contribution to perceived customer benefits,

2. It has applications in a wide variety of markets, and

3. It is difficult for competitors to imitate.

Consider the mighty Netflix : Netflix has distinctive capabilities that promise to keep the company on top even as competitors like Amazon, Redbox, and Wal-Mart try to muscle in on its turf. Some say that Netflix is really a software company masquerading as a DVD rental service. The company has fine-tuned its recommendation software, merchandising, and inventory control systems to such a degree that new orders are automatically generated even as old orders are returned. In addition, all of the company's DVD distribution centers can be polled before a customer is told that the movie he or she wants next is out of stock.  The most recent estimate s are that Netflix alone is responsible for about 37% of Internet traffic.

Other companies with core competencies that confer completive advantage:  Wal-Mart's  world-beating logistics that let it sell us clothing, dog food, and computers - at about the same price as a lot of other stores -   but it costs them less!  So when you buy a tube of toothpaste from Wal-Mart, they make more profit on the sale than their competitors, profit which lets them advertise, open more stores, and continue to build on their leadership position and drives competitors out of the "low-cost" competitive arena. Or how about  Apple ? Big investments in research, development, and design have earned them a loyal following who expects their products to consistently outperform the competitors.  Just consider that about 70% of the tunes that we download from the Internet (to our iPods, iPads, and iPhones, usually) come from Apple's iTunes store. Perceived customer benefits that are difficult to imitate.

rhetorical question (i.e., doesn't need you to answer): Can you think of other companies with core competencies that they've parlayed into competitive advantages? How can your company identify and OWN the core competencies that will let you OWN your markets?

· So, marketers: job one (apart from satisfying your customers) is  to be a leader : to identify, own, and nurture your core competencies. And these are delivered to markets with value delivery networks by companies like Dell, Netflix, Wal-Mart and Apple. Or be a market follower...

Keys to Long-Term Market Leadership

Some time ago (January 2006), McDonald's wholly-owned subsidiary,  Chipotle  Restaurants, was put on the market for investors to buys shares in what they call an "IPO" - an Initial Public Offering.  An interesting aspect of this IPO is that, for the first time since to go-go days of the Internet bubble, on day 01 of the IPO, the shares of Chipotle  actually doubled  their initial offering price: If you bought 01 or 1,000 shares of Chipotle on the first day of trading, you got in on the ground floor and paid $22 per share. And by the close of trading on the New York Stock Exchange that first day, you saw their value DOUBLE - to $44 per share.  And in 2011, we saw LinkedIn's IPO head through the roof, with initial share prices of $45 reaching as high as $100.

Ordinarily, a liberal dose of Public Relations (again, more on this in Chapter 06) is just the thing to take a new stock issue to stratospheric heights. What remains to be seen however, is how McDonald's - or Chipotle's, or LinkedIn's - management intends to manage their business to make your investment in their company continue to grow.   How does a major marketing machine like Chipotle reassure investors they will continue to grow their revenues and returns to investors? How will Chipotle maintain its share prices at $44?   One answer is to examine options for GROWTH: not simply staying in the same place, but in the inexorable logic of capitalism, expanding their markets, increasing their sales and profits, and making your investment more valuable. 

The question of the day would have to be: How will LinkedIn lock in long-term growth? (by the way, Chipotle is doing quite well, thank you, with shares priced just about $450 in January 2016 ; down from around $700 one year ago ) .  As we all saw in the highly-publicized Facebook IPO of 2012, investors ignored the warnings that were all 'round ( some were questioning the suitability of Facebook as an advertising platform;   this article explains why the BIG advertisers like Ford and other blue chip companies saw Facebook as more of a small-scale advertising platform, more appropriate for smaller businesses advertising locally), hoping their shares would continue to grow in value.  But to make that growth happen, management needs a plan to leverage their strengths against existing opportunities, and it's not clear that Facebook has come up with the plan.   Maybe Instagram will be the ticket.  Or for $19 billion, they should be able to find growth with What'sApp .

Where will Facebook's growth come from?  Clearly, they have no trouble growing their user base.  The question, though is how they will leverage that strength against external opportunities - the very definition of strategy.  Report card on Facebook: Shares have edged up to about $98 in January 2016 , with an earnings report due today (January 26, 2016).  This is up from $77 this time last year - pretty solid growth.

I don't want to suggest that bad management or lack of vision leads to stalled growth and languishing share price.  Possibly the most successful marketer in recent years is Samsung, who in 2012 shipped an estimated 213 million smartphones, and now owns 30% of the global smartphone market, ahead of Apple (with 19%).  But here's the problem ( discussed more fully in CNN/Fortune, January 28, 2013 ): Having achieved world domination, it's that much harder to find new areas of growth. According to Fortune, growth in smartphone sales is waning; penetration of smartphones has "matured" in developed regions such as North America and Western Europe.  And price competition from new products can't be far behind.  

Where will Samsung's growth come from?  One possibility: using software to develop an "ecosystem" similar to Apple, whose iPhone and iTunes store provide a mutually-reinforcing suite of software products and hardware to enjoy them.  According to Fortune, "...if consumers associate Samsung with crucial services like music or mapping, they're more likely to see their shiny piece of hardware as more valuable than another, possibly cheaper shiny piece of hardware."

We look at some strategies for growth in the next section of the mini-lecture.

But first, just this sidebar: You don't have to read the business press or listen to the market gurus chattering on TV for long before you realize that business is - at the risk of oversimplifying - all about growth.  At least if you're publicly-owned and have shareholders and creditors to satisfy. Most (but not all) of what follows in this minilecture, and for the rest of the semester, is about finding sources of organic growth , which is usually defined as “…the process of business expansion by increased output, customer base expansion, or new product development, as opposed to mergers and acquisitions, which is inorganic growth .” (Thank you, Wikipedia). To better appreciate the importance of organic growth, it might be good to look at an alternative, a more financially-based approach to growth which works well when it works, and when it doesn’t the results can be interesting. Please have a look at this short article in the April 4, 2016 New Yorker by business columnist James Surowiecki. If this link doesn’t work, try this one.

Assessing Growth Opportunities

Figure 01 immediately below presents what we call the Strategic Planning Gap.  At the bottom of the chart is a line showing sales increase over a ten year period with our current portfolio of activities and businesses.  Pretty much flat-line. Any business would much prefer to take the "high road" on the chart below - this is indicated by the line that represents "desired sales."   And as the illustration also shows, that chasm between "current" and "desired" is identified on the right as the Strategic Planning Gap.  And what's needed to bridge the gap are any of three different possible approaches: Intensive growth strategies, Integrative growth strategies, and Diversification growth strategies.

Figure 01. The Strategic Planning Gap

Intensive Growth Strategies

One way to think about growth opportunities is to explore the possibilities based on who our customers are and what we produce.  In other words, the customers we currently sell to are our "current markets" and all future, potential customers can be identified as "new markets." In the same way, the universe of products and services can be divided into those we currently offer (current products) and those we don't yet offer (new products). This produces the two-by-two matrix you see in Figure 02 below. 

Figure 02. Intensive Growth Strategies

 

Taking the matrix one quadrant at a time, we have:

1. Market Penetration Strategy: This is nothing more than selling more of the same products and services in our current markets. When  WD-40  reminds you that it can also be used to remove crayon marks from walls or polish silver, they're trying to deepen their market penetration (by getting you to use more of it). Or if you use breakfast cereal to prepare casseroles and cookies, you're probably using more than you used to, and are helping Kellogg and General Mills complete their market penetration strategies. To find growth! Apple's move to sell digital textbooks for use on (you guessed it) the iPad would be an excellent market penetration strategy. Example:  In the breakfast cereal market "...sales of sweetened cereal brands are outpacing cereal overall in part because adults are eating them outside of breakfast” and "Cinnamon Toast Crunch is a popular snack for 20- and 30-somethings while playing videogames at night” (see " The War on Cereal: Battle for the Breakfast Table ,” New York Times, June 2014.)

2. Market Development Strategy: The best example of this is global marketing - selling your current product offerings in new markets.  For some time now,  Hyundai  Motors has been offering cars to North American markets, with little change in the actual product itself. Same products, new markets. Krispy Kreme  doughnuts recently moved into the United Kingdom, hoping to sell its successful product in the potentially lucrative British market. By the way, Dunkin' Donuts did the same thing years earlier and the venture went seriously south (failed). But no one has pursued market development more successfully than  Starbuck's , who have not only turned the British into grab-it-and-go coffee drinkers, they even are coaxing the cafe-bound French coffee-drinking public to adapt to the fast-paced American style of coffee consumption. Portable coffee on the run.  Not very French, but a huge success in France!  And, Denver-based Chipotle, after starting small and on the strength of that big IPO, has used the proceeds to open stores around the country.  That's market development intensive growth Strategy.  According to the Chicagotribune.com (December 24, 2012), Burger King is attempting to sell whoppers in the country known for foie gras, fine wines, and culinary excellence (that would be France).  Bon chance! 

3. Product Development Strategy: Basically, this is about finding sales growth by offering new products to current buyers in our current markets. Again, Starbucks offers an excellent example. Besides coffee, they offer muffins, scones, cakes, cookies, bagels and dozens of other baked goods.  De Walt  tools has extended its trademark yellow-and-black contractor-quality lineup of power tools to include portable radios, suitable for the construction site, and  Swiss-Army  probably sells more outdoor gear than it does knives. All these are good examples of the power of a strong brand to leverage the roll out of new products and close the strategic planning gap.  When Facebook decides to be your email service - in addition to everything else they do - this is a new product basically.  A product development strategy.  One really interesting and current example is Wal-Mart's current push into primary care .  According to the New York Times, "Walmart, the nation's largest retailer, has spent years trying to turn some of its millions of customers into patients, offering a simple menu of medical services that consumers can buy along with everything from a bag of chips to a lawn mower. Now, the store is making an aggressive push to become a one-stop shopping destination for medical care.” (August 9th, 2014).  New Products for existing customers. Possibly my favorite example of this is Amazon, who loses money on every sale of every Kindle fire .  But they make up those losses by selling books, movies, and music to Kindle owners.

The fourth quadrant from figure 02 below - Diversification - is a special case, the riskiest bet of the intensive growth strategies, and we look at it separately.

Integrative Growth

Before discussing diversification into new markets, new competitors, new products, and new challenges, let's examine another option: Integrative Growth. Under this growth strategy, growth comes from one or more of three basic moves:

1. Backward integration: acquiring your suppliers. For example, True Value, Ace Hardware franchisees and others might band together and collectively purchase their suppliers: the various companies that manufacture ACE paints, hardware, etc., as well as the distributors upstream in the supply chain. When Sears quit buying tools from Craftsman and appliances from Kenmore for resale and purchased the companies instead, they were pursuing backward integration.  Cable TV giant Comcast's recent acquisition of NBC would be another example of backward integration.   In an interesting and bold move that's sure to shake up the publishing industry, Amazon announced in 2011 that they will directly publish 122 books themselves.  Instead of being content merely to sell books, post publication, Amazon is aggressively courting some of the publishing houses' top authors in an attempt to maintain a healthy and uninterrupted food source for their voracious, world-changing Kindle product.

2. Forward Integration: acquiring the retail outlets for your products.  Sherwin-Williams  is a good example.  Once exclusively a manufacturer of paint, now they have extensive operations - and growth from - retailing not only paint but every conceivable decorating product.   Until they were forced to sell off their distribution operations, Hollywood film studios had a nice forwardly-integrated business operating chains of movie theaters. That's an interesting point about mergers: if they reduce competition (that is, they work  too well ) the U.S. justice department is likely to decide you have a monopoly - like AT&T - and force you to break it up.

3. Horizontal Integration: acquiring competing businesses that offer products similar to yours to customer groups similar to the ones you serve. Hewlett Packard's purchase of Compac computers is the perfect example.  Growth for HP was intended to come from the addition of Compac's strong position in desktop and laptop computers, in addition to "synergies:" the idea that they could eliminate duplicated functions, increase productivity, and control costs. Finally, Sears' purchase of Lands End enormously enhanced the value offered by Lands End because it lets them get into something called "cross-channel marketing:"  Internet shoppers visit the Land end website, order a sweater, and pick it up that afternoon in a Sears store.   In 2012, food magazine publisher Meredith Corporation (publisher of Parents, Family Circle, and Better Homes and Gardens) acquired EatingWell Media Group to increase their presence in a target they feel is ripe for growth: increasing numbers of cost-conscious consumers.  Spokesperson Tom Harty told the Wall Street Journal "...food is a crowded field, but we have this unique proposition that we're going to be linking savings with content."  And presumably growing through horizontal integration. 

Recent Acquisitions by Apple

Here I just want to highlight some of the moves Apple's been making in search of growth by acquisition, and I draw on an article in the New York Times, "For Hints at Apple's Plans, Read Its Shopping List” (February 23, 2014, By Brian Chen). In the last quarter of 2013, Apple spent $525 million on acquisitions.  The largest of these was to purchase PrimeSense, a company that developed sensors that help Microsoft Xbox users control games using body movements, perhaps thinking they can apply these skills and technologies to develop the long-awaited Apple TV.  They also bought Matcha.tv, a service that recommends things to watch on TV.  Not content to stop there, they purchased location data services like Locationary, HopStop and Embark to bulk up their skills in mapping, which as we all know, aren't in the same league as Google Maps.

Of course, there are risks in simply acquiring companies outright: the star talent who receive the big bucks in a high-paying acquisition can take the money and run.  And there can be culture problems: small start-ups focused on introducing new technologies may not fit well with the priorities of their buyers, which are more about market growth than developing the next to-die-for technology. Finally, these small, acquired companies become less nimble when they're tied to the legacy technologies of larger corporations. As Chen notes, the history of tech acquisitions is littered with "big deals that turned out poorly.”  In 2010, Hewlett-Packard bought Palm (maker of the Palm Pilot), went nowhere with the new capabilities, and ended up shutting it down after releasing the Touch Pad, a tablet that was on the market for only about seven weeks.

Diversification Growth

Finally, growth might come from well-planned diversification. One view of the modern corporation is that basically any company is a pool of funds, looking for opportunities to invest those funds into profitable projects. And in theory, there's no reason why Bank of America couldn't field an American League Baseball team if it were okay with the other owners in the AL.  I said earlier that these diversification ventures can be risky, and many analysts tell investors to stay away from mergers where the diversifier is getting into an unrelated area and lacks experience.  For example, oil giant Enron used its pool of funds to diversify into, among other unrelated activities, providing broadband services.   And how about LG Electronics, Inc.?  Traditionally a maker of lower tech products like air conditioners and refrigerators, with their 1999 acquisition of Zenith Corp. they've made a very nice place for themselves in the consumer electronics world.

· One truism based on research about diversification: related diversifiers generally outperform unrelated diversifiers. 

· What synergies, what "relatedness" can you see in LG's move from air conditioners to flat panel TVs and monitors?

Another excellent example of logical, related diversification is Disney's move into the broadcast industry, setting up its own Disney channel, acquiring broadcasters ABC and ESPN, and developing theme parks and resort properties.  Also, Sony's move from consumer electronics into the related but much larger realm of entertainment was the vision behind their acquisition of Columbia Pictures, numerous recording businesses and soft and hardware for video games, to name but a few of their activities.

A Final Word About Intensive Growth Strategies

Figure 2 above provides four very practical, basic options for finding new sources of growth for a corporation.  I STRONGY urge you to consider these as you think about your cases, as you look for ways for Gillette and Chevrolet to grow and remain profitable.  But: no smart marketer feels constrained to operate within only one or the other boxes.  It may be wise to use a hybrid approach.  For example, in the New York Times article, "Adapting Listerine to a Global Market,” (September 13, 2014), author Rachel Abrams explains that Johnson and Johnson - parent company of Listerine - is increasingly looking for growth in the growing middle classes in Latin America and the Middle East (a market development strategy) by marketing not the same old products, and not exactly new products (in a "sort of” product development strategy).  They're tinkering with product formulations to adapt them to local cultures, appetites, and customs.  In Europe, for example, "...consumers want their mouthwash to solve more complicated problems than just bad breath. To meet the demand, J&J released an advanced gum treatment rinse in Britain and Ireland last year... In its 2013 annual report, J&J listed Listerine among a dozen major brands that would help propel the company's growth.”  I daresay they're combining quadrants 2 AND 3 from figure 2 above.

(As a side note, I was surprised to read this in Abrams' article: "In North America, 49% of consumers 'live comfortably or spend freely' compared with 64% in Asia Pacific. Consumers in developing markets are also more willing to spend a premium for new, innovative products.”  Our middle class in the U.S.A. may or may not be shrinking, but the middle class is clearly growing faster elsewhere.)

So:

Mission and vision statements are not just happy talk to please investors, the business press, and customers: they identify the kinds of industries and enterprises that businesses will enter into, and more importantly, the company's vision of itself: Disney sells dreams, Rubbermaid sells innovation and convenience. Choosing, providing, and communicating the value, and selecting appropriate growth strategy follows - or should follow - directly from here.

Last modified: Saturday, January 12, 2019