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E L E V E N T H E D I T I O N

STRATEGIC MARKET

MANAGEMENT

David A. Aaker Vice-Chairman, Prophet

Professor Emeritus, University of California, Berkeley

Christine Moorman T. Austin Finch Sr. Professor of Business Administration

Fuqua School of Business, Duke University

VP AND EDITORIAL DIRECTOR George Hoffman EDITORIAL DIRECTOR Veronica Visentin EXECUTIVE EDITOR Lise Johnson SPONSORING EDITOR Jennifer Manias EDITORIAL MANAGER Gladys Soto CONTENT MANAGEMENT DIRECTOR Lisa Wojcik CONTENT MANAGER Nichole Urban SENIOR CONTENT SPECIALIST Nicole Repasky PRODUCTION EDITOR Bharathy Surya Prakash COVER PHOTO CREDIT © Qweek/iStockphoto

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ISBN: 978-1-119-39220-0 (PBK) ISBN: 978-1-119-39226-2 (EVALC)

Library of Congress Cataloging-in-Publication Data

Names: Aaker, David A., author. | Moorman, Christine, author. Title: Strategic market management / by David A. Aaker, Vice-Chairman,

Prophet, Professor Emeritus, University of California, Berkeley, Christine Moorman, T. Austin Finch Sr. Professor of Business Administration, Fuqua School of Business, Duke University.

Description: Eleventh edition. | Hoboken, NJ : John Wiley & Sons, Inc., 2017. | Includes bibliographical references and index. |

Identifiers: LCCN 2017029437 (print) | LCCN 2017034381 (ebook) | ISBN 9781119392224 (epub) | ISBN 9781119392217 (pdf) | ISBN 9781119392200 (pbk.)

Subjects: LCSH: Marketing—Management. | Strategic planning. Classification: LCC HF5415.13 (ebook) | LCC HF5415.13 .A23 2017 (print) | DDC

658.8—dc23 LC record available at https://lccn.loc.gov/2017029437

The inside back cover will contain printing identification and country of origin if omitted from this page. In addition, if the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is correct.

P R E F A C E

This eleventh edition of Strategic Marketing Management continues its mission to help business leaders develop business, brand, and marketing strategies that lead to enduring competitive advantage—a task that has become more daunting over the years. In most markets, competitors are reaching parity on basic functional benefits. As a result, creating and protecting strong customer relationships and ongoing innovation is more important than ever and requires a strong marketing strategy and organization to make it happen.

Developing and implementing strategies is now very different from only a few decades ago when business environments were more stable and simpler. Every market can now be described as dynamic—with Internet entrants, new business models, global competitors, and customers who seek engagement and quality. As a result, firms need to be able to adapt strategies in order to stay relevant. It is a challenging and exciting time—full of opportunities as well as threats.

Several unique aspects of the book have been retained:

A business strategy focus that includes consideration of product/market scope, value proposition, assets and competencies, and functional area strategies.

A structured strategic analysis, including customer, competitor, market, environmental, and internal analyses, leading to an understanding of market dynamics that is supported by tools, frameworks, and planning forms.

A detailed discussion of the various types of customer value propositions as the basis for strong customer relationships and brands. A strategy requires a compelling value proposition to be customer driven and successful over time. A deep discussion of how to grow the company by energizing the business, leveraging the business into new areas, creating new businesses, and going global.

A comprehensive analysis of how to harness the key organization activities to create an effective strategy for long-term performance.

A view of strategy emphasizing the dynamic nature of markets, which requires customer- driven strategies. It also details paths to break from the momentum of the past to generate creative strategies and offerings.

THE ELEVENTH EDITION The eleventh edition reflects the following revisions:

Chapter 5, “Environmental and Strategic Analyses,” has been updated to focus on contemporary trends. It combines materials from the previous Chapter 6 to integrate firm strengths and weakness with environmental threats and opportunities in SWOT analysis as well as scenario and impact analysis. Details on firm performance metrics from the previous Chapter 6 have been retained and put into Appendix A at the end of the book.

Chapter 6 (old Chapter 8), “Creating Advantage: Customer Value Leadership,” offers a concise overview of alternative value propositions and how a firm achieves customer value leadership through points of parity and points of difference. It also overviews key threats

iii

to customer value leadership, including failure to select a focus and to align the business model. The concept of synergy is introduced in Chapter 6 as part of achieving customer value leadership.

Chapter 7, “Building and Managing Customer Relationships,” and Chapter 8, “Creating Valuable Customers,” are both new to the book. These chapters include several of the customer-related ideas in different chapters in the tenth ediction. Chapter 7 examines managing the customer journey and customer experiences—two emerging topics important to practice. Chapter 8 offers a tutorial on how to ensure that companies not only create value for customers, but also that the company has valuable customers that contribute to its performance. Using customer lifetime value tools, the concept of customer equity is introduced and evaluated. Chapter 16, “Harnessing the Organization,” has been revised extensively to focus on a broader array of factors associated with a customer-centric organization, including culture, competencies, structure, metrics and incentives, leaders, and employees.

Chapter 17, “How Marketing Creates Value for Companies,” is new to the book. This chapter examines customer equity and brand equity discussed in earlier chapters with a focus on how these assets improve firm value—both revenues and stock market performance. The latter is shown to be achieved by influencing the speed, level, volatility, and vulnerability of company cash flows.

Each chapter (except Chapter 1) contains two new “Best Practice” case studies—one digital and one global. These case studies were written to focus on successful companies— large, small, product, service, B2B, and B2C—and to highlight aspects of their strategies that correspond to the chapter topic. Discussion questions at the end of each case will allow instructors to turn to these mini-cases during class to discuss what these companies did well and to examine challenges to their success going forward.

The “Case Challenges for Part I and II” in the tenth edition have been moved to the end of the book into a section called “Case Studies.” The following cases have been retained and updated, “The Energy Bar Industry,” “Assessing the Impact of Changes in the Environment,” “Contemporary Art,” and “Dove.” “Competing Against Walmart” has been changed to focus on “Competing Against Amazon” given it now appears to be the “industry giant.”

AN OVERVIEW Chapter 1 introduces concepts of business strategy and strategic market management. The goal of sustainable competitive advantage (SCA) is discussed in detail because it drives all chapters that follow. Part I of the book, Chapters 2–5, covers strategic analysis with chapters discussing customer, competitor, market, environmental, and internal analyses.

Part II of the book, Chapters 6–17, covers the development, implementation, and evaluation of strategy. Chapter 6 examines alternative value propositions that can be adopted by the company and the importance of achieving customer value leadership. Chapters 7 and 8 focus on the all- important role of the customer relationship, including building and managing strong customer relationships and managing customer equity. Chapters 9 and 10 consider how to create valuable brands and to develop brand equity. The next four chapters present growth strategies—energizing the business (Chapter 11), leveraging the business (Chapter 12), creating new businesses

iv Preface

(Chapter 13), and managing global strategies (Chapter 14). Chapter 15 discusses setting priorities among business units and managing investment and divestment decisions for future growth.

Chapter 16 examines the organizational challenges underlying the implementation of market- ing strategy and offers solutions in the form of developing a customer-centric organization. Finally, Chapter 17 examines how strong marketing assets in the form of strong customer relationships and brands produce value for the company.

THE AUDIENCE This book is suitable for any course in a school of management or business that focuses on the management of strategies. In particular, it is aimed at:

The marketing strategy course, which might be titled Strategic Market Management, Strategic Market Planning, Strategic Marketing, or Marketing Strategy.

The policy or entrepreneur course, which might be titled Strategic Management, Strategic Planning, Business Policy, or Entrepreneurship.

The book is also designed to be used by managers who need to develop strategies in dynamic markets—those who have recently moved into general management positions or who run small businesses and want to improve their strategy development and planning processes. Another intended audience is general managers, top executives, and planning specialists who would like an overview of recent issues, frameworks, and tools in strategic market management.

A WORD TO INSTRUCTORS The eleventh edition is accompanied by a revision of the extensive instructor’s resource guide authored by David Aaker and Christine Moorman, which is located on the book’s companion Web site at www.wiley.com/college/aaker. The resource guide has a set of lecture suggestions for each chapter, a test bank, several course outlines, case notes, recommended external cases to be used with select chapter, and case notes. An Image Gallery, containing all figures and tables in the text, will also be available for instructors.

ACKNOWLEDGMENTS This book could not have been created without help from friends, students, reviewers, and colleagues at the Haas School of Business and at Prophet. Special thanks to research assistants at the Duke University Fuqua School of Business who supported this revision, including Ishita Anil, Dion Aviki, Danilo Haliz, Maddie Hilal, Brittany Holland, Anant Johri, Shreyas Jayanth, Emily Madden, Sarah Memmi, Debra Origel, Nishant Samuel, Dana Vielmetti, Scott Wallace, and Hillary Weiner. Your insights and support were essential to this revision. Thanks to Leah Porter, John Carmichael, and Mark Brodeur at Nestle who helped with the pet food example used in the planning forms and to Ricardo Guerra from Itau for his assistance in constructing the best practice case study. Finally, thanks to Edward Holub for his outstanding editorial support.

We are pleased to be associated with the publisher, John Wiley, a world class organization, and its superb editors—Rich Esposito (who helped give birth to the first edition), John Woods, Tim Kent, Ellen Ford, Jeff Marshall, Judith Joseph, Jayme Heffler, Franny Kelly (who guided the

Preface v

ninth and tenth editions), and Lise Johnson who supported us in this edition. Special thanks to Bharathy Surya Prakash, Wiley’s Production Editor, who supported us during each stage of the publication process.

Thanks to friend and colleague Jim Prost, a strategy teacher extraordinaire who made numerous suggestions about prior editions of the book and has helped create a world-class teacher’s resource manual in previous versions of the book. Thanks to Scott Wallace, Ph.D. student at Duke, who updated the teaching guides and test bank for this eleventh edition.

From Dave: This book is dedicated to the women in my life—my wife, Kay, and my three girls, Jennifer, Jan, and Jolyn, who all provide stimulation and support.

From Christine: This book is dedicated to all of my students—thank you for inspiring me to think harder and teach better.

David A. Aaker and Christine Moorman, 2017

vi Preface

C O N T E N T S

Chapter 1 Strategic Market Management—An Introduction and Overview 1 What Is a Business Strategy? 3 Strategic Market Management 10 Marketing and Its Role in Strategy 14

PART ONE STRATEGIC ANALYSIS 17

Chapter 2 External and Customer Analysis 19 External Analysis 19 The Scope of Customer Analysis 23 Segmentation 23 Customer Motivations 28 Unmet Needs 31

Chapter 3 Competitor Analysis 39 Identifying Competitors—Customer-Based Approaches 40 Identifying Competitors—Strategic Groups 42 Potential Competitors 44 Competitor Analysis—Understanding Competitors 44 Competitor Strengths and Weaknesses 49 The Competitive Strength Grid 52 Obtaining Information on Competitors 55

Chapter 4 Market/Submarket Analysis 59 Dimensions of a Market/Submarket Analysis 59 Emerging Submarkets 61 Actual and Potential Market or Submarket Size 62 Market and Submarket Growth 63 Market and Submarket Profitability Analysis 65 Cost Structure 68 Distribution Systems 69 Market Trends 69 Key Success Factors 70 Risks in High-Growth Markets 71

Chapter 5 Environmental and Strategic Analyses 78 Environmental Analysis 79 Strategic Analysis 89 From Analysis to Strategy 96

vii

PART TWO CREATING, ADAPTING, AND IMPLEMENTING STRATEGY 101

Chapter 6 Creating Advantage: Customer Value Leadership 103 Alternative Value Propositions 104 Customer Value Leadership 110 Managing for Customer Value Leadership 114

Chapter 7 Building and Managing Customer Relationships 122 The Customer Decision Journey 122 Managing Customer Experience 128 Toward Long-Term Customer Relationships 137

Chapter 8 Creating Valuable Customers 146 The Purchase Funnel 147 Customer Lifetime Models and Strategy Effectiveness 152 Customers as Valuable Assets 157

Chapter 9 Building and Managing Brand Equity 162 Brand Awareness 163 Brand Loyalty 164 Brand Associations 165 Brand Identity 171

Chapter 10 Toward a Strong Brand Relationship 180 Understanding and Prioritizing Brand Touchpoints 180 Focusing on the Customer’s Sweet Spot 182 How to Create or Find a Customer Sweet Spot 184 Get Beyond Functional Benefits 185 Broadening the Concept of a Brand 187

Chapter 11 Energizing the Business 194 Innovating the Offering 195 Energizing the Brand and Marketing 200 Increasing the Usage of Existing Customers 208

Chapter 12 Leveraging the Business 214 Which Assets and Competencies Can Be Leveraged? 215 Expanding the Scope of the Offering 220 New Markets 221 Evaluating Business Leveraging Options 222 The Mirage of Synergy 224

Chapter 13 Creating New Businesses 230 Create “Must Haves,” Rendering Competitors Irrelevant 231 The Innovator’s Advantage 234 Managing Category Perceptions 236 Creating New Business Arenas 237 From Ideas to Market 242

viii Contents

Chapter 14 Global Strategies 248 Motivations Underlying Global Strategies 249 Standardization vs. Customization 253 Expanding the Global Footprint 257 Strategic Alliances 259 Global Marketing Management 262

Chapter 15 Setting Priorities for Businesses and Brands 266 The Business Portfolio 267 Divestment or Liquidation 269 The Milk Strategy 272 Prioritizing and Trimming the Brand Portfolio 275

Chapter 16 Harnessing the Organization 283 Customer-Centric Organizational Cultures 284 Customer-Centric Competencies 286 Customer-Centric Organizational Structure 288 Metrics and Incentives for Customer Centricity 291 Leading for Customer Centricity 292 Customer-Centric Talent 294

Chapter 17 How Marketing Activities Create Value for Companies 303 The Impact of Customer and Brand Equity on Firm Revenues 304 The Effect of Marketing Assets on Firm Value 307 How Markets Value Marketing Assets 311 Managing Marketing to Contribute to Firm Value 314

Case Studies 320 The Energy Bar Industry 320 Assessing the Impact of Changes in the Environment 322 Creating a New Brand for a New Business 324 Competing Against the Industry Giant 326 Leveraging a Brand Asset 329

Appendix A: Internal Analysis 332

Appendix B: Planning Forms 339

Notes 354

Index 367

Contents ix

C H A P T E R O N E

Strategic Market Management—An

Introduction and Overview

Plans are nothing, planning is everything. —Dwight D. Eisenhower

Even if you are on the right track, you’ll get run over if you just sit there. —Will Rodgers

If you don’t know where you’re going, you might end up somewhere else. —Casey Stengel

All markets today are dynamic. Change is in the air everywhere, and change affects strategy. A winning strategy today may not prevail tomorrow. It might not even be relevant tomorrow.

There was a time, not too many decades ago, when the world held still long enough for strategies to be put into place and refined with patience and discipline. The annual strategic plan guided the firm. That simply is no longer the case. New products, product modifications, subcategories, technologies, applications, market niches, segments, media, channels, and on and on are emerging faster than ever in nearly all industries—from snacks to fast food to automobiles to financial services to software. Multiple forces feed these changes, including digital technologies, the rise of China and India, trends in healthy living, energy crises, political instability, and more. The result is markets that are not only dynamic but risky, complex, and cluttered.

Such convoluted markets make strategy creation and implementation far more challenging. Strategy has to win not only in today’s marketplace but also in tomorrow’s, when the customer, the competitor set, and the market context may all be different. In environments shaped by this new reality, some firms are driving change. Others are adapting to it. Still others are fading in the face of change. How do you develop successful strategies in dynamic markets? How do you stay ahead of competition? How do you stay relevant to the customer?

1

The task is challenging. Strategists need new and refined perspectives, tools, and concepts. In particular, they need to develop competencies around six management tasks—strategic analysis, innovation, getting control of multiple business units, developing sustainable competitive advantages (SCAs), and developing growth platforms.

Strategic analysis. The need for information about customers, competitors, and trends affecting the market is now stronger than ever. Furthermore, the information needs to be continuous and not tied to a planning cycle, because a timely detection of threats, opportunities, strategic problems, or emerging weaknesses can be crucial to getting the response right. There is an enhanced premium on the ability to predict trends, project their impact, and distinguish them from mere fads. That means resources need to be invested and competencies created in terms of getting information, filtering it, and converting it into actionable analysis.

Customer value. A strategy that fails to create customer value has no future. This value must resonate with a segment of customers and offer more benefits and/or lower costs than competitors. Creating that value for customers and ensuring that company profits from it over time are central tasks in strategy.

Innovation. Markets evolve and competitors imitate customer value. Therefore, it is important that the company creates new sources of value over time. The ability to innovate is key to winning in dynamic markets as numerous research studies have shown. Innovation, however, turns out to have a host of challenges. There is the organizational challenge of creating a context that supports innovation. There is the brand portfolio challenge of making sure that the innovation fits among current offerings. There is the strategic challenge of developing the right mix of innovations that ranges from incremental to transformational to ensure the company can maintain profits while also preparing for the future. There is the execution challenge; it is necessary to turn innovations into offerings in the marketplace. There are too many examples of firms that owned an innovation and let others bring it to market.

Multiple businesses. It is the rare firm now that does not operate multiple business units defined by channels and countries in addition to product categories and subcategories, countries, and product categories. Decentralization is a century-old organizational form that provides for accountability, a deep understanding of the product or service, being close to the customer, and fast response, all of which are good things. However, in its extreme form, autonomous business units can lead to the misallocation of resources, redundancies, a failure to capture cross-business potential synergies, and confused brands. A challenge, explored in Chapter 16, is to adapt the decentralization model so that it no longer inhibits strategy adaptation in dynamic markets.

Creating sustainable competitive advantages (SCAs). Creating strategic advantages that are truly sustainable in the context of dynamic markets and dispersed business units is challenging. Competitors all too quickly copy product and service improvements that are valued by customers. What leads to SCAs in dynamic markets? One possible cornerstone is the development of assets such as customer relationships, brands, and distribution channels, or competencies such as digital marketing skills or marketing analytics expertise. Another is leveraging organizational synergy created by multiple business units, which is much more difficult to copy than a single new product or service.

Developing growth platforms. Growth is imperative for the vitality and health of any organization. In a dynamic environment, stretching the organization in creative ways becomes an

2 Chapter 1 Strategic Market Management—An Introduction and Overview

essential element of seizing opportunities and adapting to changing circumstances. Growth can come from revitalizing core businesses to make them growth platforms as well as by creating new business platforms.

This book is concerned with helping managers identify, select, implement, and adapt market- driven business strategies that will enjoy a sustainable advantage in dynamic markets, as well as create synergy and set priorities among business units. The intent is to provide concepts, methods, procedures, and best practice case studies that will lead to competencies in these six crucial management tasks—and, ultimately, to high-quality strategic decision making and profitable growth.

The book emphasizes the customer because in a dynamic market, a customer orientation is critical to company success. The current, emerging, and latent motivations and unmet needs of customers need to influence strategies. Because of this, every strategy needs to have a value proposition that is meaningful and relevant to customers.

This chapter starts with a very basic but central concept, that of a business strategy. The goal is to lend structure and clarity to a term that is widely employed but seldom defined. It continues with an overview of the balance of the book, introducing and positioning many of the subjects, concepts, and tools to be covered. Finally, the role of marketing in business strategy is discussed. There is a significant trend for marketing to have a seat at the strategy table and to see the chief marketing officer (CMO) as empowered to create growth initiatives.

WHAT IS A BUSINESS STRATEGY? Before discussing the process of developing sound business strategies, it is fair to address two questions. What is a business? What is a business strategy? Clarifying these concepts is a necessary start toward a winning, adaptable strategy.

A Business

A business is an organizational unit with a defined strategy and a manager with sales and profit responsibility. The organizational unit can be defined by a variety of dimensions, including product line, country, channels, or segments. An organization will thus have many business units that relate to each other horizontally and vertically.

There is an organizational and strategic trade-off in deciding how many businesses should be operated. On one hand, it can be compelling to have many units because then each business will be close to its market and potentially capable of developing an optimal strategy. Thus, a strategy for each country or each region or each major segment may have some benefits. Too many business units become inefficient, however, and result in programs that lack scale economies and fail to leverage the strategic skills of the best managers. As a result, there is pressure to aggregate businesses into larger entities.

Business units can be aggregated to create a critical mass, to recognize similarities in markets and strategies, and to gain synergies. Businesses that have similar market contexts and business strategies will be candidates for aggregation to leverage shared knowledge. Another aggregation motivation is to encourage synergies among business units when the combination is more likely to realize savings in cost or investment or create a superior value proposition.

There was a time when firms developed business strategies for decentralized business units defined by product, countries, or segments. These business strategies were then packaged or

What is a Business Strategy? 3

aggregated to create a firm strategy. That time has passed. There also now needs to be a firm strategy that identifies macro trends and strategy responses to these trends as a firm, allocates resources among business units, and recognizes synergy potentials. So there needs to be a strategy for the Ford company and perhaps the SUV group as well as the Ford Explorer, a major SUV brand.

The Business Strategy

Four dimensions define an effective business strategy: the product-market investment strategy, the customer value proposition, the assets and competencies, and the functional strategies and programs. These four dimensions are depicted in Figure 1.1. To be effective, all four elements should be based on the idea of customer value. This foundation drives subsequent decisions about where and how to compete to win.

The Foundation of Customer Value

A critical foundation of any strategy is to ensure that the company’s actions offer value to customers. Without offering value, decisions about where and how to compete are unlikely to succeed. Unfortunately “value” may be one of the most overused and misused terms in business. Thus a “value” price is often wrongly used to mean a low price or a bundled price. Low-priced products can offer customers excellent value. However, equating customer value with low price obscures the more fundamental role value plays in how markets operate and how firms must compete.

Ultimately, customer value is about the difference between the benefits customers perceive they are getting from an offering minus the perceived cost of obtaining these benefits—adjusted

Assets & competencies

Functional area strategies & programs

Value proposition

How to Compete

Where to Compete

The product-market investment decision

A BUSINESS STRATEGY

Figure 1.1 A Business Strategy

4 Chapter 1 Strategic Market Management—An Introduction and Overview

for the riskiness of the offering. Think about customer value using the following approach: Customer Value [1 Perceived Risk] [Perceived Benefits Perceived Costs]. The greater the perceived benefits and/or the lower the perceived total costs and/or risks of a product, the greater the customer value and the higher the likelihood the customer will choose that product. Each component will now be examined in detail.

Theodore Levitt, famously observed “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” Perceived benefits are these outcomes that customers associate with a product, service, or relationship from a company. What people want from a copier are machine up-time, speed of through-put and print quality, but customers also make choices based on the quality and speed of customer service. What people want from a video game is fun, excitement, and escape.

Customers’ perceived costs also have many dimensions. Price paid is the most straightforward cost. However, examining the full range of costs customers incur in their search for, acquisition, and disposal of products represent total life-cycle costs. In the personal computer market, for example, the total life-cycle costs include acquisition costs (comprised of searching, ordering, price paid, processing, receiving, and installing costs), operating costs (notably energy consump- tion), psychological costs of learning a new system, and maintenance and disposal costs (including the cost of software upgrades, technical assistance, and repairs).

Customer choices are also swayed by differences in perceived risks between offerings and the companies that sell them. The degree of risk depends on the buyer’s uncertainty about the answers to questions such as, “Can I trust the supplier’s promises? Will the offering perform as expected? Will the vendor stay around to support the product in the future?” Small and new companies with unknown brand names, no recommendations, and limited track records are at a real disadvantage because perceived risks sharply offset the gains from any superior perceived benefits.

Leaders should be wary of these common strategy pitfalls in managing for customer value:

First, attributes do not replace benefits. Attributes are the product or service features that the company offers to the customer—the quarter-inch drill. The benefit is what the customer gets—the quarter-inch hole—and any other needs that are met by the hole. Even though managers seem to endorse Levitt’s powerful insight, most proceed to ignore the message. Instead they segment their markets by product attributes (type of drill, power, price point, etc.) or customer demographics, rather than focusing on how they are meeting customer needs. Second, within markets, customers vary in their emphasis on certain costs and benefits. Some segments of video game customers want high-tech performance features in a game that make it more realistic or futuristic, such as Rise of Tomb Raider, Grand Theft Auto, or Metro: Last Light; other segments want to personalize characters and the experience such as in World of Warcraft and Minecraft. The nature of the costs depends on the customer segment and the particular offering. Not all customers will recognize these costs and incorporate them into their buying decisions. Furthermore, costs that are incurred far in the future may be discounted back to their present value (consciously or not) at such a high discount rate that they virtually vanish.

Third, customer value is dynamic. At any point in time, customers have a preference and know what they value. However, as customers become more experienced and competitors shift priorities, customer value evolves.

What is a Business Strategy? 5

The Product-Market Investment Strategy: Where to Compete

The scope of the business and the dynamics within that scope represent a very basic strategy dimension. Which sectors should receive investments in resources and management attention? Which should have resources withdrawn or withheld? Even for a small organization, the allocation decision is key to strategy.

The scope of a business is defined by the products it offers and chooses not to offer, by the markets it seeks to serve and not serve, by the competitors it chooses to compete with and to avoid, and by its level of vertical integration. Sometimes the most important business scope decision is what products or segments to avoid because such a decision, if followed by discipline, can conserve resources needed to compete successfully elsewhere. Peter Drucker, the management guru, challenged executives to specify—“What is our business and what should it be? What is not our business, and what should it not be?” Such a judgment can sometimes involve painful choices to divest or liquidate a business or avoid an apparently attractive opportunity. Chapter 15 discusses disinvestment judgments and why they are hard to make and easy to avoid.

Many organizations have demonstrated the advantages of having a well-defined business scope. Williams-Sonoma offers products for the home and kitchen. IBM turned around its firm under the direction of Lou Gerstner in part by dialing up its service component and more recently by expanding its software and data analytics footprint. P&G focuses on a broad spectrum of nonfood consumer goods with an emphasis on current or potential billion dollar brands such as Tide/Arial, Always/Whisper, Crest, Iams, Pampers, Charmin, Bounty, Pantene, Downy/Lenor, and Gillette. Walmart and Amazon have a wide scope that generates both scale economies and a one-stop shopping value proposition.

More important than the scope is the scope dynamics. What product markets will be entered or exited in the coming years? As Figure 1.2 suggests, growth can be generated by bringing existing products to new markets (market expansion), bringing new products to existing markets (product expansion), or entering new product markets (diversification).

Expanding or changing the product-market mix can help the organization achieve growth and vitality and can be a lever to cope with the changing marketplace by seizing opportunities as they emerge. During the first five years of the Jeff Immelt era, GE changed its focus and character by investing in healthcare, energy, water treatment, home mortgages, and entertainment (by buying Universal) while exiting markets for insurance, industrial diamonds, business outsourcing based in India, and a motor division. In addition, the percentage of revenue sources outside the United States grew from 40 percent to nearly 50 percent.

There are risks as the scope expansion ventures further from the core business—the firm’s offering may not be distinctive, problems in operations may arise, or the firm’s brands may be

Market penetration

Market expansion

Product expansion

Diversification

Present products New products

Present markets

New markets

Figure 1.2 Product-Market Growth Directions

6 Chapter 1 Strategic Market Management—An Introduction and Overview

inadequate to support the expansion. Despite similarities in manufacturing and distribution, Bausch & Lomb’s attempt to move from eye care to mouthwash was a product and brand failure. An effort by a manufacturing equipment company to go into robots failed when it could not create or acquire the needed technology. Attention and resources may also be diverted from the core business, causing it to weaken.

The investment pattern will determine the future direction of the firm. Although there are obvious variations and refinements, it is useful to conceptualize the investment alternatives for each product-market as follows:

Invest to grow (or enter the product market)

Invest only to maintain the existing position

Milk the business by minimizing investment

Recover as many of the assets as possible by liquidating or divesting the business

The Customer Value Proposition and Customer Value Leadership

The customer value proposition is a clear statement about what sources of distinctive value the business wants to offer the customer. To be successful, the target market selected must find the value relevant and meaningful. It must also be supported by all aspects of the company’s strategy. For example, if Jessica Alba’s Honest Company promises consumers “effective, unquestionably safe, and eco-friendly” body and home products, all ingredients must reflect this status—a point questioned in recent lawsuits brought against the company. To be credible, all other aspects of the company’s communication and interactions must also support this position, including where the product is sold, the transparency of the salespeople, and all online interactions. To support a successful strategy, the value proposition should be sustainable over time and be differentiated from competitors.

Home Depot and Lowe’s are home improvement retailers with very different value propositions. Home Depot has very austere, functional stores that are designed to appeal to contractors and homeowners on the basis of good price and basic functionality. Lowe’s strategy since 1994 has been to have a softer side, a look that would be comfortable to women. Thus, their stores are well lit, the signs colorful and clear, the floors spotless, and the people friendly and helpful. Years later, the Lowe’s strategy has traction, and Home Depot, with service problems caused by a cost reduction program, is attempting to adjust its own value proposition.

A value proposition is just table stakes for competing, however. The most effective strategies pave the way the firm to be a customer value leader, which means that it performs very well on one type of value and at least meets basic levels on other types. For example, while IKEA competes on price, its no-frills products measure up to basic standards of functionality and its store environments, while simple, are clean, well-lit, and organized. Customer value leaders make decisive choices about which customers they will target within a market and with what types of value.

Assets and Competencies

The strategic assets and competencies that underlie the strategy are the critical resources that produce sustainable competitive advantage (SCA) for a firm. According to resource-based theories of the firm, these resources produce competitive advantage because they can be converted into sources of value for customers; they are rare, not easily imitated; and good substitutes for the

What is a Business Strategy? 7

resource do not exist, which keeps competitors from offering the same value; and the firm can leverage them to its advantage.1

A strategic asset is a resource that the firm owns or controls that can be leveraged in the design or implementation of a firm’s strategy. Assets include general resources such as financial assets, human assets (leaders and employees), physical assets (plant and equipment), legal assets (patents and trademarks) as well as marketing assets in the form of strong brand reputations, customer relationships, and powerful knowledge of markets.

Competencies leverage these assets to perform activities important to the firm’s strategy. They do so through organizational processes, which act as recipes for actions. Without the right assets, these processes are not likely to have much impact. At the same time, the assets, whether they are smart employees, patents, or strong brands, will not help the company unless they are leveraged repeatedly through strong processes. These processes help companies outpace competitors and also make it difficult for them to easily imitate the firm’s strengths because it is hard to observe all of the complex activities involved in a competency. Therefore, companies must ensure that they have both the strong assets and processes for leveraging those resources for marketing excellence. If exercised well, these competencies can, over time, add to the strength of a company’s asset base by improving customer relationships and brands.

The ability of assets and competencies to support a strategy will in part depend on their strength relative to competitors. To what extent are the assets and competencies unique or rare in the marketplace? If unique now, how easily can they be imitated by competitors? Many assets require a long-time to develop and so competitors trying to build the strength of Amazon’s strong customer relationships may be hopelessly behind. Competencies are often difficult to imitate because competitors cannot easily understand the recipe that companies use to create such outstanding processes. This is why Southwest Airlines is known to offer tours of their offices and activities—they know that the special ingredient that makes their culture such a valuable asset can neither be understood nor imitated very easily.

Assets and competencies leveraged across multiple product markets offer additional syner- gies that can be a source of SCA. Synergies can come in many forms. Two businesses can reduce costs by sharing a distribution system, sales force, or logistics system, as when Gillette acquired Duracell (and later was itself acquired by P&G). Synergy can also be based on sharing the same asset, as with the HP brand shared by the dozens of business units or a competence such as Toyota’s ability to manage manufacturing plants across brands and countries. Another source of synergy is the sharing of functional area strategies across business units. For example, the Ford Motor Company may be able to sponsor the World Cup, which would benefit all brand across divisions. Another synergy source is the sharing of R&D. P&G aggregates brands such as Head & Shoulders, Aussie, Infusion, and Pantene into a hair care category not only to provide shelf space guidance to retailers and to create promotions more easily, but also to manage its innovation processes. Finally, a combination of products can provide a value proposition. Some software firms have aggregated products in order to provide a systems solution to customers; Microsoft Office is one example.

Functional Strategies and Programs

A company’s value proposition, assets, and competencies require the support of functional activities to succeed. Assets and competencies should mandate some strategy imperatives in the form of a supportive set of functional strategies or programs.

8 Chapter 1 Strategic Market Management—An Introduction and Overview

Functional strategies or programs that could drive the business strategy might include:

Information technology strategy

Distribution strategy

Global strategy

Quality program

Sourcing strategy

Logistical strategy

Manufacturing strategy

Analytics program

The need for certain functional strategies and programs can be determined by asking a few questions. What must happen for the firm to be able to deliver on the value proposition? Are the assets and competencies needed in place? Do they need to be created, strengthened, or supported? How?

Criteria to Select Business Strategies

The principal criteria useful for selecting a strategy can be grouped around five general questions:

Is the ROI attractive? Creating a value proposition that is appealing to customers may not be worthwhile if the investment or operating cost is excessive. Starbucks opened in Japan in 1996 in the Ginza district and grew to over 400 units, many of which were in the highest rent areas. The result was a trendy brand but one that was vulnerable to competitors, who matched or exceeded Starbucks’ product offerings and were not handicapped with such high overhead because they developed less costly sites.

Is there a sustainable competitive advantage? Unless the business unit has or can develop a real competitive advantage that is sustainable over time in the face of competitor reaction, an attractive long-term return will be unlikely. To achieve a

PITFALLS IN STRATEGY DEVELOPMENT

Richard Rumelt, noted strategy thinker, has identified some common pitfalls in developing a business strategy.2 First, a central problem or threat is ignored. The problem could be a quality issue or a receding marketplace. A competitor’s innovation or a customer trend could represent a threat. A strategy developed as if either did not exist will be doomed. Second, the strategy is a long to-do list with no sense of what is important. There needs to be a sense of priorities. Third, a set of goals is assumed to be a strategy. It is not. There can and should be goals, especially long-term goals that go beyond financial measures, but a strategy needs to address the four key dimensions in order to find a path to success. Finally, a strategy is a fluffy description of some desired state of affairs. We will become the industry leaders while increasing margins and addressing sustainability challenges. Rather, the strategies and accompanying action plans need to be specific.

What is a Business Strategy? 9

sustainable competitive advantage, a strategy should exploit organizational assets and competencies and neutralize weaknesses.

Will the strategy have success in the future? A strategy needs to be able to survive the dynamics of the market, with its emerging threats and opportunities. Either the strategy components should be expected to have a long life or the strategy should be capable of adapting to changing conditions. In that context, future scenarios (described in Chapter 5) might be used to test the robustness of the strategy with respect to future uncertainties.

Is the strategy feasible? The strategy should be within both the financial and human resources of the organization. It also should be internally consistent with other organizational characteristics, such as the firm’s structure, systems, people, and culture. These organizational considerations are covered in Chapter 16. Does the strategy fit with the other strategies of the firm? Are the sources and uses of cash flow in balance? Is organizational flexibility reduced by an investment in financial or human resources? Is potential synergy captured by the strategy?

STRATEGIC MARKET MANAGEMENT Strategic market management is a process designed to help management create, change, or retain a business strategy and to create new strategies for the future. A marketing strategy is a subset of business strategy that involves the same four strategy components although the scope is restricted to marketing. It includes decisions and budgets related to product market activities, customer value proposition, marketing assets and competencies, and different functional areas within marketing.

The Book Framework

Figure 1.3 provides a structure for strategic market management and for this book. A brief overview of its principal elements and an introduction to the key concepts are presented in this chapter.

EXPANDING THE BUSINESS SCOPE

In his classic article “Marketing Myopia,” Theodore Levitt explained how firms that define their business myopically in product terms can stagnate even though the basic customer need they serve is enjoying healthy growth.3 Because of a myopic product focus, others gain the benefits of growth. In contrast, firms that regard themselves as being in the transportation rather than the railroad business, the energy instead of the petroleum business, or the communication rather than the telephone business are more likely to exploit opportunities.

The concept is simple. Define the business in terms of the basic customer need rather than the product. Visa has defined itself as being in the business of enabling customers to exchange value (any asset, including cash on deposit, the cash value of life insurance, or the equity in a home) for virtually anything anywhere in the world. As the business is redefined, both the set of competitors and the range of opportunities are often radically expanded. After redefining its business, Visa estimated that it had reached only 5 percent of its potential given the new definition.

Defining a business in terms of generic need can be extremely useful for fostering creativity, generating strategic options, and avoiding an internally oriented product focus.

10 Chapter 1 Strategic Market Management—An Introduction and Overview

External Analysis

External analysis, summarized in Figure 1.3, involves an examination of the relevant elements external to an organization—customers, competitors, markets and submarkets, and the environment or context outside of the market. Customer analysis, the first step of external

External Analysis

• Customer analysis • Competitor analysis • Market/submarket analysis • Environmental analysis

Internal Company Analysis

• Size, growth, and financial performance • Assets and competencies (including brand, customer

relationships, innovation) • Image and positioning • Current and past strategies • Organizational culture • Cost structure

STRATEGIC ANALYSIS

External Assessment

Opportunities, threats, trends,

insights, and external

uncertainties

Internal Company Assessment

Firm strengths, weaknesses, liabilities, problems, constraints, and uncertainties

STRATEGIC ANALYSIS OUTPUT

• Identify strategy alternatives - Product-market investment strategies

- Customer value proposition

- Assets, competencies, and synergies

- Functional strategies and programs • Select strategy

CREATING AND ADAPTING STRATEGY

IMPLEMENTING STRATEGY AND PRODUCING FIRM VALUE

• Implement strategy • Measure performance

Figure 1.3 Overview of Strategic Management

Strategic Market Management 11

analysis and a focus of Chapter 2, involves identifying the organization’s customer segments and each segment’s motivations and unmet needs. Competitor analysis, covered in Chapter 3, attempts to identify competitors (both current and potential) and describe their performance, image, strategy, and strengths and weaknesses. Market analysis, the subject of Chapter 4, aims to determine the attractiveness of the market and submarkets and to understand the dynamics of the market so that threats and opportunities can be detected and strategies adapted. Environmental analysis, the subject of Chapter 5, is the process of identifying and under- standing emerging opportunities and threats created by forces in the context of the business.

The external analysis should be purposeful, focusing on key outputs: the identification of present and potential opportunities, threats, trends, strategic uncertainties, and strategic choices. There is a danger in being excessively descriptive. Because there is literally no limit to the scope of a descriptive study, the result can be a considerable expenditure of resources with little impact on strategy.

The frame of reference for an external analysis is typically a defined strategic business unit (SBU), but it is useful to conduct the analysis at several levels. External analyses of submarkets sometimes provide critical insights; for example, an external analysis of the mature beer industry might contain analyses of the import and nonalcoholic beer submarkets, which are growing and have important differences. It is also possible to conduct external analyses for groups of SBUs, such as divisions, that have characteristics in common. For instance, a food products company might consider analyses of the healthy-living segment and food trends that could span operating units within the firm.

Internal Analysis

Internal analysis, introduced in Chapter 5 (see also similar competitor criteria in Chapter 2), Appendix A, and as summarized in Figure 1.3, aims to provide a detailed understanding of strategically important aspects of the business. Performance analysis looks not only at financial performance, but also examines the company’s assets and competencies (including brand, customer relationships, and innovation), the company’s current image and position, culture as well as its past and current strategies. The identification and assessment of organizational strengths and weaknesses will guide strategic priorities, including both the development of new strategies and the adaptation of existing ones.

Creating and Adapting Strategy

After describing strategic analysis, the book turns to the creation and adaptation of strategy. How do you decide on the business scope? What are the alternative value propositions, and how do they guide strategy development? What assets and competencies will provide points of advantage, and which will aim for points of parity? What functional strategies and programs will lead to strategic success? What growth options will receive investment? Is the core business to be the source of growth, or is there a need to move beyond the core? What is to be the global strategy? How should the business units be prioritized? Should there be disinvestment in the business portfolio? How can the organization be adapted so that it supports rather than constrains strategy?

Chapter 6 provides an overview of the scope of strategic choices by describing the firm’s choice of value propositions as a means to customer value leadership and sustainable competitive advantage. Chapter 7 examines customer relationships with a focus on facilitating the decision

12 Chapter 1 Strategic Market Management—An Introduction and Overview

journey, creating value through strong experiences, and defending relationships over the long- term. Chapter 8 shifts to a focus creating valuable customers by examining purchase funnel management and customer lifetime value approaches. Chapter 9 shows how brand equity, a key asset can be created and used. Chapter 10 discusses how to develop a strong brand relationship with customers. The next four chapters discuss growth options: Chapter 11 covers energizing the business, Chapter 12 leveraging the business, Chapter 13 creating new businesses, and Chapter 14 global strategies. Chapter 15 discusses the disinvestment option, an important and often overlooked dimension of the investment decision.

Implementing Strategy and Producing Firm Value

Chapter 16 examines the organizational reality of implementing strategy. It considers the idea of customer-centricity—an approach that puts the customer at the forefront of all company decisions—as a guiding approach to ensuring that the company is able to compete effectively in the marketplace over time. Customer centricity requires a focus on five organizational elements— culture, competencies, structure, metrics and incentives, and human capital. Finally, Chapter 17 considers more deeply how marketing creates value for firm, including the effect of customer relationships and brands on both revenues and shareholder value. The arrow feeding back to the firm (top box) denotes the financial performance effects and improvement of assets and competencies that strengthen the company.

The Planning Cycle

Too often an annual planning exercise is perceived as strategy development when the output is not strategy but an operating and resource budget that specifies financial targets, hiring plans, and

GALLO: A CASE STUDY

Gallo, despite producing roughly one of every four bottles of wine sold in the United States (primarily in the form of cheap wines sold under the Gallo name), thought it had to adapt to a strong market trend to premium varietals.

One vehicle was the launching of the premium Gallo of Sonoma brand, which enjoyed several significant potential SCAs. The grapes available to Gallo from Sonoma County in northern California (whose climate, some say, is superior to the famous Napa region), coupled with the company’s willingness and ability to make great wine, have resulted in a product that has won some major international wine competitions. In addition, the brand gained synergies from Gallo’s substantial distribution clout and operational scale efficiencies.

The decision to put the Gallo name on the new line undoubtedly created a huge liability, but it also had some compensating advantages. First, it permitted the business to leverage the credibility and personality of a third-generation family winemaker, Gina Gallo. Second, it boosted the pride of the organization and its partners in an aspect of the business (winemaking) that is at the core of its values. Finally, the seeming incongruity of Gallo making a fine wine could appeal to the wine tastemakers of the world by giving them a chance to prove that they are above labels.

The success of Gallo of Sonoma emboldened Gallo to radically change the business and brand strategy. Gallo of Sonoma became the Gallo Family Vineyards Sonoma, one of four Gallo Family brands. The Gallo value brands were retired, and other brands in the portfolio took on the value role.

Strategic Market Management 13

investment authorizations. Research at McKinsey involving a survey of over 700 executives suggests ways to make the strategy development process more effective.4 In particular, a strategy process should involve the following activities.

Start with the issues. CEOs say that planning should focus on anticipating big challenges and spotting important trends. Strategy choice will be well served by identifying the key associated strategic issues. One CEO asks the business leaders in his firm to imagine how a set of specific trends will affect their business. Another creates a list of three to six priorities for each business to form a basis for discussion.

Bring together the right people. In particular, it is not enough to have staff people involved but also the people who will implement the strategy, the decision makers. Also, in order to foster synergies and strategies that span product or country organizational silos, it is worthwhile to have relevant teams of businesses represented.

Adapt planning cycles to the businesses. It is unrealistic to say that all businesses need to have planning exercises each year. Some may need it every other year or even every third year. Also, trends, events, or issues should trigger a strategy review even if it is not in the annual cycle.

Implement a strategy performance system. Too many businesses fail to follow up on strategy development. As a result, it becomes a rather empty exercise. Major strategic initiatives should have measurable progress goals as well as end objectives. What will be the barrier to success? What needs to happen for the strategy to be on track?

MARKETING AND ITS ROLE IN STRATEGY Marketing’s strategic role has grown over the years. The question for each organization is whether the chief marketing officer (CMO) and his or her team have a seat at the strategy table or are relegated to being tactical implementers of tasks such as managing the advertising program. The view that marketing is tactical is changing; it is now more and more frequently being accepted as being part of the strategic management of the organization. Given the definition of a business strategy and the structure of strategic market management, the roles that marketing can and should play become clearer.

One marketing role is to be the primary driver of the strategic analysis. The marketing group is in the best position to understand the customers, competitors, market and submarkets, and environ- mental forces and trends. By managing marketing research and market data, it controls much of the information needed in the external analysis. Marketing should also take the lead in the internal analysis with respect to selected assets (such as the brand portfolio and the distribution channel) and competencies (such as new product introduction and customer relationship management).

A second role is to focus attention on customer insight and customer value. By placing a premium on meeting customer needs over other organizational imperatives, marketing helps ensure company relevance over time.

A third role is to drive growth strategy for the firm. Growth options are either based on or dependent on customer and market insights, and marketing therefore should be a key driver. In fact, a study by Booz Allen and Hamilton of some 2,000 executives found that a small but growing number of firms (9 percent) describe the CMO as a growth champion involved in all strategic levers relating to growth.5

14 Chapter 1 Strategic Market Management—An Introduction and Overview

Finally, marketing should play a leading role in building, managing, and defending strong customer and brand assets—called customer and brand equity. These assets deliver value back to the firm and are critical to firm strategy now and in the future.

Thus, marketing is a partner, usually a key partner, in the development and implementation of a business strategy. The conceptualization of a business and marketing strategy as having four dimensions helps illuminate the nature of that relationship. The firms that are able to achieve success over time are those that realize that marketing should have a strong voice in business strategy.

KEY LEARNINGS

Strategy needs to be developed and executed in the context of a dynamic market. To cope, it is important to develop competencies in strategic analysis, innovation, managing multiple business, and developing SCAs and growth platforms.

A business strategy includes the determination of the product-market investment strategy, the customer value proposition, assets and competencies, and the functional area strategy. A marketing strategy involves the allocation of the marketing budget over product markets, the customer value proposition by segment, the marketing assets and competencies, and the strategies of the functional areas of marketing.

Strategic market management, a process designed to help management create, change, or retain a business strategy and to create new strategies for the future. It involves external analysis, internal analysis, creating and adapting strategy, and implementing strategy and producing firm value. Marketing plays a key role in a firm’s business strategy. It drives company strategic analysis; it focuses attention on customer insight and value; it drives company growth strategies; and it builds, manages, and defends company customer and brand assets. The CMO role has grown over the years and is now often charged with being a partner in developing strategies and a vehicle to deal with the dysfunctions of the product-market silos.

FOR DISCUSSION 1. What is a business strategy? Do you agree with the definition proposed? Illustrate

your answer with examples. Consider one of the following firms. Go to the firm’s website and annual report to gain an understanding of its business strategy. Look at elements such as the products and services offered, the history of the firm, and its values. What is the business strategy? What are the firm’s product markets? What are its value propositions? What assets and competencies are important to this strategy? What outstanding functional programs and strategies exist?

a. Dell b. Zappos c. Visa d. A firm of your choice

Marketing and Its Role in Strategy 15

2. In question 1, identify any distinctive elements of each firm’s marketing strategy. 3. Considering the Gallo wine case, are there any current wine companies for whom

this strategy would not have worked? Why?

4. Apply Theodore Levitt’s marketing-myopia concept to print media, magazines, and newspapers. What is the implication?

5. Which criteria to pick a strategy do you consider most important? Why? Name one company that failed because it did not follow your priority. What should it have done instead?

16 Chapter 1 Strategic Market Management—An Introduction and Overview

P A R T O N E

S T R A T E G I C A N A L Y S I S

C H A P T E R T W O

External and Customer Analysis

The purpose of an enterprise is to create and keep a customer. —Theodore Levitt

Consumers are statistics. Customers are people. —Stanley Marcus

Before you build a better mousetrap, it helps to know if there are any mice out there. —Mortimer B. Zuckerman

Developing or adapting strategy in a dynamic market logically starts with external analysis, an analysis of the factors external to a business that can affect strategy. The four chapters of Part One present concepts and methods useful in conducting an external analysis. The Appendix contains a complete template for internal firm analysis.

EXTERNAL ANALYSIS A successful external analysis needs to be directed and purposeful. There is always the danger that it will become an endless process resulting in an excessively descriptive report. In any business there is no end to the material that appears potentially relevant. Without discipline and direction, volumes of useless descriptive material can easily be generated.

Affecting Strategic Decisions

The external analysis process should not be an end in itself. Rather, it should be motivated throughout by a desire to affect strategy. As Figure 2.1 shows, an external analysis can impact strategy directly by suggesting strategic decision alternatives or influencing choices among them. More specifically, it should address the following questions:

Should existing business areas be liquidated, milked, maintained, or targeted for investment?

Should new business areas be entered?

19

What are the value propositions? What should they be?

What assets and competencies should be created, enhanced, or maintained?

What strategies and programs should be implemented in functional areas? What should be the positioning strategy, segmentation strategy, distribution strategy, brand-building strategy, manufacturing strategy, and so on?

Additional Analysis Objectives

Figure 2.1 also suggests that an external analysis can contribute to strategy indirectly by identifying the following:

Significant trends and future events

Threats and opportunities

Strategic uncertainties that could affect strategy outcomes

A significant trend or event, such as concern about saturated fat or the emergence of a new competitor, can dramatically affect the evaluation of strategy options. A new technology, which can represent both a threat to an established firm and an opportunity to a prospective competitor, can signal new business arenas.

Strategic Uncertainties

Strategic uncertainty is a particularly useful concept in conducting an external analysis. If you could know the answer to one question prior to making a strategic commitment, what would that question be? If a property casualty insurance company were to consider whether to add earthquake insurance to its line, important strategy uncertainties might include the following:

What will be the potential losses of a major earthquake?

What will be the impact on the customer base of failing to offer coverage?

Could coverage be provided in partnerships?

Strategic uncertainties focus on specific unknown elements that will affect the outcome of strategic decisions. “Should earthquake coverage be added?” is a strategic decision, whereas

Identification • Trends/future events • Threats/opportunities • Strategic uncertainties

Strategic Decisions • Where to compete • How to compete

Analysis • Information-need areas • Scenario analysis

External Analysis

Figure 2.1 The Role of External Analysis

20 Part One Strategic Analysis

“What are the potential losses from a major earthquake?” is a strategic uncertainty. Most strategic decisions will be driven by a set of these uncertainties.

Figure 2.2 offers examples of strategic uncertainties and the strategic decisions to which they might relate. A single strategic uncertainty can often lead to additional sources of strategic uncertainty. One common strategic uncertainty shown there is what will be the future demand for a product (such as ultrasound diagnostic equipment). Asking, “On what does that depend?” will usually generate additional strategic uncertainties. One uncertainty might address technological improvements, whereas another might consider the technological development and cost/benefit levelsachievedbycompetitivetechnologies.Stillanothermightlookintothefinancialcapacityofthe healthcare industry to continue capital improvements. Each of these strategic uncertainties can, in turn, generate still another level of strategic uncertainties.

Analysis

There are three ways of handling uncertainty. First, a strategic decision can be precipitated because the logic for a decision is compelling and/or because a delay would be costly or risky. Second, it may be worthwhile to attempt to reduce the uncertainty by information acquisition and analysis of an information-need area. The effort could range from a high-priority task force to a low-key monitoring effort. The level of resources expended will depend on the potential impact on strategy and its immediacy. Third, the uncertainty could be modeled by a scenario analysis.

A scenario is an alternative view of the future environment that is usually prompted by an alternative possible answer to a strategic uncertainty or by a prospective future event or trend. Is the current popularity of vitamin-enhanced waters a fad, or does it indicate a solid growth area? Such a question could be the basis for a positive and a negative scenario. Each could be associated with very different environmental profiles and strategy recommendations. In Chapter 5, information-need areas and scenario analysis are covered in more detail.

Strategic Uncertainties Strategic Decisions

Will a major firm enter? Will a tofu-based dessert product be accepted? Will a technology be replaced? Will the dollar strengthen against an offshore currency? Will computer-based operations be feasible with current technology? How sensitive is the market to price?

Investment in a product market Investment in a tofu-based product

Investment in a technology Commitment to offshore manufacturing Investment in a new system

A strategy of maintaining price parity

Strategic Uncertainties Second-Level Strategic Uncertainties

What will be the future demand of an ultrasound test?

Performance improvements? Competitive technological developments? Financial capacity of healthcare industry?

Figure 2.2 Strategic Uncertainties

Chapter 2 External and Customer Analysis 21

A host of concepts and methods are introduced in this and the following three chapters. It would, of course, be unusual to use all of them in any given context and the strategist should resist any compulsion to do so. Rather, those that are most relevant to the situation at hand should be selected. Furthermore, some areas of analysis will be more fruitful than others and will merit more effort.

The Level of Analysis—Defining the Market

An external analysis of what? To conduct an external analysis, the market or submarket boundaries need to be specified. The scope of external analysis can involve an industry broadly defined (sporting goods), narrowly defined (high performance skis), or using a scope definition that falls in between such as:

Ski clothing and equipment

Skis and snowboards

Downhill skis

The level of analysis will depend on the organizational unit and strategic decisions involved. A sporting goods company, such as Wilson, will be making resource decisions across sports and thus needs to be concerned with the whole industry. A ski equipment manufacturer may only be concerned with elements of sporting goods relating to skis, boots, and clothing. The maker of high-performance skis might be interested in only a subsegment of the ski industry. One approach to defining the market is to specify the business scope. The scope can be identified in terms of the product market and in terms of the competitors. Relevant, of course, are the future product market and competitors as well as the present ones.

There is always a trade-off to be made. A narrow scope specification will inhibit a business from identifying trends and opportunities that could lead to some attractive options and directions. Thus, a maker of downhill skis may want to include snowboards and cross-country skis because they represent business options or because they will impact the ski equipment business. On the other hand, depth of analysis might be sacrificed when the scope is excessively broad. A more focused analysis may generate more insight.

The analysis usually needs to be conducted at several levels. The downhill ski and snowboard industry might be the major focus of the analysis. However, an analysis of sporting goods might suggest and shed light on some substitute product pressures and market trends. Also, an analysis may be needed at the segment level (e.g., high-performance skis) because entry, investment, and strategy decisions are often made at that level. Furthermore, the key success factors could differ for different product markets within a market or industry. One approach is a layered analysis, with the primary level receiving the most depth of analysis. Another approach could be multiple analyses, perhaps consecutively conducted. The first analysis might stimulate an opportunity that would justify a second analysis on a submarket.

When Should an External Analysis Be Conducted?

There is often a tendency to relegate the external analysis to an annual exercise. Each year, of course, it may not require the same depth as the initial effort. It may be more productive to focus on a part of the analysis in the years immediately following a major effort.

The annual planning cycle can provide a healthy stimulus to review and change strategies. However, a substantial risk exists in maintaining external analysis as an annual event. The need

22 Part One Strategic Analysis

for strategic review and change is often continuous. Information sensing and analysis therefore also need to be continuous. The framework and concepts of external analysis can still play a key role in providing structure even when the analysis is continuous and addresses only a portion of the whole.

External analysis deliberately commences with customer and competitor analyses because they can help define the relevant industry or industries. An industry can be defined in terms of the needs of a specific group of customers—those buying fresh cookies on the West Coast, for instance. Such an industry definition then forms the basis for the identification of competitors and the balance of external analysis. An industry such as the cookie industry can also be defined in terms of all its competitors. Because customers have such a direct relationship to a firm’s operation, they are usually a rich source of relevant operational opportunities, threats, and uncertainties.

THE SCOPE OF CUSTOMER ANALYSIS In most strategic market-planning contexts, the first logical step is to analyze the customers. Customer analysis can be usefully partitioned into an understanding of how the market segments, an analysis of customer motivations, and an exploration of unmet needs. Figure 2.3 presents a basic set of questions for each area of inquiry.

SEGMENTATION Segmentation is often the key to developing a sustainable competitive advantage. In a strategic context, segmentation means the identification of customer groups that respond to competitive offerings differently from other groups. A segmentation strategy couples the identified segments with a program to deliver an offering to those segments. Thus, the development of a successful segmentation strategy requires the conceptualization, development, and evaluation of a targeted competitive offering.

SEGMENTATION Who are the biggest customers? The most profitable? The most attractive potential customers? Do the customers fall into any logical groups based on needs, motivations, or characteristics? How could the market be segmented into groups that would require a unique business strategy?

CUSTOMER MOTIVATIONS What elements of the product/service do customers value most? What are the customers’ objectives? What are they really buying? How do segments differ in their motivation priorities? What changes are occurring in customer motivation? In customer priorities?

UNMET NEEDS Why are some customers dissatisfied? Why are some changing brands or suppliers? What are the severity and incidence of consumer problems? What are unmet needs that customers can identify? Are there some of which consumers are unaware? Do these unmet needs represent leverage points for competitors or a new business model?

Figure 2.3 Customer Analysis

Chapter 2 External and Customer Analysis 23

A segmentation strategy should be judged on three dimensions. First, can a competitive offering be developed and implemented that will appeal to the target segment? Second, can the appeal of the offering and the subsequent relationship with the target segment be maintained over time despite competitive responses? Third, is the resulting business from the target segment worthwhile, given the investment required to develop and market an offering tailored to it? A successful segmentation strategy creates a dominant position within a market that competitors will be unwilling or unable to attack successfully.

How Should Segments Be Defined?

The task of identifying segments is difficult because in any given context there are literally hundreds of ways to divide up the market. Typically, the analysis will consider five, ten, or more segmentation variables. To avoid missing a useful way of defining segments, it is important to consider a wide range of variables. These variables need to be evaluated on the basis of their ability to identify segments for which different strategies are (or should be) pursued.

The most useful segment-defining variables for an offering are rarely obvious. Among the variables frequently used are those shown in Figure 2.4.

The first set of variables describes segments in terms of general characteristics unrelated to the product involved. Thus, a bakery might be concerned with geographically defined segments related to communities or even neighborhoods. A consulting company may specialize in the hospitality industry. A fast food firm in the United States may target Hispanics because this segment is projected to triple in size by 2050.

CUSTOMER CHARACTERISTICS Geographic Type of organization Size of firm Lifestyle

Sex Age Occupation

Small Southern communities as markets for discount stores Computer needs of restaurants versus manufacturing firms versus banks versus retailers Large hospital versus medium versus small Jaguar buyers tend to be more adventurous, less conservative than buyers of Mercedes-Benz and BMW Mothers of young children Cereals for children versus adults The paper copier needs of lawyers versus bankers versus dentists

PRODUCT-RELATED APPROACHES

User type Usage Benefits sought

Price sensitivity Competitor Application Brand loyalty

Appliance buyer—home builder, remodeler, homeowner Concert—season ticket holders, occasional patrons, nonusers Dessert eaters—those who are calorie-conscious versus those who are more concerned with convenience Economy-sensitive Honda Civic buyer versus the luxury Mercedes-Benz buyer Users of competing products Professional users of chain saws versus homeowners Those committed to Heinz ketchup versus price buyers

Figure 2.4 Examples of Approaches to Defining Segments

24 Part One Strategic Analysis

Demographics are particularly powerful for defining segments, in part because a person’s life stage affects his or her activities, interests, and brand loyalties. Another reason is that demo- graphic trends are predictable. Such trends are discussed in Chapter 5. Gold Violin, recognizing this trend, has established itself as a source of products designed for the active elderly. Specialized items such as a talking watch, a bed-vibrating alarm clock, a doorknob turner, and a lighted hands-free magnifier (all with tasteful, attractive designs) are just some of the Gold Violin products that appeal to this long-ignored demographic segment.

Another demographic play is represented by the Toyota Scion xB, which is a small car with a funky design (tall, angular, and boxy), and the Scion iB, the world’s smallest four seat car, both aimed at Generation Y, the so-called echo boomers. The average age of a Toyota buyer is 48, the company’s inexpensive entries are considered boring, and Scion is an effort to become relevant and interesting to a key target segment. To create a buzz around Scion xB when it was introduced, Toyota targeted the 15 percent of the echo-boomer target market seen as “leaders and influencers”—those who encourage their peers to gravitate to a new style, whether it be in music, sports, or cars.1

The second category of segment variables includes those that are related to the product. One of the most frequently employed is usage. A bakery may follow a very different strategy in serving restaurants that rely heavily on bakery products than in serving those that use fewer such products. A manufacturer of lawn equipment may design a special line for a large customer such as Walmart but sells through distributors using another brand name for other outlets. Four other useful segment variables are benefits, price sensitivity, loyalty, and applications.

Benefits

If there is a most useful segmentation variable, it would be benefits sought from a product, because the selection of benefits can determine a total business strategy. In gourmet frozen dinners and entrees, for example, the market can be divided into buyers who are calorie conscious, those who focus on nutrition and health, those interested in taste, and price-conscious buyers. Each segment implies a very different strategy.

The athletic shoe industry segments into serious athletes (small in number but influential), weekend warriors, and casual wearers using athletic shoes for street wear. Recognizing that the casual wearer segment is 80 percent of the market and does not really need performance, several shoe firms have employed a style-focused strategy as an alternative to the performance strategy adopted by such firms as Nike.

Price Sensitivity

The benefit dimension representing the trade-off between low price and high quality is both useful and pervasive; hence, it is appropriate to consider it separately. In many product classes, there is a well-defined breakdown between those customers concerned first about price and others who are willing to pay extra for higher quality and features. General merchandise stores, for example, form a well-defined hierarchy from discounters to prestige department stores. Automobiles span the spectrum from the Honda Civic to the Buick LaCrosse to the Lexus 460. Airline service is partitioned into first class, business class, and economy class. In each case, the segment dictates the strategy.

Chapter 2 External and Customer Analysis 25

Loyalty

Brand loyalty, an important consideration in allocating resources, can be structured using a loyalty matrix as shown in Figure 2.5. Each cell represents a very different strategic priority and can justify a very different program. Generally, it is too easy to take the loyal customer for granted. However, a perspective of total profits over the life of a customer makes the value of an increase in loyalty more vivid. Thus, the highest priority is to retain existing loyal customers and, if possible, increase their commitment intensity and perhaps encourage them to talk to others.

The key is often to reward the loyal customer by living up to expectations consistently, providing an ongoing relationship, and offering extras that surprise and delight.

THE MALE SHOPPER2

The male shopper has been long ignored. A segmentation scheme provides insight into how males differ and suggests strategies for appealing to very different segments.

The Metrosexual. An affluent urban sophisticate, age 20–40, who loves to buy and looks for trendy, prestigious, and high-quality products. Into men’s grooming, expensive haircuts. Think Polo, Ralph Lauren, Beiersdorf, and Banana Republic.

The Retrosexual. Traditional male behavior, into football and NASCAR, rejects feminism, nostalgic for the way things were, prefers below-casual clothing, not into moisturizers for men. Think Levi’s, Nike, Old Spice, Burger King, and Target.

The Modern Man. Between “metro” and “retro,” this shopper shares their interests but does not go overboard. A sophisticated consumer in his twenties or thirties, he is comfortable with women but does not shop with them. Think Gap, Macy’s, and fast casual restaurants.

The Dad. Good income. Involved in the family shopping. Efficient shopper. More functional clothing. Think Nordstrom’s, McDonald’s, and Amazon.

The Maturiteen. More savvy, responsible, and pragmatic than earlier generations of teens. A technology master adept at online research and buying. Sony, Adidas, Old Navy, Circuit City, and Internet sites of all types do well.

Customer

Noncustomer

Medium

Low to Medium

Low Loyalty

High

High

Highest

Zero

Moderate Loyal Loyalty

Figure 2.5 The Brand Loyalty Matrix: Priorities

26 Part One Strategic Analysis

The loyalty matrix suggests that the moderate loyals, including those of competitors, should also have high priority because they represent one route to increase the size of the loyal segment. Using the matrix involves estimating the size of each of the six cells, identifying the customers in each group, and designing programs that will influence their brand choice and loyalty level. The brand loyal noncustomer is a low priority because the cost to attract is usually prohibitive unless a competitor misstep provides an opportunity. The nonloyal group will have a reduced long-term value because they will be easily enticed by a price deal.

Applications

Some products and services, particularly industrial products, can best be segmented by use or application. A laptop computer may be needed by some for use while traveling, whereas others may use it at the office. One segment may use a computer primarily for Internet access, while others may use it for editing documents or for data analysis. Some might use a four-wheel drive for light industrial hauling, and others may buy primarily for recreation.

Christiansen et al. argue that an application focus is more likely to lead to successful new products and marketing programs.3 They illustrate by telling the story of McDonald’s that found many consumers bought its milkshapes in the morning in order to help them kill time while driving to work and provide energy to tide them over until lunch. Being efficient to buy and capable of being consumed with only one hand were therefore critical. Such an insight leads to ideas like making the shake thicker (so it takes longer to consume), making the purchase even more efficient with buyer cards, and adding fruit to make it more interesting in the context of a boring commute. The basic concept is that ideas for products and marketing programs are more likely to come from a deep understanding of how the product is used than by under- standing the customer. The success of Arm & Hammer in extending its business can be credited to a focus on applications involving deodorizing (carpets, kitty litter, clothes, underarms, and refrigerators).

Multiple Segments versus a Focus Strategy

Two distinct segmentation strategies are possible. The first focuses on a single segment, which can be much smaller than the market as a whole. Walmart, now the largest U.S. retailer, started by concentrating on cities with populations under 25,000 in eleven south central states—a segment totally neglected by its competition, the large discount chains. This rural geographic focus strategy was directly responsible for several significant SCAs, including: an efficient and responsive warehouse supply system; a low-cost, motivated workforce; relatively inexpensive retail space; and a lean and mean, hands-on management style. Union Bank, California’s fifth largest bank, makes no effort to serve individuals and thus provides a service operation tailored to business accounts that is more committed and comprehensive than those of its competitors.

An alternative to a focusing strategy is to involve multiple segments. General Motors provides the classic example. In the 1920s, the firm positioned the Chevrolet for price- conscious buyers, the Cadillac for the high end, and the Oldsmobile, Pontiac, and Buick for well-defined segments in between. A granulated potato company has developed different strategies for reaching fast-food chains, hospitals and nursing homes, and schools and colleges.

Chapter 2 External and Customer Analysis 27

In many industries, aggressive firms are moving toward multiple-segment strategies. Campbell Soup, for example, makes its nacho cheese soup spicier for customers in Texas and California and offers a Creole soup for southern markets and a red-bean soup for Hispanic markets. In New York, Campbell uses promotions linking Swanson frozen dinners with the New York Giants football team, and in the Sierra Nevada Mountains, skiers are treated to hot soup samples. Developing multiple strategies is costly and often must be justified by an enhanced aggregate impact.

There can be important synergies between segment offerings. For example, in the alpine ski industry, the image developed by high-performance skis is important to sales at the recreational-ski end of the business. Thus, a manufacturer that is weak at the high end will have difficulty at the low end. Conversely, a successful high-end firm will want to exploit that success by having entries in the other segments. A key success factor in the general aviation industry is a broad product line, ranging from fixed-gear, single-engine piston aircraft to turboprop planes, because customers tend to trade up and will switch to a different firm if the product line has major gaps.

CUSTOMER MOTIVATIONS After identifying customer segments, the next step is to consider their motivations: What lies behind their purchase decisions? And how does that differ by segment? It is helpful to list the segments and the motivation priorities of each, as shown in Figure 2.6 for air travelers.

Internet retailers have learned that there are distinct shopper segments, and each has a very different set of driving motivations.4

Newbie shoppers—need a simple interface, as well as a lot of hand-holding and reassurance.

Reluctant shoppers—need information, reassurance, and access to live customer support.

Frugal shoppers—need to be convinced that the price is good and they don’t have to search elsewhere.

Strategic shoppers—need access to the opinions of peers or experts and choices in configuring the products they buy.

Enthusiastic shoppers—need community tools to share their experiences, as well as engaging tools to view the merchandise and personalized recommendations.

Convenience shoppers—(the largest group) want efficient navigation, a lot of information from customers and experts, and superior customer service.

Segment Motivation

Business Reliable service, convenient schedules, easy-to-use airports, frequent-flyer programs, and comfortable service

Vacationers Price, feasible schedules

Figure 2.6 Customer Motivation Grid: Air Travelers

28 Part One Strategic Analysis

Some motivations will help to define strategy. A truck, for example, might be designed and positioned with respect to power. Before making such a strategic commitment, it is crucial to know where power fits in the motivation set. Other motivations may not define a strategy or differentiate a business, but may instead represent a dimension for which parity performance must be obtained or the battle will be lost. If the prime motivation for buyers of gourmet frozen- food dinners is taste, a viable firm must be able to deliver at least acceptable taste.

Determining Motivations

As Figure 2.7 suggests, consumer motivation analysis starts with the task of identifying motivations for a given segment. Although a group of managers can identify motivations, a more valid list is usually obtained by getting customers to discuss the product or service in a systematic way. Why is it being used? What is the objective? What is associated with a good or bad use experience? For a motivation such as car safety, respondents might be asked why safety is important. Such probes might result in the identification of more basic motives, such as the desire to feel calm and secure rather than anxious.

Customers can be accessed with group or individual interviews. Griffin and Hauser of the MIT Quality Function Deployment (QFD) program compared the two approaches in a study of food-carrying devices.5 They found that individual interviews were more cost-effective and that the group processes did not generate enough extra information to warrant the added expense. They also explored the number of interviews needed to gain a complete list of motivations and concluded that 20–30 will cover 90 to 95 percent of the motivations.

The number of motivations can be in the hundreds, so a second task is to cluster them into groups and subgroups. Affinity charts developed by a managerial team are commonly used. Each team member is given a set of motives on cards. One member puts a motive on the table or pins it to a wall, and the others add similar cards to the pile until there is a consensus that the piles represent reasonable groupings. An alternative is to use customers or groups of customers to sort the motives into piles. The customers are then asked to select one card from each pile that best represents their motives. Although managers gain buy-in and learning by going through the process themselves, Griffin and Hauser report that in the twenty applications at one firm, the managers considered customer-based approaches better representations than their own.

A third task of customer motivation analysis is to determine the relative importance of the motivations. Again, the management team can address this issue. Alternatively, customers can be asked to assess the importance of the motivations directly or perhaps through trade-off questions. If an engineer had to sacrifice response time or accuracy in an oscilloscope, which would it be? Or how would an airline passenger trade off convenient departure time with

Identify Motivations

Group and Structure

Motivations

Assess Motivation Importance

Assign Strategic Roles to

Motivations

Figure 2.7 Customer Motivation Analysis

Chapter 2 External and Customer Analysis 29

price? The trade-off question asks customers to make difficult judgments about attributes. Another approach is to see which judgments are associated with actual purchase decisions. Such an approach revealed that mothers often selected snack food based on what “the child likes” and what was “juicy” instead of qualities they had said were important (nourishing, easy to eat).

A fourth task is to identify the motivations that will play a role in defining the value proposition of the business. The selection of motivations central to strategy will depend on customer motivations and other factors, such as competitors’ strategies that emerge in the competitor analysis. Another factor is how feasible and practical the resulting strategy is for the business. Internal analysis will be involved in making that determination, as will an analysis of the strategy’s implementation.

Changing Customer Priorities

It is particularly critical to gain insight into changes in customers’ priorities. In the high-tech area, customer priorities often evolve from needing help in selecting and installing the right equipment

BUYER HOT BUTTONS

Motivations can be categorized as important or unimportant, yet the dynamics of the market may be better captured by identifying current buyer hot buttons. Hot buttons are motivations whose salience and impact on markets are significant and growing. What are buyers talking about? What are stimulating changes in buying decisions and use patterns?

In consumer retail food products, for example, hot buttons include the following:

Freshness and naturalness. Grocery stores have responded with salad bars, packaged precut vegetables, and efforts to upgrade the quality and selection of their fresh produce. Healthy eating. Low fat, particularly saturated and trans fat, is a prime driver, but concern about sodium, sugar, and processed foods is also growing and affecting product offerings in most food categories. Ethnic eating. A growing interest in ethnic flavors and cooking such as Asian, Mediterranean, and Caribbean cuisines has led to an explosion of new offerings. Brands usually start in ethnic neighborhoods, move into natural-food and gourmet stores, and finally reach the mainstream markets. Gourmet eating. The success of Williams-Sonoma and similar retailers reflects the growth of gourmet cooking and has led to the introduction of a broader array of interesting cooking aids and devices. Meal solutions. The desire for meal solutions has led to groups of products being bundled together as a meal and to a host of carryout prepared foods offered by both grocery stores and restaurants. Low-carb foods. The influence of low-carb diets has created a demand for reduced-carb food variants in both grocery stores and restaurants. Convenience. Shoppers have taken convenience to a new level with frozen dinners and cake mixes and even canned soup considered to demand too much preparation. Open and eat is the key. Snacks and yogurt deliver.

30 Part One Strategic Analysis

to wanting performance to looking for low cost. In the coffee business, customer tastes and habits have evolved from buying coffee at grocery stores to drinking coffee at gourmet cafes to buying and brewing their own whole-bean gourmet coffees. Assuming that customer priorities are not changing can be risky. It is essential to ask whether a significant and growing segment has developed priorities that are different from the basic business model.

The Customer as Active Partner

Customers are increasingly becoming active partners in their relationship with the firm and brand rather than passive targets of product development and advertising. The trend is illustrated by patients taking control of medical issues, the control of media shifting as audiences move to DVRs such as TiVo, and the power-enhancing access to information and fellow customers provided by the Internet.

To harness this change, managers should create and support customer communities. One motivation is to hear customer experiences and opinions about a brand in a context that will engender unbiased, motivated thoughts. Interacting with the customer on the Internet requires skills in listening, engaging, and leading. Each has challenges. Often there is information overload. There is a mention of McDonald’s on the Internet every 5 seconds or so. Software to summarize content can play a role if integrated into an information system. Engaging can be difficult because it depends on where the firm has permission to enter the space, and there can be risks of a misstatement or inflaming an issue if it is engaged. However, clearly identified firm spokespeople can be effective. Leading usually requires getting in front of the Internet discussion with products or programs.

UNMET NEEDS An unmet need is a customer need that is not satisfied by existing product offerings. OfficeMax, for example, found that people, especially women professionals, wanted a cubicle workplace with color, patterns, and textures. The result was four product lines that promised to enliven and personalize cubicle environments delivered under the tagline “Life Is Beautiful, Work Can Be Too.” An unmet need provided not only a route to a successful offering, but also a way to enhance a brand relationship.

Unmet needs are strategically important because they represent opportunities for firms to increase their market share, break into a market, or create and own new markets. They can also represent threats to established firms in that they can be a lever that enables competitors to disrupt an established position. Ariat, for example, broke into the market for equestrian footwear by providing high-performance athletic footwear to riders who were not well served by traditional riding boots. Driven by the belief that riders are athletes, Ariat developed a brand and product line that was responsive to an unmet need.

Sometimes customers may not be aware of their unmet needs because they are so accustomed to the implicit limitations of existing equipment. Who could have conceived of a need for an electric lightbulb or a tractor before technology made them possible? Unmet needs that are not obvious may be more difficult to identify, but they can also represent a greater opportunity for an aggressive business because there will be little pressure on established firms to be responsive. The key is to stretch the technology or apply new technologies in order to expose unmet needs.

Chapter 2 External and Customer Analysis 31

Using Customers to Identify Unmet Needs

Customers are a prime source of unmet needs. The trick is to access them and to get customers to detect and communicate unmet needs. What product-use experience problems have emerged? What is frustrating? How does it compare with other product experiences? Are there problems with the total-use system in which the product is embedded? How can the product be improved? This kind of research helped Dow come up with Spiffits, a line of premoistened, disposable cleaning towels that addressed the need for a towel already moistened with a cleaning compound.

A structured approach, termed problem research, develops a list of potential problems with the product or service. The problems are then prioritized by asking a group of 100–200 respondents to rate each problem as to whether (1) the problem is important, (2) the problem occurs frequently, and (3) a solution exists. A problem score is obtained by combining these ratings. A dogfood problem research study found that buyers thought dog food smelled bad, cost too much, and was not available in different sizes for different dogs. Subsequently, products responsive to these criticisms emerged. Another study led an airline to modify its cabins to provide more leg room.

Eric von Hippel, a researcher at MIT who studies customers as sources of service innovations, suggests that lead users provide a particularly fertile ground for discovering unmet needs and new product concepts.7 Lead users are users who:

Face needs that will be general in the marketplace, but face them months or years before the bulk of competitors. A person who is very much into health foods and nutrition would be a lead user with respect to health foods if we assume that there is a trend toward health foods.

Are positioned to benefit significantly by obtaining a solution to those needs. Lead users of office automation would be firms that would benefit significantly from technological advancement.

USER-DEVELOPED PRODUCTS

For an internal application, IBM designed and built the first printed circuit card insertion machine of a particular type to be used in commercial production.6 After building and testing the design in house, IBM sent engineering drawings of its design to a local machine builder along with an order for eight units. The machine builder completed this and subsequent orders and applied to IBM for permission to build essentially the same machine for sale on the open market. IBM agreed, and as a result, the machine builder became a major force in the component insertion equipment business.

In the early 1970s, store owners and sales personnel in southern California began to notice that youngsters were fixing up their bicycles to look like motorcycles, complete with imitation tailpipes and chopper-type handlebars. Sporting crash helmets and Honda motorcycle T-shirts, the youngsters raced fancy 20-inchers on dirt tracks. Obviously onto a good thing, the manufacturers came out with a whole new line of motorcross models. California users refined this concept into the mountain bike. Manufacturers were guided by the California customers to develop new refinements, including the 21-speed gear shift that doesn’t require removing one’s hands from the bars. Mountain bike firms are still watching their West Coast customers.

32 Part One Strategic Analysis

An effective and efficient way to access customers is to use the Internet to engage them in a dialogue. Dell, for example, has a website called Ideastorm where customers can post ideas and observe and “vote” on the ideas of others. They also see the reaction of Dell, which can include responses such as “under review” or “partially implemented.” Among the suggestions was to have backlit keyboards, to support free software such as Linux, and to design quieter computers. Starbucks with its MyStarbucksidea site is among many firms that are attempting to do something similar. A risk with customer-driven idea sites is that there can be a surge around an idea that is impractical or unwise, and the company would then be defensive. But it has the potential of leveraging many perspectives to generate ideas that can result in real energy and innovation.

A less direct way is to create communities of customers and let them converse with each other. The conversation will illuminate problems and unmet needs. P&G, for example, has the engagement platform BeingGirl, where preteen and teen girls can discuss coming of age issues with each other. It is an effective forum to spread awareness and knowledge about P&G feminine hygiene products and programs. Intuit’s site, developed to allow tax professionals to answer each other’s questions, provides insights into the kinds of questions being posed, which in turn informs Intuit’s TurboTax refinement efforts.

Qualitative Research

Qualitative research is a powerful tool in understanding customers and potential customers, their unmet needs, and their motivation at a very basic level. It can involve focus-group sessions, in-depth interviews, customer case studies, or ethnographic research. The concept is to search for the real concerns and motivations that do not emerge from structured lists and that customers may not be consciously aware of. For instance, buyers of sports utility vehicles might really be expressing their youth or a youthful attitude rather than a set of functional benefits. Getting inside the customer can provide strategic insights that do not emerge any other way.

Although a representative cross-section of customers is usually sought, special attention to some is often merited. Very loyal customers are often best able to articulate the bonds that the firm is capable of establishing. Lost customers (those who have defected) are often particularly good at graphically communicating problems with the product or service. New customers or customers who have recently increased their usage may suggest new applications. Organizational buyers using multiple vendors may have a good perspective of the firm relative to the competition.

The Internet has changed and enhanced qualitative research.8 No longer time and location limited—you don’t have to gather people into a conference room or send out interviewers to conduct one-on-one dialogues. Respondents do not have to rely on the memory of an experience weeks or months ago. A research study can now access experiences as they happen, where they happen. Respondents do not have to be from one location, but can be global. Further respondents, even if globally located, can be engaged with each other. Spontaneous interactions and moments of self-discovery can be stimulated. And it is more cost-effective and much faster than focus groups, in-depth interviews, or ethnographics.

Firms can address research tasks that ask consumers to engage in the following activities:

Assume that you are interested in wine experiences. Respondents can keep a journal and show by video or picture the context of their wine experience and their observations about it. A moderator can ask probing questions.

Chapter 2 External and Customer Analysis 33

Assume that you want to understand the food inventory of consumers. Instead of asking about a respondent’s refrigerator contents, ask him or her to take you on a photo tour of the fridge.

Assume you want to get into deep emotions surrounding a brand. Ask respondents to deprive themselves of it for a day and record the resulting emotions over the course of the day. Or ask the respondent to create or find images that reflect the feelings associated with a brand and post them. Encourage a discussion around the most interesting.

Assume you want some insight into a brand. Post six pictures and ask respondents which jumps out at them in a certain brand context.

Assume you need to develop a new product to revitalize a frozen dinner brand. First, ask respondents to use an online diary recording their experiences and activities related to frozen dinners complete with videos and descriptions for a week. A moderator interjects questions. Second, expose another respondent set to ten concepts presented with a video showing the package and use experience. An online discussion with moderator interaction is part of the process. Finally, three finished concepts are put to an in-home test during which respondents film their test experience.

Ethnographic Research

A powerful qualitative research approach is ethnographic or anthropological research, which involves directly observing customers in as many contexts as possible. By accurately observing not only what is done involving the target or service, but also why it is being done, companies can achieve a deeper level of understanding of the customer’s needs and motivations and generate actionable insights. It is often done by having researchers spend real time with customers in their homes or offices. P&G has its executives regularly engaged in such research. However, it can also be aided by a video camera or by the Internet-based research in which customers monitor themselves in a structured way.

For example, the financial data company Thomson Corporation regularly studies from 25 to 50 customers, examining their behavior from three minutes prior to using their data as well as three minutes afterward.9 One such study, which found that analysts were inputting the data into a spreadsheet, led to a new service. Although this research approach has been around for nearly a century, it has taken on new life in the last few years in packaged goods firms such as Unilever and also in business-to-business firms such as Intel and GE.

Ethnographic research is particularly good at identifying breakthrough innovations. Cus- tomers usually cannot verbalize such innovations because they are used to the current offerings. Henry Ford famously observed that had he asked customers what they wanted, they would have said faster horses. By watching people buy and use in the context of their lives or their businesses, however, experienced and talented anthropologists (or executives, in the case of P&G) can generate insights that go beyond what customers could talk about.

Ethnographic research works.10 After one study observed the difficulty people had in cleaning the bathroom, P&G developed Magic Reach, a device with a long handle and swivel head. Visits to contactors and home renovators resulted in the development of the OXO hammer (with a fiberglass core to cut vibration and a rubber bumper on top to avoid leaving marks when

34 Part One Strategic Analysis

removing nails) as part of a line of professional-grade tools. Sirius followed 45 people for a week, studying music listened to, magazines read, and TV shows watched, and then developed a portable satellite-radio player that can load up to 50 hours of music for later playback. Black & Decker’s observation that electric drill users ran out of power led to the detachable battery pack. Intel’s research in developing countries led it to develop a cheap PC that could run on truck batteries in 100-degree temperatures. GE found through ethnographic research that buyers of plastic fiber for fire-retardant jackets were more concerned with performance than price. That led to a completely different business model in GE’s efforts to enter the field.

Ethnographic research can also be used to improve existing products or services. Marriott had a multifunctional team of seven people (including a designer and an architect) spend six weeks visiting twelve cities, hanging out with guests at hotel lobbies, cafes, and bars.11 They learned that hotels were not doing well at service for small groups of business travelers. As a result, lobbies and adjacent areas were redesigned to be more suitable for transacting business, with brighter lights and “social zones” with a mix of small tables, larger tables, and semiprivate spaces.

The Ideal Experience

The conceptualization of an ideal experience can also help identify unmet needs. A major publisher of directories polled its customers, asking each to describe its ideal experience with the firm. The publisher found that its very large customers (the top 4 percent who were generating 45 percent of its business) wanted a single contact point to resolve problems, customized products, consultation on using the service, and help in tracking results. In contrast, smaller customers wanted a simple ordering process and to be left alone. These responses provided insights into improving service while cutting costs.12

KEY LEARNINGS

External analysis should influence strategy by identifying opportunities, threats, trends, and strategic uncertainties. The ultimate goal is to improve strategic choices—decisions as to where and how to compete. Segmentation (identifying customer groups that can support different competitive strategies) can be based on a variety of customer characteristics, such as benefits sought, customer loyalty, and applications.

Customer motivation analysis can provide insights into what assets and competencies are needed to compete, as well as indicate possible SCAs.

Unmet needs that represent opportunities (or threats) can be identified by asking customers, by accessing lead users, by ethnographic research, and by interacting with customers.

FOR DISCUSSION 1. Why do a strategic analysis? What are the objectives? What, in your view, are the three

keys to making a strategic analysis helpful and important? Is there a downside to conducting a full-blown strategic analysis?

Chapter 2 External and Customer Analysis 35

2. Consider the buyer “hot buttons” described on page 30. What are the implications for Betty Crocker? What new business areas might be considered given each hot button? Answer the same questions for a grocery store chain such as Safeway.

3. Consider the segments in the male shopper insert on page 26. Describe each further. What cars would they drive? What kinds of vacation would they take? What shirt brands would they buy?

4. What is a customer buying at Nordstrom? At Banana Republic? At Zara? 5. Pick a company or brand or business on which to focus, such as cereals. What are

the major segments? What are the customer motivations by segments? What are the unmet needs?

BEST DIGITAL PRACTICE

Glossier: Using Beauty to Talk Back to Consumers

When Emily Weiss founded beauty-brand Glossier her goal was simple: create an online platform through which women could connect and share their beauty routines and preferences with one another. Weiss wanted to bring a more personalized element to the experience of finding beauty products, and believed a forum that allowed women to more easily seek out suggestions and support was critical.

Glossier grew out of Weiss’ blog Into the Gloss, which highlighted the daily beauty routines of contemporary celebrities, models, and makeup moguls. The blog’s intention was to give individuals a first-hand look into the bathroom “top shelves” of women like Karlie Kloss and Bobbi Brown and gain inspiration for their own collections. Additionally, Weiss included a commenting function that enabled women to swap stories about utilizing different skin care and makeup products. When unique monthly views of the site surpassed 1 million, Weiss realized that there was an opportunity to begin designing a line of products based on her readers’ knowledge. This was the driver behind the launch of Glossier.

Since its inception in 2014, Glossier has relied on two things to set itself apart in the already crowded $250 billion beauty market. The first is its brand identity. Weiss has carefully maintained a unified look and feel across its website and advertisements. For example, there is a distinct focus on showcasing diverse women and infusing a “millennial-facing voice” into its marketing and messaging.

A second point of differentiation is the strength of Glossier’s digital community and customer feedback loop. Weiss has made the site an ongoing “two-way conversation” between the company’s product team and user community. Weiss mines user-generated content as an inspiration for future product development. Furthermore, as Glossier loyalists post their beauty habits on sites such as Instagram, the company benefits from free marketing.

Glossier’s concerted effort to talk “with” and not “at” its shoppers has certainly piqued consumer interest. Two products have had 10,000-person waiting lists and the company is seeing a significant uptick in international demand.

Under Weiss, Glossier is positioned to become a major player within the beauty market. Its success to date is a solid example of how careful analysis of consumer ideas can help marketers strategically and tactically respond to unmet areas of need.

36 Part One Strategic Analysis

Questions:

1. What is Glossier’s key customer analysis tool?

2. What, if anything, should major cosmetic competitors such as L’Oreal or Estee Lauder do in response to Glossier’s success? What actions can Glossier take to protect itself against these moves?

Source: Raisa Bruner, “This Beauty Startup has Become So Popular that it has 10,000 People on a Waitlist for Lipstick,” Business Insider, May 24, 2016, http://www.businessinsider.com/how-glossier-became-so- popular-2016-5

BEST GLOBAL PRACTICE

P&G Customer Analysis Guides Marketing Communications in China

Customer analysis is as essential to the marketing of existing products as it is to new product design and development. In 1998, P&G initially learned this lesson the hard way when it decided to expand the Pampers brand into China. Assuming that parents would prioritize price point over quality, the company launched a less expensive but poorer made version of the product. Sales lagged, and P&G eventually determined that Pampers’ consumers in China valued quality-based attributes like convenience, dryness, and softness as much as low product cost. This drove P&G to establish a new principle of “Delight, don’t dilute” when it came to product development in emerging markets and resulted in P&G successfully creating a Pampers line for China that delivered both good price and quality. Still, P&G was faced with the larger task of trying to change Chinese consumers’ purchasing habits.

Around the same time, the company was conducting in-depth research among new parents that revealed two key insights: that the quality of a baby’s sleep and its impact on the baby’s development was a real concern. To understand whether this insight could be connected to Pampers’ attempted expansion in China, P&G commissioned a study at the Beijing Children’s Hospital’s Sleep Research Center. The study showed that babies wearing Pampers fell asleep 30 percent faster, slept an extra 30 minutes every night, and had 50 percent less disruption throughout the night.

Data from this research drove the Pampers team to launch the “Golden Sleep” campaign in 2007. The campaign’s objective was to frame disposable diapers as aides to quality sleep. P&G set up extensive advertising, mass carnivals, and in-store campaigns in urban areas, yet the cornerstone was getting women to post a picture of their baby sleeping on the Pampers website.

Pampers collected so many photos that they broke the Guinness World Record for photo- montages. Over 200,000 responses were received and subsequently displayed in a 7,000 square foot collection hung in a retail store in Shanghai.

By utilizing customer analysis to help shape commercialization activities, P&G was able to both expand its share of the baby disposable diapers market and increase the market itself. Sales went up 55 percent, and from 2006 to 2011 the market grew to nearly 3 billion. It has grown bigger year over year, and Pampers remains a category leader today.

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Chapter 2 External and Customer Analysis 37

Questions:

1. Do you think “Delight, don’t dilute” is a principle that P&G can easily apply to other emerging markets? Why or why not? What customer analysis tool would be most helpful in making this determination?

2. Why were the photos of sleeping babies more effective than just reporting P&G research reports?

Sources: David Aaker, “How Pampers Made Diapers Relevant in China,” Prophet, https://www.prophet.com/ thinking/2013/05/how-pampers-made-diapers-relevant-in-china/

Mya Frazier, “How P&G Brought the Diaper Revolution to China,” CBS MoneyWatch, January 11, 2010, http://www.cbsnews.com/news/how-pg-brought-the-diaper-revolution-to-china/

38 Part One Strategic Analysis

C H A P T E R T H R E E

Competitor Analysis

Induce your competitors not to invest in those products, markets and services where you expect to invest the most . . . that is the fundamental rule of strategy. —Bruce Henderson, founder of BCG

There is nothing more exhilarating than to be shot at without result. —Winston Churchill

The best and fastest way to learn a sport is to watch and imitate a champion. —Jean-Claude Killy, skier

There are numerous well-documented reasons why the Japanese automobile firms were able to penetrate the U.S. market successfully, especially during the 1970s. One important reason, however, is that they were much better than U.S. firms at doing competitor analysis.1

David Halberstam, in his account of the automobile industry,graphicallydescribedthe Japanese efforts at competitor analysis in the 1960s. “They came in groups. . . . They measured, they photographed, they sketched, and they tape-recorded everything they could. Their questions were precise. They were surprised how open the Americans were.”2 The Japanese similarly studied European manufacturers, especially their design approaches. In contrast, according to Halberstam, the Americans were late in even recognizing the competitive threat from Japan and never did well at analyzing Japanese firms or understanding the new strategic imperatives created by the revised competitive environment even though the Japanese car firms were very open about their methods.

Competitor analysis is the second phase of external analysis. Again, the goal should be insights that will influence the development of successful business strategies. The analysis should focus on the identification of threats, opportunities, or strategic uncertainties created by emerging or potential competitor moves, weaknesses, or strengths.

Competitor analysis starts with identifying current and potential competitors. There are two very different ways of identifying current competitors. The first examines the perspective of the customer who must make choices among competitors. This approach groups competitors according to the degree to which they compete for a buyer’s choice. The second approach attempts to place competitors in strategic groups on the basis of their competitive strategy.

39

After competitors are identified, the focus shifts to attempting to understand them and their strategies. Of particular interest is an analysis of the strengths and weaknesses of each competitor or strategic group of competitors. Figure 3.1 summarizes a set of questions that can provide a structure for competitor analysis.

IDENTIFYING COMPETITORS—CUSTOMER-BASED APPROACHES One approach to identifying competitor sets is to look at them from the perspective of customers—what choices are customers making? A Cisco buyer could be asked what brand would have been purchased had Cisco not made the required item. A buyer for a nursing home meal service could be asked what would be substituted for granulated potato buds if they increased in price. A sample of sports car buyers could be asked what other cars they considered and perhaps what other showrooms they actually visited.

Brand-Use Associations

Another approach that provides insights is the association of brands with specific-use contexts or applications. Perhaps twenty or thirty product users could be asked to identify a list of use situations or applications. For each use context they would then name all the brands that are appropriate. Then for each brand, they would identify appropriate use contexts so that the list of use contexts would be more complete. Another group of respondents would then be asked to make judgments about how appropriate each brand is for each use context. Then brands would be clustered based on the similarity of their appropriate use contexts. Thus, if Doritos was perceived as a snack, its set of competitors would be different than if it was perceived as a party enhancer.

WHO ARE THE COMPETITORS?

Against whom do we usually compete? Who are our most intense competitors? Less intense but still serious competitors? Makers of substitute products? Can these competitors be grouped into strategic groups on the basis of their assets, competencies, and/or strategies? Who are the potential competitive entrants? What are their barriers to entry? Is there anything that can be done to discourage them?

EVALUATING COMPETITORS

What are their objectives and strategies? Their levels of commitment? Their exit barriers? What are their cost structures? Do they have cost advantages or disadvantages? What are their images and positioning strategies? Which are the most successful/unsuccessful competitors over time? Why? What are the strengths and weaknesses of each competitor or strategic group? What leverage points (or strategic weaknesses or customer problems or unmet needs) could competitors exploit to enter the market or become more serious competitors? How strong or weak is each competitor with respect to their assets and competencies? Generate a competitor strength grid.

Figure 3.1 Questions to Structure Competitor Analysis

40 Part One Strategic Analysis

The same approach will work with an industrial product that might be used in several distinct applications.

Both the customer-choice and brand-use approaches suggest a conceptual basis for identi- fying competitors that can be employed by managers even when marketing research is not available. The concept of alternatives from which customers choose and the concept of appropriateness to a use context can be powerful tools to understand the competitive environment.

Indirect Competitors

In most instances, primary competitors are quite visible and easily identified. Coke competes with Pepsi, other cola brands, and private labels such as President’s Choice. CitiBank competes with Chase, Bank of America, and other major banks. NBC competes with ABC, CBS, and Fox. Boeing competes with Airbus. The competitor analysis for this group should be done with depth and insight.

In many markets, however, customer priorities are changing, and indirect competitors offering customers product alternatives are strategically relevant. Understanding these indirect competitors can be strategically and tactically important, as the following examples demonstrate.

Coke focused on Pepsi and ignored for many years the emerging submarkets in water, energy drinks, and fruit-based drinks. The result was a missed opportunity and the eventual need to pursue an expensive and difficult catch-up strategy. While the major television networks struggle against each other, independent networks have emerged. Strong cable networks, such as ESPN, Fox, HBO, and CNN, have flourished; pay-per-view, Netflix, computer games, mobile applications, and the Internet are competing for the leisure time of viewers.

While banks focused on competing banks, their markets were eroded by mutual funds, insurers, and brokers.

While Folgers, Maxwell House, and others competed for supermarket business using coupon promotions, other firms, such as Starbucks, succeeded in selling a very different kind of coffee in different ways. And Starbucks has more recently been threatened by gourmet coffee makers sold for home use and by alternatives offered by chains like Dunkin’ Donuts and McDonald’s. Steel minimills were ignored by the major steel firms until they gradually became a major player.

The energy bar category, established in the mid-1980s by PowerBar, includes direct competitors such as Clif, Balance, and dozens of small, local niche firms. There are also a host of indirect competitors, many with very similar products: candy bars (Snickers was called “the energy bar” for many years), breakfast bars, meal replacement bars, diet bars, granola bars, and the cereal bar category. Understanding the positioning and new product strategies of these indirect competitors will be strategically important to businesses in the energy bar category.

Both direct and indirect competitors can be further categorized in terms of how relevant they are, as determined by similar positioning. Thus, candy bars will be more relevant to Balance than to PowerBar because of where the former has positioned itself (Balance Gold is even marketed as

Chapter 3 Competitor Analysis 41

being “like a candy bar”). For the same reason, Clif will be a closer competitor to PowerBar than to Balance.

The competitive analysis in nearly all cases will benefit from extending the perspective beyond the obvious direct competitors. By explicitly considering indirect competitors, the strategic horizon is expanded, and the analysis more realistically mirrors what the customer sees. In the real world, the customer is never restricted to a firm’s direct competitors, but instead is always poised to consider other options.

A key issue with respect to strategic analysis in general, and competitor analysis in particular, is the level at which the analysis is conducted. Is it at the level of a business unit, the firm, or some other aggregation of businesses? Because an analysis will be needed at all levels at which strategies are developed, multiple analyses might ultimately be necessary. For example, when Clif developed Luna, an energy bar designed for women, PowerBar countered with Pria. The manager of the Luna business may need a competitive analysis of energy bars for women, in which case the other energy bars might be considered indirect competitors.

IDENTIFYING COMPETITORS—STRATEGIC GROUPS The concept of a strategic group provides a very different approach toward understanding the competitive structure of an industry. A strategic group is a set of firms that:

Over time pursues similar competitive strategies (e.g., the use of the same distribution channel, the same type of communication strategies, or the same price/quality position)

Has similar characteristics (e.g., size, aggressiveness)

Has similar assets and competencies (such as brand associations, logistics capability, global presence, or research and development)

For example, there historically have been three strategic groups in the pet food industry, which is the subject of an illustrative industry analysis in the appendix to this book. One strategic group consists of very large diversified, branded consumer and food product companies. All distribute through mass merchandisers and supermarkets, have strong established brands, use advertising and promotions effectively, and enjoy economies of scale. The major players include Nestle Purina Petcare and Big Heart Pet Brands (owned by Smuckers).

A second strategic group of highly focused ultra-premium producers, such as Hill’s Petfood (Science Diet and Prescription Diet) and the Iams Company, sells product through veterinary offices and specialty pet stores. They have historically used referral networks to reach pet owners concerned with health. When P&G acquired Iams in 1999 and introduced it into mass merchandisers and supermarkets, the distinction between the two strategic groups blurred and new competitive dynamics were introduced. Iams became a threat to established brands in this space, and the Hill’s brands found their competitive context very different. Now owned by Mars, these two companies are still competing for premium consumers.

The third strategic group, private-label, is producers that supply Walmart and other major retailers.

In fact, many industries are populated by several strategic groups: premium-dominated volume entries such as United in airlines or Budweiser in beer, low-cost entries such as JetBlue in airlines and Milwaukee’s Best in beer, and niche groups such as timeshare planes and low alcohol and craft beers.

42 Part One Strategic Analysis

Each strategic group has mobility barriers that inhibit or prevent businesses from moving from one strategic group to another. An ultra-premium group in pet food producers has the brand reputation, product, and manufacturing knowledge needed for the health segment, access to influential veterinarians and retailers, and a local customer base. Private-label manufacturers have low-cost production, low overhead, and close relationships with customers. It is possible to bypass or overcome the barriers, of course. A private-label manufacturer could create a branded entry, especially if markets are selected to minimize conflicts with existing customers. The barriers are real, however, and a firm competing across strategic groups is usually at a disadvantage.

A member of a strategic group can have exit as well as entry barriers. For example, assets such as plant investment or a specialized labor force can represent a meaningful exit barrier, as can the need to protect a brand’s reputation.

The mobility barrier concept is crucial because one way to develop a sustainable competitive advantage is to pursue a strategy that is protected by assets and competencies that represent barriers to competitors. Consider the PC and server market. Dell and others marketed computers direct to consumers by telephone and the Internet. They developed a host of assets and competencies to support their direct channels, including an impressive product support system. Competitors such as HP—which has used indirect channels involving retailers and systems firms—have developed a very different set of assets and competencies. HP and Dell have both struggled to cross the channel barriers. Competition has largely been between the groups rather than brands. As the direct channel lost appeal while products matured and service problems emerged, HP gained in the marketplace.

Using the Strategic Group Concept

The conceptualization of strategic groups can make the process of competitor analysis more manageable. Numerous industries contain many more competitors than can be analyzed individually. Often it is simply not feasible to consider thirty competitors, to say nothing of hundreds. Reducing this set to a small number of strategic groups makes the analysis compact, feasible, and more usable. For example, in the wine industry, competitor analysis by a firm like Robert Mondavi might examine three strategic groups: jug wines, premium wines ($10–$20), and super-premium wines (over $20). Little strategic content and insight will be lost in most cases because firms in a strategic group will be affected by and react to industry developments in similar ways. Thus, in projecting future strategies of competitors, the concept of strategic groups can be helpful.

Strategic groupings can refine the strategic investment decision. Instead of determining in which industries to invest, the decision can focus on what strategic group warrants investment. Thus, it will be necessary to determine the current profitability and future potential profitability of each strategic group. One strategic objective is to invest in attractive strategic groups in which assets and competencies can be employed to create strategic advantage.

The emergence of a new strategic group or subgroup is of particular importance. It can create a dynamic that will affect strategies of all competitors for a long time. Major disruptions to an industry often start small with inferior products, so analysis needs to proceed with an eye toward projecting future offerings rather than assuming they will not evolve. Chapter 13 elaborate on this point.

Chapter 3 Competitor Analysis 43

POTENTIAL COMPETITORS In addition to current competitors, it is important to consider potential market entrants, such as firms that might engage in:

1. Market expansion. Perhaps the most obvious potential competitors are firms operating in other geographic regions or in other countries. A cookie company may want to keep a close eye on a competing firm in an adjacent state, for example.

2. Product expansion. The leading ski firm, Rossignol, has expanded into ski clothing, thus exploiting a common market, and has moved to tennis equipment, which takes advantage of technological and distribution overlap.

3. Backward integration. Customers are another potential source of competition. General Motors bought dozens of manufacturers of components during its formative years. Major can users, such as Campbell Soup, have integrated backward, making their own containers.

4. Forward integration. Suppliers attracted by margins are also potential competitors. Suppliers, believing they have the critical ingredients to succeed in a market, may be attracted by the margins, the control, and the visibility that come with integrating forward. Apple, Inc., for example, opened a chain of retail stores.

5. The purchase of assets or competencies. A current small competitor with critical strategic weaknesses can turn into a major entrant if it is purchased by a firm that can reduce or eliminate those weaknesses. Predicting such moves can be difficult, but sometimes an analysis of competitor strengths and weaknesses will suggest some possible synergistic mergers. A competitor in an above-average growth industry that does not have the financial or managerial resources for the long haul might be a particularly attractive candidate for merger.

COMPETITOR ANALYSIS—UNDERSTANDING COMPETITORS Understanding competitors and their activities can provide several benefits. First, an understanding of the current strategy, strengths, and weaknesses of a competitor can suggest opportunities and threats that will merit a response. Second, insights into future competitor strategies may allow the prediction of emerging threats and opportunities. Third, a decision about strategic alternatives might easily hinge on the ability to forecast the likely reaction of key competitors. Finally, competitor analysis may result in the identification of some strategic uncertainties that will be worth monitoring closely over time. A strategic uncertainty might be, for example, “Will Competitor A decide to move into the western U.S. market?”

As Figure 3.2 indicates, competitor actions are influenced by eight elements. The first of these reflects financial performance, as measured by size, growth, and profitability.

Size, Growth, and Profitability

The level and growth of sales and market share provide indicators of the vitality of a business strategy. The maintenance of a strong market position or the achievement of rapid growth usually

44 Part One Strategic Analysis

reflects a strong competitor (or strategic group) and a successful strategy. In contrast, a deteriorating market position can signal financial or organizational strains that might affect the interest and ability of the business to pursue certain strategies. To provide a crude sales estimate for businesses that are buried in a large company, take the number of employees and multiply it by the average sales per employee in the industry. For many businesses, this method is very feasible and remarkably accurate.

After size and growth comes profitability. A profitable business will generally have access to capital for investment unless it has been designated by the parent to be milked. A business that has lost money over an extended time period or has experienced a recent sharp decrease in profitability may find it difficult to gain access to capital either externally or internally.

Image and Positioning Strategy

A cornerstone of a business strategy can be an association, such as being the strongest truck, the most durable car, the smallest consumer electronics equipment, or the most effective cleaner. More often, it is useful to move beyond class-related product attributes to intangibles that span product class, such as quality, innovation, sensitivity to the environment, or brand personality.

In order to develop positioning alternatives, it is helpful to determine the image associations, including the brand personality of the major competitors. Weaknesses of competitors on relevant attributes or personality traits can represent an opportunity to differentiate and develop an advantage. Strengths of competitors on important dimensions may represent challenges to exceed them or to outflank them. In any case, it is important to know the competitive profiles.

Competitor image and positioning information can be deduced in part by studying a firm’s products, advertising, website, and actions, but often customer research is helpful to ensure that an accurate current portrayal is obtained. The conventional approach is to start with qualitative

Current and Past Strategies

Size, Growth, and Profitability

Objectives and Commitment

Image and Positioning

Strengths and Weaknesses

Cost Structure

Organization and Culture

Exit Barriers

COMPETITOR ACTIONS

Figure 3.2 Competitor Analysis

Chapter 3 Competitor Analysis 45

customer research to find out what a business and its brands mean to customers. What are the associations? If the business were a person, what kind of person would it be? What visual imagery, books, animals, trees, or activities are associated with the business? What is its essence?

Objectives and Commitment

A knowledge of competitor objectives provides the potential to predict whether or not a competitor’s present performance is satisfactory or strategic changes are likely. The financial objectives of the business unit can indicate the competitor’s willingness to invest in that business even if the payout is relatively long term. In particular, what are the competitor’s objectives with respect to market share, sales growth, and profitability? Nonfinancial objectives are also helpful. Does the competitor want to be a technological leader? Or to develop a service organization? Or to expand distribution? Such objectives provide a good indication of the competitor’s possible future strategy.

The objectives of the competitor’s parent company (if one exists) are also relevant. What are the current performance levels and financial objectives of the parent? If the business unit is not performing as well as the parent, pressure might be exerted to improve or the investment might be withdrawn. Of critical importance is the role attached to the business unit. Is it central to the parent’s long-term plans, or is it peripheral? Is it seen as a growth area, or is it expected to supply cash to fund other areas? Does the business create synergy with other operations? Does the parent have an emotional attachment to the business unit for any reason? Deep pockets can sometimes be accompanied by short arms; just because resources exist does not mean they are available.

Current and Past Strategies

The competitor’s current and past strategies should be reviewed. In particular, past strategies that have failed should be noted because such experiences can inhibit the competitor from trying similar strategies again. Also, a knowledge of a competitor pattern of new product or new market moves can help anticipate its future growth directions. Is the strategy based on product-line breadth, product quality, service, distribution type, or brand identification? If a low-cost strategy is employed, is it based on economies of scale, the experience curve, manufacturing facilities and equipment, or access to raw material? What is its cost structure? If a focus strategy is evident, describe the business scope.

Organization and Culture

Knowledge about the background and experience of the competitor’s top management can provide insight into future actions. Are the managers drawn from marketing, engineering, or manufactur- ing? Are they largely from another industry or company? Clorox, for example, has a very heavy Procter & Gamble influence in its management, lingering from the years that Procter & Gamble operated Clorox as a subsidiary before the courts ordered divestiture following an antitrust suit.

An organization’s culture, supported by its structure, systems, and people, often has a pervasive influence on strategy. A cost-oriented, highly structured organization that relies on tight controls to achieve objectives and motivate employees may have difficulty innovating or shifting into an aggressive, marketing-oriented strategy. A loose, flat organization that emphasizes innovation and risk taking may similarly have difficulty pursuing a disciplined product-refinement and cost-reduction program. In general, as Chapter 16 will make clearer, organizational elements such as culture, structure,competencies,incentives,andpeoplelimittherangeofstrategiesthatshouldbeconsidered.

46 Part One Strategic Analysis

Cost Structure

Knowledge of a competitor’s cost structure, especially when the competitor is relying on a low- cost strategy, can provide an indication of its likely future pricing strategy and its staying power. The following information can usually be obtained and can provide insights into cost structures:

The number of employees and a rough breakdown of direct labor (variable labor cost) and overhead (which will be part of fixed cost)

The relative costs of raw materials and purchased components

The investment in inventory, plant, and equipment (also fixed cost)

Sales levels and number of plants (on which the allocation of fixed costs is based)

Outsourcing strategy

Exit Barriers

Exit barriers can be crucial to a firm’s ability to withdraw from a business area and thus are indicators of commitment. They include the following:3

Specialized assets—plant, equipment, or other assets that are costly to transform to another application and therefore have little salvage value

Fixed costs, such as labor agreements, leases, and a need to maintain parts for existing equipment

Relationships to other business units in the firm resulting from the firm’s image or from shared facilities, distribution channels, or sales force

Government and social barriers—for example, governments may regulate whether a railroad can exit from a passenger service responsibility, or firms may feel a sense of loyalty to workers, thereby inhibiting strategic moves

Managerial pride or an emotional attachment to a business or its employees that affects economic decisions

NINTENDO—SUCCESS THAT STARTED WITH COMPETITOR ANALYSIS

The story of the Nintendo business strategy and brand is nothing short of astounding, and competitive analysis played an important part. BrandJapan, an annual survey of the strength of over 1,000 Japanese brands, saw a remarkable stability spanning nine years in the cast of characters occupying the top two dozen positions. Then came Nintendo. In the 2005 findings, Nintendo was ranked 135 in the survey. From that point it rose to 66 in 2006, to 5 in 2007, and finally to number one in 2008, a position it held with a value of over 93 while the next seven brands were bunched at 82 to 84, and a position it retained in 2009. During the 2004 to 2008 period, its stock price went up more than fivefold, and at one point its market cap was behind only Toyota in Japan. Why? What drove this performance?

(continued)

Chapter 3 Competitor Analysis 47

Assessing Strengths and Weaknesses

Knowledge of a competitor’s strengths and weaknesses provides insight into its ability to pursue various strategies. It also offers important input into the process of identifying and selecting strategic alternatives. One approach is to exploit a competitor’s weakness in an area where the firm has an existing or developing strength. The desired pattern is to develop a strategy that will pit “our” strength against a competitor’s weakness. Another approach is to bypass or neutralize a competitor’s strength.

One firm that developed a strategy to neutralize a competitor’s strength was a small software firm that lacked a retail distribution capability or the resources to engage in retail advertising.

The products were clearly the drivers. Nintendo DS, released in December 2004, was a compact portable game console characterized by an innovatively intuitive touch-pen method. It was supported by games such as Nintendogs, Animal Crossing, and Brain Age aimed at a wide target market, including young females and even seniors. Then came Wii, a new form of game that incorporated user movement into gaming. With a wireless controller and the Wii remote that detects movement in three dimensions, the user can dance, golf, box, play a guitar, and so on. Opponents can be sourced in other locations and even other countries. In fact, the DS and Wii with their supporting games created a new market categorized as “casual games,” video games that require less skills and experience and are characterized by simple and intuitive rules. The new casual game category went from 1 percent of the market to over 20 percent by 2005.4

But what was behind the Nintendo innovation success? Why was it able to win facing Sony and Microsoft? One principle reason was the acceptance of a realistic and astute analysis of the two competitors: Sony (Playstation) and Microsoft (P3 players). Nintendo recognized that Sony and Microsoft had and will have equipment that had better technology—higher performance, higher resolution, and higher quality graphics that appeal to the heavy users—young males. They were focused on that objective and invested in chips, software, manufacturing, and hardware to keep delivering. Given this reality, Nintendo took a different course, a low-tech route, even though that meant that the heavy user segment would be ceded to the two competitors.

Nintendo decided to refocus away from the hard core young males who were into action games and high-quality graphics toward a broader audience less concerned with better and better graphics. The key for this group would be a wide array of easy-to-use games that would move beyond the action genre and include some learning vehicles. One goal is to have the mother as a participant and an advocate rather than a cynic and opponent. Another is to involve the whole family so the games are not simply related to boys’ retreats. The strategy went against the convention of focusing on heavy users and trying to better competitor’s offerings.

Sony and Microsoft aggressively responded with innovations of their own, and the Nintendo lofty brand position did not hold. By 2011, the Nintendo brand had fallen but still was in the top 15 of 1,000 brands, while DS was in the top 25 and Wii in the top 50. But then Nintendo fought back with more innovations. A successor to the DS line, the Nintendo 3DS produced a three-dimensional effect with glasses and included games that can only be played on the device. A new Wii, the WiiU, included a GamePad controller that can be the centerpiece of the home entertainment system allowing the user to connect and control entertainment options such as games, television shows, and more. Both leveraged the Nintendo franchise games such as Mario and Zelda plus new brands as well. In addition, Nintendo8 provided access to the games of the 1980s and provided a link to the brand’s heritage.

48 Part One Strategic Analysis

It targeted value-added software systems firms, which sell total software and sometimes hardware systems to organizations such as investment firms or hospitals. These value-added systems firms could understand and exploit the power of the product, integrate it into their systems, and use it in quantity. The competitor’s superior access to a distribution channel or resources to support an advertising effort was thus neutralized.

The assessment of a competitor’s strengths and weaknesses starts with an identification of relevant assets and competencies for the industry and then evaluates the competitor on the basis of those assets and competencies. We now turn to these topics.

COMPETITOR STRENGTHS AND WEAKNESSES What are the Relevant Assets and Competencies?

Competitor strengths and weaknesses are based on the existence or absence of assets or competencies. Thus, an asset such as a well-known name or a prime location could represent a strength, as could a competency such as the ability to develop a strong promotional program. Conversely, the absence of an asset or competency can represent a weakness.

To analyze competitor strengths and weaknesses, it is thus necessary to identify the assets and competencies that are relevant to the industry. As Figure 3.3 suggests, four sets of questions can be helpful.

1. What businesses have been successful over time? What assets or competencies have contributed to their success? What businesses have had chronically low performance? Why? What assets or competencies do they lack? By definition, assets and competencies that provide SCAs should affect performance over time. Thus, businesses that differ with respect to performance over time should also differ with respect to their assets and competencies. Analysis of the causes of the performance usually suggests sets of relevant competencies and assets. Typically, the superior perform- ers have developed and maintained key assets and competencies that have been the basis for their performance. Conversely, weakness in several assets and competencies relevant to the industry and its strategy should visibly contribute to the inferior performance of the weak competitors over time.

Customer Motivations?

Drivers of Business Success or Failure?

Critical Value- Added

Components?

Industry Mobility Barriers?

RELATIVE ASSETS AND

COMPETENCIES

Figure 3.3 Identifying Relevant Assets and Competencies

Chapter 3 Competitor Analysis 49

For example, in the CT scanner industry, the best performer, General Electric, has superior product technology and R&D, scale economies, an established systems capa- bility, a strong sales and service organization (owing, in part, to its X-ray product line), and an installed base.

2. What are the key customer motivations? What is needed to be preferred? What is needed to be considered? Customer motivations usually drive buying decisions and thus can dictate which assets or competencies potentially create meaningful advantages. In the heavy-equipment industry, customers value service and parts backup. Caterpillar’s promise of “24-hour parts service anywhere in the world” has been a key asset because it is important to customers. Apple has focused on the motivation of designers for user-friendly design platforms.

There are motivations that lead to a brand being excluded from consideration. An offering characteristic may not determine winners, but a deficiency will eliminate it from being considered. Hyundai, for example, needs to be perceived as having adequate quality. A series of “best car” awards in 2009 did not necessarily vault the brand to a superior position, but for many, it did get rid of the “inadequate” perception.

3. What assets and competencies represent industry mobility (entry and exit) barriers? Strategic groups are characterized by structural stability even when one group is much more profitable than the others. The reason is mobility barriers, which can be both entry barriers and exit barriers. Some groups have assets and competencies that will be difficult and sometimes impossible to duplicate by those seeking to enter. International deep water oil-well drilling firms, for example, have technology, equipment, and people that domestic, on-shore firms cannot duplicate. These assets also represent exit barriers because there is no other use to which they could be put.

4. What are the significant value-added components in the value chain? A firm that can excel on a critical value-added component can have a sustainable advantage. The component can be critical because of its cost such as package handling for FedEx or the call center at Dell. Or it can be critical because of the customer benefit it generates or affects such as the ordering system at Amazon or the ingredients of a P&G detergent. In examining the value chain, it is helpful to start with suppliers and end with the customer use experience while charting all the components in between. The components can be found throughout the organization and that of its partners. For eBay, for example, operations, customer support, auction services, plus the operations of those selling goods are all potential candidates.

A Checklist of Strengths and Weaknesses

Figure 3.4 provides an overview checklist of the areas in which a competitor can have strengths and weaknesses. The first category is innovation. One of the strengths of Kao Corporation is its ability to develop innovative products in soaps, detergents, skin care, and even data storage disks. Its new products usually have a distinct technological advantage. In a highly technical industry, the percentage spent on R&D and the emphasis along the basic/applied continuum can be indicators of the cumulative ability to innovate. The outputs of the process in terms of product characteristics and performance capabilities, new products, product modifications, and patents provide more definitive measures of the company’s ability to innovate.

50 Part One Strategic Analysis

The second area of competitor strengths and weaknesses is manufacturing and operations. Manufacturing is a major area of strength of Toyota, based on its culture, work processes, and ability to reduce inventory and costs. Walmart has developed significant operational capacity and efficiency advantages, based in part by working closely with suppliers. In addition to potential cost advantages, superior processes and systems at both Toyota and Walmart provide strategic and tactical flexibility.

The third area is finance, the ability to generate or acquire funds in the short as well as the long run. Companies with deep pockets (financial resources) have a decisive advantage because they can pursue strategies not available to smaller firms. This is especially true in times of stress. Firms with a strong balance sheet can seize opportunities. Operations provide one major source of funds. What is the nature of cash flow that is being generated and will be generated given the known uses for funds? Cash or other liquid assets and the deep pockets of a parent firm are important sources as well.

Management is the fourth area. Controlling and motivating a set of highly disparate business operations are strengths for GE, Disney, and other firms that have successfully diversified. The quality, depth, and loyalty (as measured by turnover) of top and middle management provide an important asset for others. Another aspect to analyze is the culture. The values and norms that permeate an organization can energize some strategies and inhibit others. In particular, some

INNOVATION MANAGEMENT Technical product or service superiority New product capability R&D Technologies Patents

Quality of top and middle management Knowledge of business Culture Strategic goals and plans Entrepreneurial thrust Planning/operation system Loyalty—turnover Quality of strategic decision making

MANUFACTURING/OPERATIONS Cost structure Effective and flexible operations Efficient operations Vertical integration Workforce attitude and motivation Capacity Outsourcing

MARKETING Product quality reputation Product characteristics/differentiation Brand name recognition Breadth of the product line—systems capability Customer orientation Segmentation/focus Distribution Retailer relationship Advertising/promotion skills Sales force Customer service/product support

FINANCE—ACCESS TO CAPITAL From operations From net short-term assets Ability to use debt and equity financing Parent’s willingness to finance CUSTOMER BASE

Size and loyalty Market share Growth of segments served

Figure 3.4 Analysis of Strengths and Weaknesses

Chapter 3 Competitor Analysis 51

organizations, such as 3M, possess both an entrepreneurial culture that allows them to initiate new directions and the organizational skill to nurture them. The ability to set strategic goals and plans can represent significant competencies. To what extent does the business have a vision and the will and competence to pursue it?

The fifth area is marketing. Often the most important marketing strength, particularly in the high-tech field, involves the product line: its quality reputation, breadth, and the features that differentiate it from other products. Brand image and distribution have been key assets for businesses as diverse as Pizza Hut, Dell, and Bank of America. The ability to develop a true customer orientation can be an important strength. For P&G, two of its strengths are consumer understanding and brand building. Another strength can be based on the ability and willingness to advertise effectively. The success of Perdue chickens, MasterCard, and Budweiser were all due in part to an ability to generate superior advertising. Other elements of the marketing mix, such as the sales force and service operation, can also be sources of sustainable competitive advantage. One of Caterpillar’s strengths is the quality of its dealer network. Still another possible strength, particularly in the high-tech field, is an ability to stay close to customers.

The final area of interest is the customer base. How substantial is the customer base, and how loyal is it? How are the competitor’s offerings evaluated by its customers? What are the costs that customers will have to absorb if they switch to another supplier? Extremely loyal and happy customers are difficult to dislodge. What are the size and growth potentials of the segments served by a competitor?

THE COMPETITIVE STRENGTH GRID With the relevant assets and competencies identified, the next step is to scale your own firm and the major competitors or strategic groups of competitors on those assets and competencies. The result is termed a competitive strength grid and serves to summarize the position of the competitors with respect to assets and competencies.

A sustainable competitive advantage is almost always based on having a position superior to that of the target competitors in one or more asset or competence area that is relevant both to the industry and to the strategy employed. Thus, information about each competitor’s position with respect to relevant assets and competencies is central to strategy development and evaluation.

If a superior position does not exist with respect to assets and competencies important to the strategy, it probably will have to be created or the strategy may have to be modified or abandoned. Sometimes there simply is no point of difference with respect to the firms regarded as competitors. A competency that all competitors have will not be the basis for an SCA. For example, flight safety is important among airline passengers, but if airlines are perceived to be equal with respect to pilot quality and plane maintenance, it cannot be the basis for an SCA. Of course, if some airlines can convince passengers that they are superior with respect to antiterrorist security, then an SCA could indeed emerge.

The Luxury Car Market

A competitor strength grid is illustrated in Figure 3.5 for the luxury car market. The relevant assets and competencies are listed on the left, grouped as to whether they are considered keys to success or are of secondary importance. The principal competitors are shown as column headings across the top. Each cell could be coded as to whether the brand is strong, above average, average, below average, or weak in that asset or competence category. The figure uses an above average, average, and below average scale.

52 Part One Strategic Analysis

53

Assets and Competencies Key for Success

Product quality

Product differentiation

Dealer satisfaction

Market share

Quality of service

Secondary Importance

Financial capability

Quality of management

Brand name recognition

Advertising/promotion

Cadillac (GM)

Lincoln (Ford)

Lexus (Toyota)

Acura (Honda)

Infiniti (Nissan)

Mercedes Benz Volvo BMW Audi Jaguar

1 = Less than average

2 = Average

3 = Above average

EuropeanJapaneseU.S.

3-point scale

Figure 3.5 Illustrative Example of a Competitive Strength Grid for the U.S. Luxury Car Market

The resulting Figure 3.5 provides a summary of the hypothetical profile of the strengths and weaknesses of ten brands. Two can be compared, such as Ford and Lexus or BMW and Audi. BMW and Lexus have enviable positions.

In the grid, Lincoln is shown as not being well regarded. But that changed in 2013 when Lincoln, blessed with an incredible heritage, attempted a break-out reinvigoration. The effort rested in large part on the new MKZ midsize car that delivered luxurious quality, good looks with an appealing fluid design described as “smooth and soft,” an interior that was competitive with the other premium brands, and included a host of differentiating innovations such as push-button shifting and a panoramic glass roof. There is a hybrid version that got 45 mpg.

The car was introduced with an aggressive digital marketing program and a set of television ads that provided a link to the past heritage with glimpses of the some of the classic models and a full-page newspaper print ad that explained how Lincoln will become great again. People who test drive a Lincoln received a diner reward, a “Lincoln date night,” and there will be a 24-hour concierge to help navigate model choice. The dealer experience got a significant upgrade. At the same time, the organization was renamed as the Lincoln Motor Company (both a step up and a step back in time from the Lincoln Division), and the customer dealer experience was upgraded to Lexus levels. The strategy worked and new models have been introduced every year since.

A tough assignment but it has been done before. Cadillac came back from a similar point in 2003 with its CTS model. It was able to demonstrate the CTS could perform as well or better than any rival in terms of acceleration and drivability. It further got credibility and visibility by getting third-party quality recognition. It took years, but Cadillac came back. Hyundai is another brand that overcame a disastrous and well-earned reputation for poor quality and design. Hyundai changed course, created superior cars that won awards, and added some brilliant marketing. The result was impressive visibility, a revised image, and a remarkable increase in relevance.

So the image data has momentum but also is dynamic. It can change, especially if a major relaunch is anchored by an innovative new model that delivers value, gets recognition, and gains traction in the marketplace. It needs to get the delicate balance required to leverage the heritage into authenticity, personality, and self-expressive benefits rather than nostalgic charm.

Analyzing Submarkets

It is often desirable to conduct an analysis for submarkets or strategic groups and perhaps for different products. A firm may not compete with all other firms in the industry, but only with those engaged in similar strategies and markets. For example, a competitive strength grid may look very differentforthesafetysubmarket,withVolvohavingmorestrength.Similarly,thehandling submarket may also involve a competitive grid that will look different, with BMW having more strength.

The Analysis Process

The process of developing a competitive strength grid can be extremely informative and useful. One approach is to have several managers create their own grids independently. The differences can usually illuminate different assumptions and information bases. A reconciliation stage can dissemi- nate relevant information and identify and structure strategic uncertainties. For example, different opinions about the quality reputation of a competitor may stimulate a strategic uncertainty that justifies marketing research. Another approach is to develop the grid in a group setting, perhaps supported by preliminary staff work. When possible, objective information based on laboratory tests or customer perception studies should be used. The need for such information becomes clear when disagreements arise about where competitors should be scaled on the various dimensions.

54 Part One Strategic Analysis

OBTAINING INFORMATION ON COMPETITORS A competitor’s website is usually a rich source of information and the first place to look. The strategic vision (along with a statement about values and culture) is often posted and the portfolios of businesses are usually laid out. The way that the latter are organized can provide clues as to business priorities and strategies. When IBM emphasizes its e-servers, for example, that says something about its direction in the server business. The website also can provide information about such business assets as plants, global access, and brand symbols. Research on the competitor’s site can be supplemented with search engines, access to articles, and financial reports about the business.

Detailed information on competitors is generally available from a variety of other sources as well. Competitors usually communicate extensively with their suppliers, customers, and distributors; security analysts and stockholders; and government legislators and regulators. Contact with any of these can provide information. Monitoring trade magazines, trade shows, advertising, speeches, annual reports, and the like can be informative. Technical meetings and journals can provide information about technical developments and activities. Thousands of databases accessible by computer now make available detailed information on most companies.

Detailed information about a competitor’s standing with its customers can be obtained through market research. For example, regular telephone surveys could provide information about the successes and vulnerabilities of competitors’ strategies. Respondents could be asked questions such as the following: Which store is closest to your home? Which do you shop at most often? Are you satisfied? Which has the lowest prices? Best specials? Best customer service? Cleanest stores? Best-quality meat? Best-quality produce? And so on. Those chains that were well positioned on value, on service, or on product quality could be identified, and tracking would show whether they were gaining or losing position. The loyalty of their customer base (and thus their vulnerability) could be indicated in part by satisfaction scores and the willingness of customers to patronize stores even when they were not the most convenient or the least expensive.

KEY LEARNINGS

Competitors can be identified by customer choice (the set from which customers select) or by clustering them into strategic groups (firms that pursue similar strategies and have similar assets, competencies, and other characteristics). In either case, competitors will vary in terms of how intensely they compete. Competitors should be analyzed along several dimensions, including their size, growth and profitability, image, objectives, business strategies, organizational culture, cost structure, exit barriers, and strengths and weaknesses.

Potential strengths and weaknesses can be identified by considering the characteristics of successful and unsuccessful businesses, key customer motivation, mobility barriers, and value-added components.

The competitive strength grid, which arrays competitors or strategic groups on each of the relevant assets and competencies, provides a compact summary of key strategic information.

Chapter 3 Competitor Analysis 55

FOR DISCUSSION 1. Consider the news industry. Identify the competitors to CNN and organize them in

terms of their intensity of competition.

2. Evaluate Figure 3.5. What surprises are there in the figure? What are the impli- cations for Cadillac? For Audi?

3. Pick a company or brand or business on which to focus. What business is it in? Who are its direct and indirect competitors? Which in each category are the most relevant competitors?

4. Consider the automobile industry. Identify competitors to Ford SUVs and organize them in terms of their intensity of competition. Also organize them into strategic groups. What are the key success factors for the strategic groups? Do you think that will change in the next five years?

5. Consider the Nintendo case on page 47. Why was Nintendo the firm to come up with the DS and the Wii products and not SONY or Microsoft? How did Nintendo do it? What assets and competencies were required?

BEST DIGITAL PRACTICE

T-Mobile: The Un-Carrier

Consumer frustration with perceived unnecessary costs and complexity in the wireless telecommu- nications industry has long been prevalent. Yet among a market landscape dominated by rigid contracts and layers of bureaucracy for customers, one company saw an opportunity for disruption. T-Mobile, long overshadowed by AT&T, Verizon, and Sprint, decided to craft a unique “Un-carrier” strategy that centered on not acting like a wireless carrier.

Since 2013, T-Mobile has introduced a series of improvements to consumer plans that emphasize simplicity, fairness, and value. These have included eliminating long-term contracts, instituting unlimited access to data, and allowing for faster phone upgrades. Though each campaign has differed, the overarching Un-carrier strategy was designed to highlight T-Mobile’s commitment to improving the wireless carrier experience beyond parity levels.

T-Mobile has gained traction with the strategy through targeted brand positioning and creative messaging. Positioned as the “rebel,” T-Mobile is not afraid to challenge industry leaders over the status quo. Putting caps on data utilization, for example, has historically allowed carriers to maximize revenue. T-Mobile observed that this frustrated consumers and thus decided to eliminate the common practice of metering voice and text capabilities. By placing customer needs ahead of profit margins, T-Mobile was able to effectively separate itself within the market. Additionally, rather than trying to obtain an edge with technological advances, T-Mobile created a series of must-haves that other carriers weren’t set up to provide. One example was the company’s willingness to pay the early termination fees of all customers who switch to T-Mobile from other carriers. Ultimately, T-Mobile’s goal was to be everything that traditional players were not. To support this positioning, the company generated a series of humorous advertising spots highlighting why individuals were switching their plans over from competitors. CEO John Legere also initiated a series of TED-talk style presentations that pointed to the unique points of differentiation T-Mobile offered.

56 Part One Strategic Analysis

BEST GLOBAL PRACTICE

Xiaomi: Less is More

Since its founding in 2010, the Chinese communications technology company Xiaomi has established itself as a true competitor among both global incumbents like Apple and Samsung and local niche players like Huawei. Through CEO Lei Jun’s careful creation of strong, favorable, and unique associations for the company, Xiaomi is an excellent example of a challenger within a highly competitive market.

Xiaomi is known for its strategy of selling high-end smartphones at an attractive cost. Products are often marked 30–50% cheaper than Apple and Samsung. The low prices are driven by the company’s penchant for austere design, efficient manufacturing, and willingness to accept a low margin. While this business model runs contrary to many other Chinese companies, it has helped Xiaomi build good equity among its target segment: the middle-class in China. This group wants a smartphone but often can’t afford one and are attracted to Xiaomi products because they provide “good value for the money.”

Another competitive advantage for Xiaomi has been its ability to earn the loyalty of its customers, dubbed “Mi-fans.” Executives see customer engagement as a key driver of favorable brand perception, and thus provide numerous points of interaction with the company’s fan base. For example, Xiaomi frequently interacts with customers through social media and relies on user feedback to innovate. Some of these “VIP” customers receive gifts to acknowledge their contributions to the company. Finally, the company hosts day-long festivals to roll out special marketing campaigns and showcase new products. Fans wait in long lines to attend and enjoy the comradery of interacting with one another and with the company. All of these factors combined have made the Xiaomi brand a true friend in the eyes of its customers.

Xiaomi has further cemented its industry foothold through its unique approach to distribution and advertising. The company sells products directly through its own online store and large established

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Within a year and a half of launching the campaign, T-Mobile had added 22.5 million subscribers to its network. The company was also recognized as one of Fast Company Magazine’s Most Innovative Companies.

Questions:

1. Perform a competitive analysis of the wireless telecommunications industry?

2. How can T-Mobile maintain its competitive advantage?

Sources: David Aaker, “5 Lessons from T-Mobile’s Game-Changing Strategy,” https://www.prophet.com/ thinking/2014/02/5-lessons-from-t-mobiles-game-changing-strategy/

Lauren Johnson, “How T-Mobile Trashed Its Own Industry and Gained 22 Million Subscribers in the Process,” Adweek, October 23, 2014, http://www.adweek.com/news/technology/how-t-mobile-trashed- its-own-industry-and-gained-22m-subscribers-process-160935

Ed Oswald, “10 of the Crazy Perks T-Mobile Offers,” CheatSheet, November 16, 2015, http://www. cheatsheet.com/gear-style/10-of-the-crazy-perks-t-mobile-offers.html/?a viewall

Chapter 3 Competitor Analysis 57

online retail sites such as Tmall.com—both of which make its products more accessible to the core customer segment in China and to consumers in peripheral markets like Taiwan and Hong Kong. This strategy also helps Xiaomi bypass the cost of retail storefronts that Samsung, Apple, and others must underwrite. Xiaomi also spends little to no money on expensive paid media. Rather, it relies on word-of- mouth promotion through online communities, earned media in the press, and the charisma of its CEO, Lei Jun, who has garnered attention for his “Steve Jobs-esque” product announcements.

By 2015, Xiaomi had secured the spot of the third-ranked global smartphone company with a $45 billion market cap. Its enormous success demonstrates how a challenger brand can win among category leaders in even the most crowded and competitive of markets.

Questions:

1. What assets and competencies are central to Xiaomi’s success as a challenger?

2. What is Xiaomi’s greatest vulnerability that could be exploited by global incumbents or local niche players?

Sources: David Aaker, “6 Steps to Become an Ultimate Disruptor Like Xiaomi,” Prophet, https://www.prophet. com/blog/aakeronbrands/236-how-xiaomi-became-the-ultimate-disruptor-in-6-steps

Dan Seifert, “What is Xiaomi? Here’s the Chinese Company that just Stole One of Android’s Biggest Stars,” The Verge, August 29, 2013, http://www.theverge.com/2013/8/29/4672668/what-is-xiaomi- china-smartphone-hugo-barra-android

David Barboza, “In China, an Empire Built by Aping Apple,” The New York Times, June 4, 2013, http:// www.nytimes.com/2013/06/05/business/global/in-china-an-empire-built-by-aping-apple.html?page wanted all&_r 0

Eva Dou, “Xiaomi: The Secret to the World’s Most Valuable Startup,” The Wall Street Journal, April 6, 2015, http://www.wsj.com/articles/to-lift-brand-xiaomi-fosters-phone-fan-club-1428345473

58 Part One Strategic Analysis

C H A P T E R F O U R

Market/Submarket Analysis

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. —Warren Buffett

Be where the world is going. —Beth Comstock, Vice Chair, General Electric

Find a niche, not a nation. —Seth Godin, Marketing Visionary

Market analysis builds on customer and competitor analyses to make strategic judgments about a market (and submarket) and its dynamics. Should a firm invest, and what should the level of commitment be? Or should it disinvest? One of the primary objectives of a market analysis is to determine the attractiveness of a market (or submarket) to current and potential participants. Market attractiveness, the market’s profit potential as measured by the long-term return on investment achieved by its participants, will provide important input into the product-market investment decision. The frame of reference is all participants.

A second and related objective of market analysis is to understand the dynamics of the market. It informs the investment decision, but also sheds light on what it would take to be a winner in the space. The need is to identify emerging submarkets, key success factors, trends, threats, opportunities, and strategic uncertainties that can guide information gathering and analysis. A key success factor is an asset or competency that is needed to play the game. If a firm has a strategic weakness in a key success factor that isn’t neutralized by a well-conceived strategy, its ability to compete will be limited.

DIMENSIONS OF A MARKET/SUBMARKET ANALYSIS The nature and content of an analysis of a market and its submarkets will depend on context but will often include the following dimensions:

59

Emerging submarkets

Actual and potential market and submarket size

Market and submarket growth

Market and submarket profitability

Cost structure

Distribution systems

Trends and developments

Key success factors

Figure 4.1 provides a set of questions structured around these dimensions that can serve to stimulate a discussion identifying opportunities, threats, and strategic uncertainties. Each dimension will be addressed in turn. The chapter concludes with a discussion of the risks of growth markets.

SUBMARKETS Are submarkets emerging defined by lower price points, the emergence of niches, systems solutions, new applications, a customer trend, or new technology? How should the submarket be defined?

SIZE AND GROWTH Important submarkets? What are the size and growth characteristics of a market and submarkets? What submarkets are declining or will soon decline? How fast? What are the driving forces behind sales trends?

PROFITABILITY For each major submarket consider the following: Is this a business area in which the average firm will make money? How intense is the competition among existing firms? Evaluate the threats from potential entrants and substitute products. What is the bargaining power of suppliers and customers? How attractive/profitable are the market and its submarkets both now and in the future?

COST STRUCTURE What are the major cost and value-added components for various types of competitors?

DISTRIBUTION SYSTEMS What are the alternative channels of distribution? How are they changing?

MARKET TRENDS What are the trends in the market?

KEY SUCCESS FACTORS What are the key success factors, assets, and competencies needed to compete successfully? How will these change in the future? How can the assets and competencies of competitors be neutralized by strategies?

Figure 4.1 Questions to Help Structure a Market Analysis

60 Part One Strategic Analysis

EMERGING SUBMARKETS The management of a firm in any dynamic market requires addressing the challenge and opportunity of relevance, as described in the box below. In essence, the challenge is to detect and understand emerging submarkets, identify those that are attractive to the firm given its assets and competencies, and then adjust offerings and brand portfolios in order to increase their relevance to the chosen submarkets. The opportunity is to influence these emerging submarkets so that competitors become less relevant.

In Chapter 13, characteristics of new business areas or submarkets will be detailed. Knowing these characteristics can help detect and analyze emerging submarkets. They include offerings that:

Provide a lower price point—discount airlines

Serve nonusers—Kodak Brownie camera

Serve niche markets—performance snowboards

Provide systems solutions—home theaters

Serve unmet needs—Lexus car buying experience

Respond to a customer trend—nutrient-dense energy drinks

Leverage a new technology—Gillette Fusion Razors

RELEVANCE

All too frequently, despite retaining high levels of awareness, attitude, and even loyalty, a brand loses market share because it is not perceived to be relevant to emerging submarkets. If a group of customers want hybrid cars, it does not matter how good they think your firm’s SUV is. They might love and recommend it, but if they are interested in a hybrid because of their changing needs and desires, then your brand is irrelevant to them. This may be true even if your firm also makes hybrids under the same brand. The hybrid submarket is different than SUVs and has a different set of relevant brands.

Relevance for a brand occurs when two conditions are met. First, there must be a perceived need or desire by customers for a submarket defined by some combination of an attribute set, an application, a user group, or other distinguishing characteristic. Second, the brand needs to be among the set considered to be relevant for that submarket by the prospective customers. This implies that a brand needs to be positioned against the submarket in addition to whatever other positioning strategies may be pursued. It must also be visible and be perceived to meet minimal performance levels.

Nearly every marketplace is undergoing change—often dramatic, rapid change—that creates relevance issues. Examples appear in nearly every industry, from computers, consulting, airlines, power generators, and financial services to snack food, beverages, pet food, and toys. Hardware, paint, and flooring stores struggle with the reality of Home Depot. Xerox and Kodak have found it difficult to address a relevance challenge as other firms are carving up the digital imaging world.

The key to managing such change is twofold. First, a business must detect and understand emerging submarkets, projecting how they are evolving. Second, it must maintain relevance in the

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Chapter 4 Market/Submarket Analysis 61

ACTUAL AND POTENTIAL MARKET OR SUBMARKET SIZE A basic starting point for the analysis of a market or submarket is the total sales level. Among the sources that can be helpful are published financial analyses of the relevant firms, customers, government data, and trade magazines and associations. The ultimate source is often a survey of product users in which the usage levels are projected to the population.

Potential Market—The User Gap

In addition to the size of the current, relevant market or submarket, it is often useful to consider the potential size. A new use, new user group, or more frequent usage could dramatically change the size and prospects for the market or submarket.

There is unrealized potential for the cereal market in Europe and among institutional customers in the United States—restaurants and schools/day-care facilities. All these segments have room for dramatic growth. In particular, Europeans buy only about 25 percent as much cereal as their U.S. counterparts. If technology allowed cereals to be used more conveniently away from home by providing shelf-stable milk products, usage could be further expanded. Of course, the key is not only to recognize the potential but also to have the vision and program in place to exploit it. A host of strategists have dismissed investment opportunities in industries because they lacked the insight to see the available potential and take advantage of it.

Small Can Be Beautiful

Some firms have investment criteria that prohibit them from investing in small markets. Chevron, Microsoft, Frito-Lay, and Procter & Gamble, for example, have historically looked to new products that would generate large sales levels within a few years. Yet in an era of micro- marketing, much of the action is in smaller niche segments. If a firm avoids them, it can lock itself out of much of the vitality and profitability of a business area. Furthermore, most substantial business areas were small at the outset, sometimes for many years and, as noted in Chapter 13, some become attractive niche submarkets. Avoiding the small market can thus mean that a firm must later overcome the first-mover advantage of others.

face of these emerging submarkets. Businesses that perform these tasks successfully have the organizational skills to detect change, the organizational vitality to respond, and a well-conceived brand strategy. Chapters 9 and 11 examine the threat of brand energy loss to relevance.

The emergence of a new subcategory is also an opportunity for the firm that can dominate that submarket, control its perception, and make competitors less relevant or even irrelevant. IBM did this with e-business. Gillette did it with the Mach III and Fusion brands. Charles Schwab did it with Schwab OneSource. Creating and owning subcategories can only occur when the right firm, armed with the right idea and offering, is ready to act at the right time. But when it happens, it can be a strategic home run and the source of unusual profits over a long time period.1

Chapter 13 discusses how innovation can create new submarkets where competitors are less relevant.

62 Part One Strategic Analysis

Further, there is evidence recounted in the book The Long Tail by Chris Anderson that many markets have changed so that the small niche business is economically viable and should not be automatically ignored.2 The book, music, entertainment, and broadcasting areas illustrate the fact that the tail—the offerings that are not the large hit products—is extensive and collectively important. Cable networks serve smaller but worthwhile audiences. Companies limited by retailers to a small selection can provide access to a full line from their websites; KitchenAid, for example, offers its products in some 50 colors. With eBay, Amazon, Google, and others, the economics of marketing small niche items has changed. The fact that some 25,000 items are introduced in the grocery stores each year and car makers offer some 250 different models indicates that niche marketing is viable outside the Internet world as well.

There is a downside to having too many niche offerings. First, companies can create debilitating operating and marketing costs when the offerings are too extensive. Second, customers can become overwhelmed by the confusion of too many choices and rebel—looking for the equivalent of Colgate’s Total, a product that simplified decision making in a cluttered environment. Thus, many firms are trimming lines that have gotten too large. Nevertheless, the analysis of niche markets needs to reflect the new reality that customers have faster and more extensive access to information than before and that products are accessible in ways not feasible just a few years ago.

MARKET AND SUBMARKET GROWTH After the size of the market and its important submarkets have been estimated, the focus turns to growth rate. What will be the size of the markets and submarkets in the future? If all else remains constant, growth means more sales and profits even without increasing market share. It can also mean less price pressure when demand increases faster than supply and firms are not engaged in experience curve pricing, anticipating future lower costs. Conversely, declining sales can mean reduced sales and often increased price pressure as firms struggle to hold their shares of a diminishing pie.

It may seem that the strategy of choice would thus be to identify and avoid or disinvest in declining situations and to identify and invest in growth contexts. Of course, the reality is not that simple. In particular, declining product markets can represent a real opportunity for a firm, in part because competitors may be exiting and disinvesting. The firm may attempt to become a profitable survivor by encouraging others to exit and by becoming dominant in the most viable segments.

The other half of the conventional wisdom, that growth contexts are always attractive, can also fail to hold true. Growth situations can involve substantial risks. Because of the importance of correctly assessing growth contexts, a discussion of these risks is presented at the end of this chapter.

Identifying Driving Forces

In many contexts, the most important strategic uncertainty involves the prediction of market sales. A key strategic decision, often an investment decision, can hinge on not only being correct but also understanding the driving forces behind market dynamics.

Chapter 4 Market/Submarket Analysis 63

Addressing most key strategic uncertainties starts with asking on what the answer depends. In the case of projecting sales of a major market, the need is to determine what forces will drive those sales. For example, the sales of a new consumer electronics device may be driven by machine costs, the evolution of an industry standard, or the emergence of alternative technologies. Each of these three drivers will provide the basis for key second-level uncertainties.

In the wine market, the relationship of wine to health and the future demand for premium reds might be driving forces. One second-level strategic uncertainty might then ask on what the demand for premium red will depend.

Forecasting Growth

Historical data can provide a useful perspective and help to separate hope from reality. Accurate forecasts for new packaged goods can be based on the timing of trial and repeat purchases. Durable goods forecasts can be based on projecting initial sales patterns. However, care needs to be exercised. Apparent trends in data such as those shown in Figure 4.2 can be caused by random fluctuations or by short-term economic conditions, and the urge to extrapolate should be resisted. Furthermore, the strategic interest is not on projections of history but rather on the prediction of turning points, times when the rate and perhaps direction of growth change.

Sometimes leading indicators of market sales may help in forecasting and predicting turning points. Examples of leading indicators include the following:

Demographic data. The number of births is a leading indicator of the demand for education and the number of people reaching age 65 is a leading indicator of the demand for retirement facilities. Sales of related equipment. Personal computer and printer sales provide a leading indicator of the demand for supplies and service needs.

Market sales forecasts, especially of new markets, can be based on the experience of analogous industries. The trick is to identify a prior market with similar characteristics. Sales of color televisions might be expected to have a pattern similar to sales of black-and-white televisions, for example. Sales of a new type of snack might look to the history of other previously introduced snack categories or other consumer products, such as energy bars or granola bars. The most value will be obtained if several analogous product classes and the differences in the product class experiences related to their characteristics can be examined.

Figure 4.2 Sales Patterns

64 Part One Strategic Analysis

Submarket Growth

Submarket growth is usually critical because it affects investment decisions and value proposi- tions. That involves identifying and analyzing current and emerging submarkets. While the overall beer category is flat, a deeper look shows that imports are declining, and craft beers are showing significant growth. Among restaurants, fast casual chains such as Panera Bread, Chipotle Mexican Grill, and Panda Express are fast growing.

Detecting Maturity and Decline

One particularly important set of turning points in market sales occurs when the growth phase of the product life cycle changes to a flat maturity phase and when the maturity phase changes into a decline phase. These transitions are important indicators of the health and nature of the market. Often they are accompanied by changes in key success factors. Historical sales and profit patterns of a market can help to identify the onset of maturity or decline, but the following often are more sensitive indicators:

Price pressure caused by overcapacity and the lack of product differentiation. When growth slows or even reverses, capacity developed under a more optimistic scenario becomes excessive. Furthermore, the product evolution process often results in most competitors matching product improvements. Thus, it becomes more difficult to maintain meaningful differentiation. Buyer sophistication and knowledge. Buyers tend to become more familiar and knowledgeable as a product matures, and thus they become less willing to pay a premium price to obtain the security of an established name. Computer buyers over the years have gained confidence in their ability to select computers—as a result, the value of big names has receded. Substitute products or technologies. Sales of fresh pre-portioned ingredients with recipes delivered to customers’ homes (e.g., Blue Apron) may portend a decline in frozen and packaged store bought meals.

Saturation. When the number of potential first-time buyers declines, market sales should mature or decline.

No growth sources. The market is fully penetrated and there are no visible sources of growth from new uses or users.

Customer disinterest. The interest of customers in applications, new product announcements, and so on falls off.

MARKET AND SUBMARKET PROFITABILITY ANALYSIS Economists have long studied why some industries or markets are profitable and others are not. Harvard economist and business strategy guru Michael Porter applied his theories and findings to the business strategy problem of evaluating the investment value of an industry, market, or submarket.3 The problem is to estimate how profitable the average firm will be. It is hoped, of course, that a firm will develop a strategy that will bring above-average profits. If the average profit level is low, however, the task of succeeding financially will be much more difficult than if the average profitability were high.

Chapter 4 Market/Submarket Analysis 65

Porter’s approach can be applied to any industry, but it also can be applied to a market or submarket within an industry. The basic idea is that the attractiveness of an industry or market as measured by the long-term return on investment of the average firm depends largely on five factors that influence profitability, shown in Figure 4.3:

The intensity of competition among existing competitors

The existence of potential competitors who will enter if profits are high

Substitute products that will attract customers if prices become high

The bargaining power of customers

The bargaining power of suppliers

Each factor plays a role in explaining why some industries are historically more profitable than others. An understanding of this structure can also suggest which key success factors are necessary to cope with the competitive forces.

Existing Competitors

The intensity of competition from existing competitors depends on several factors, including:

The number of competitors, their size, and their commitment

Whether their product offerings and strategies are similar

The existence of high fixed costs

The size of exit barriers

Competition among Existing

Firms

Threat of Substitute Products

Bargaining Power of

Customers

Bargaining Power of Suppliers

Threat of Potential Entrants INDUSTRY

PROFITABILITY

Figure 4.3 Porter’s Five-Factor Model of Market Profitability

Source: Michael E. Porter, Competitive Advantage, New York: The Free Press, 1985, Chapter 1.

66 Part One Strategic Analysis

The first question to ask is, how many competitors are already in the market or making plans to enter soon? The more competitors that exist, the more competition intensifies. Are they large firms with staying power and commitment or small and vulnerable? The second consideration is the amount of differentiation. Are the competitors similar or are some (or all) insulated by points of uniqueness valued by customers? The third factor is the level of fixed costs. High fixed-cost industries such as telecommunications and airlines experience debilitating price pressures when overcapacity gets large. Finally, one should assess the presence of exit barriers such as specialized assets, long-term contract commitments to customers and distributors, and relationship to other parts of a firm.

One major factor in the shakeout of the Internet bubble firms was the excessive number of competitors. Because the barriers to entry were low and the offered products so similar, margins were insufficient (and often nonexistent), especially given the significant investment in infra- structure and brand building that was needed. Given the fast market growth and the low barriers to entry, these results should have been anticipated; at one time there were a host of pet-supply and drugstore e-commerce offerings competing for a still-embryonic market.

Potential Competitors

Chapter 3 discusses identifying potential competitors that might have an interest in entering an industry or market. Whether potential competitors, identified or not, actually do enter depends in large part on the size and nature of barriers to entry. Thus, an analysis of barriers to entry is important in projecting likely competitive intensity and profitability levels in the future.

Various barriers to entry include required capital investment (the infrastructure in cable television and telecommunication) and economies of scale (Becton Dickinson’s 80 percent market share in the blood collection category means that R&D investments are spread over a large number of units making it difficult for competitors to enter). Likewise, barriers to entry can include distribution channels (Frito-Lay and Texas Instruments have access to customers that is not easily duplicated) and product differentiation (Apple and Harley-Davidson have highly differentiated products that protect them from new entrants).

Substitute Products

Substitute products compete with less intensity than do the primary competitors. They are still relevant, however, as the discussion in Chapter 3 made clear. They can influence the profitability of the market and be a major threat. Thus, plastics, glass, and fiber-foil products exert pressure on the metal can market. Electronic alarm systems are substitutes for the security guard market. E-mail threatens some portion of the express-delivery market of FedEx, UPS, and the U.S. Postal Service. Substitutes that show a steady improvement in relative price/performance and for which the customer’s cost of switching is minimal are of particular interest.

Customer Power

When customers have relatively more power than sellers, they can force prices down or demand more services, thereby affecting profitability. A customer’s power will be greater when its purchase size is a large proportion of the seller’s business, when alternative suppliers are

Chapter 4 Market/Submarket Analysis 67

available, and when the customer can integrate backward and make all or part of the product. Thus, tire manufacturers face powerful customers in the automobile firms. Soft-drink firms sell to fast-food restaurant chains that have strong bargaining power. Walmart has enormous power over its suppliers. It can dictate prices and product specifications; if companies resist, there is an Asian supplier that will comply. Walmart is the leading seller of practically all appliances. Because approximately 15 percent of all Procter & Gamble sales go through Walmart (a proportion that approaches 30 percent for some categories), even P&G is subject to customer power.

Supplier Power

When the supplier industry is concentrated and sells to a variety of customers in diverse markets, it will have relative power that can be used to influence prices. Power will also be enhanced when the costs to customers of switching suppliers are high. Thus, the highly concentrated oil industry is often powerful enough to influence profits in customer industries that find it expensive to convert from oil. However, the potential for regeneration whereby industries can create their own energy supplies, perhaps by recycling waste, may have changed the balance of power in some contexts.

COST STRUCTURE An understanding of the cost structure of a market can provide insights into present and future key success factors. The first step is to conduct an analysis of the value chain, presented in Figure 4.4, which shows the steps in the production and delivery of an offering that add value. As suggested in Figure 4.4, the proportion of value added attributed to one value chain stage can become so important that a key success factor is associated with that stage. It may be possible to develop control over a resource or technology, as did the OPEC oil cartel. More likely, competitors will aim to be the lowest-cost competitor in a high value-added stage of the value chain. Advantages in lower value-added stages will simply have less leverage. Thus, in the metal can business, transportation costs are relatively high, and a competitor that can locate plants near customers will have a significant cost advantage.

It may not be possible to gain an advantage at high value-added stages. For example, a raw material, such as flour for bakery firms, may represent a high value added, but because the raw

Production Stage Markets That Have Key Success Factors Associated with the Production Stage

Raw material procurement Raw material processing Production fabricating Assembly Physical distribution Marketing Service backup Technology development

Gold mining, winemaking Steel, paper Integrated circuits, tires Apparel, instrumentation Bottled water, metal cans Branded cosmetics, liquor Software, automobiles Razors, medical systems

Figure 4.4 Value-Added and Key Success Factors

68 Part One Strategic Analysis

material is widely available at commodity prices, it will not be a key success factor. Nevertheless, it is often useful to look first at the highest value-added stages, especially if changes are occurring. For example, the cement market was very regional when it was restricted to rail or truck transportation. With the development of specialized ships, however, waterborne transportation costs dropped dramatically. Key success factors changed from local ground transportation to production scale and access to the specialized ships.

DISTRIBUTION SYSTEMS An analysis of distribution systems should include three types of questions:

What are the alternative distribution channels?

What are the trends? What channels are growing in importance? What new channels have emerged or are likely to emerge?

Who has the power in the channel, and how is that likely to shift?

Sometimes the creation of a new channel of distribution can lead to a sustainable competitive advantage. The growth of regional airports in Europe allowed discount airlines such as Ryan Airlines and Easyjet to exploit deregulation to create cheap flights across the continent. Amazon has radically changed many categories and has recently decided to disrupt the furniture category.

An analysis of likely or emerging changes within distribution channels can be important in understanding a market and its key success factors. The increased sale of wine in supermarkets made it much more important for winemakers to focus on packaging and advertising. The consolidation of department stores meant that clothing brands had fewer retailers through which to sell their products

MARKET TRENDS Often one of the most useful elements of external analysis comes from addressing the question, what are the market trends? The question has two important attributes: it focuses on change and it tends to identify what is important. Strategically useful insights almost always result. A discussion of market trends can serve as a useful summary of customer, competitor, and market analyses. It is thus helpful to identify trends near the end of market analysis.

While the soft-drink market stagnated in the United States, sales of noncarbonated beverages grew sharply and sales of herb- and vitamin-fortified beverages exploded. Not surprisingly, the major soft-drink companies sought to obtain a position in these trendy categories. Reports that dark chocolate is heart-healthy has increased sales in the confectionary market and spawned new products involving dipped fruits and nuts. Chocolate makers scrambled to redo their lines and create novel and value-creating new products.

Trends versus Fads

It is crucial to distinguish between trends that will drive growth and reward those who develop differentiated strategies and fads that will only last long enough to attract investment (which is subsequently underemployed or lost forever). Schwinn, the classic name in bicycles, proclaimed mountain biking a fad in 1985 with disastrous results to its market position and, ultimately, its

Chapter 4 Market/Submarket Analysis 69

corporate health.4 The mistaken belief that certain e-commerce markets, such as those for cosmetics and pet supplies, were solid trends caused strategists to undertake initial share-building strategies that eventually led to the ventures’ demise.

Irma Zandl, marketing trendspotter, recommends three questions that can help detect a real trend, as opposed to a fad.5

1. What is driving it? A trend will have a solid foundation with legs. Trends are more likely to be driven by demographics (rather than pop culture), values (rather than fashion), lifestyle (rather than a fashionable crowd), or technology (rather than media).

2. How accessible is it in the mainstream? Will it be constrained to a niche market for the foreseeable future? Will it require a major change in ingrained habits? Is the required investment in time or resources a barrier (perhaps because the product is priced too high or too hard to use)?

3. Is it broadly based? Does it find expression across categories or industries? Eastern influences, for example, apparent in health care, food, fitness, and design—are a sign of a broader trend.

Faith Popcorn observes that fads are about products, while trends are about what drives consumers to buy products. She also suggests that trends (which are big and broad, lasting an average of 10 years) cannot be created or changed, only observed.6

Still another perspective on fads comes from Peter Drucker, who opined that a change is something that people do, whereas a fad is something people talk about. The implication is that a trend demands substance and action supported by data rather than simply an idea that captures the imagination. Drucker also suggests that the leaders of today need to move beyond innovation to be change agents—the real payoff comes not from simply detecting and reacting to trends, even when they are real, but from creating and driving them.7

KEY SUCCESS FACTORS An important output of market analysis is the identification of key success factors (KSFs) for strategic groups in the market. These are assets and competencies that provide the basis for competing successfully. There are two types. Strategic necessities do not necessarily provide an advantage, because others have them, but their absence will create a substantial weakness. The firm needs to achieve a point of parity with respect to strategic necessities. The second type, strategic strengths, are the firm’s assets or competencies that are superior to those of competitors and provide a base of advantage. The set of assets and competencies developed in competitor analysis provides a base from which key success factors can be identified. The points to consider are which are the most critical assets and competencies now and, more important, which will be most critical in the future.

It is important not only to identify KSFs but also to project them into the future and, in particular, to identify emerging KSFs. Many firms have faltered when KSFs changed and the competencies and assets on which they were relying became less relevant. For example, for industrial firms, technology and innovation tend to be most important during the introduction and growth phases, whereas the roles of systems capability, marketing, and service backup become more dominant as the market matures. In consumer products, marketing and

70 Part One Strategic Analysis

distribution skills are crucial during the introduction and growth phases, but operations and manufacturing become more crucial as the product settles into the maturity and decline phases.

RISKS IN HIGH-GROWTH MARKETS The conventional wisdom that the strategist should seek out growth areas often overlooks a substantial set of associated risks. As shown in Figure 4.5, there are risks that:

The number and commitment of competitors may be greater than the market can support.

A competitor may enter with a superior product or low-cost advantage.

Key success factors might change and the organization may be unable to adapt.

Technology might change.

The market growth may fail to meet expectations.

Price instability may result from overcapacity or from retailers’ practice of pricing hot products low to attract customers.

Resources might be inadequate to maintain a high growth rate.

Adequate distribution may not be available.

Competitive Overcrowding

Perhaps the most serious risk is that too many competitors will be attracted by a growth situation and enter with unrealistic market share expectations. The reality may be that sales volume is insufficient to support all competitors. Overcrowding has been observed in virtually all hyped markets, from railroads to automobiles, airplanes, radio stations and equipment, television sets, and personal computers.

Overcrowding was never more vividly apparent (in retrospect, at least) than in the Internet bubble that occurred around 2000. At one point there were at least 150 online brokerages, 1,000

RISKS OF HIGH-GROWTH

MARKETS

Competitive Risk • Overcrowding • Superior competitive

entry

Market Changes • Changing KSFs • New technology • Disappointing growth • Price instability

Firm Limitations • Resource constraints • Distribution

unavailable

Figure 4.5 Risks of High-Growth Markets

Chapter 4 Market/Submarket Analysis 71

travel-related sites, and 30 health and beauty sites that were competing for attention. Dot-com business-to-business (B2B) exchanges were created for the buying and selling of goods and services, information exchanges, logistics services, sourcing industry data and forecasts, and a host of other services. The number of these B2B companies grew from under 250 to over 1,500 during the year 2000 and then fell to under 250 again in 2003. At the peak, there were estimated to be more than 140 such exchanges in the industrial supplies industry alone.8

The following conditions are found in markets in which a surplus of competitors is likely to be attracted and a subsequent shakeout is highly probable. These factors were all present in the B2B dot-com experience:

1. The market and its growth rate have high visibility. As a result, strategists in related firms are encouraged to consider the market seriously and may even fear the consequences of turning their backs on an obvious growth direction.

2. Very high forecast and actual growth in the early stages are seen as evidence confirming high market growth as a proven phenomenon.

3. Threats to the growth rate are not considered or are discounted and little exists to dampen the enthusiasm surrounding the market. The enthusiasm may be contagious when venture capitalists and stock analysts become advocates.

4. Few initial barriers exist to prevent firms from entering the market. There may be barriers to eventual success (such as limited retail space); however, that may not be evident at the outset.

5. Some potential entrants have low visibility and their intentions are unknown or uncertain. As a result, the quantity and commitment of the competitors are likely to be underestimated.

Superior Competitive Entry

The ultimate risk is that a position will be established in a healthy growth market and a competitor will enter late with a product that is demonstrably superior or that has an inherent cost advantage.

Thus, Honda was first to the U.S. market in 1999 with a hybrid car, but its offering struggled in part because it was a two-seater with a frumpy design and technological limitations. Toyota’s Prius, introduced two years later, was a bigger car with better styling and technology and took over market leadership. The success of late-entry, low-cost products from Asia has occurred in countless industries, from automobiles to clothing to TVs.

Changing Key Success Factors

A firm may successfully establish a strong position during the early stages of market development, only to lose ground later when key success factors change. One forecast is that the surviving personal computer makers will be those able to achieve low-cost production through sourcing in low-cost countries, exploitation of the experience curve, and obtaining efficient, low-cost distribution—capabilities not necessarily critical during the early stages of market evolution. Many product markets have experienced a shift over time from a focus on product technology to a focus on process technology, operational excellence, and the customer experience. A firm that

72 Part One Strategic Analysis

might be capable of achieving product technology-based advantages may not have the resources, competencies, and orientation/culture needed to respond to the demands of the evolving market.

Changing Technology

Developing first-generation technology can involve a commitment to a product line and production facilities that may become obsolete and to a technology that may not survive. A safe strategy is to wait until it is clear which technology will dominate and then attempt to improve it with a compatible entry. When the principal competitors have committed themselves, the most promising avenues for the development of a sustainable competitive advantage become more visible. In contrast, the early entry has to navigate with a great deal of uncertainty.

Disappointing Market Growth

Many shakeouts and price wars occur when market growth falls below expectations. Sometimes the market was an illusion to begin with. Internet-based B2B exchanges did not provide value to firms that already had supplier relationships that were, on balance, superior to the B2B exchanges. There was an absence of a compelling value proposition to overcome marketplace inertia. Sometimes the need is so apparent that potential growth seems assured. However, this potential may not be realized for many reasons. For example, the demand for computers exists in many underdeveloped countries, but a lack of funds and the absence of suitable technology inhibit buying.

The demand might be real but might simply take longer to materialize because the technology is not ready or because customers are slow to change. Demand for electronic banking, for example, took many years longer than expected to materialize.

Forecasting demand is difficult, especially when the market is new, dynamic, and glamor- ized. This difficulty is illustrated by an analysis of more than 90 forecasts of significant new products, markets, and technologies that appeared in Business Week, Fortune, and the Wall Street Journal from 1960 to 1979.9 Forecast growth failed to materialize in about 55 percent of the cases cited. Among the reasons were overvaluation of technologies (e.g., three-dimensional color TV and tooth-decay vaccines), consumer demand (e.g., two-way cable TV, quadraphonic stereo, and dehydrated foods), a failure to consider the cost barrier (e.g., the SST and moving sidewalks), or political problems (e.g., marine mining). The forecasts for roll-your-own cigarettes, small cigars, Scotch whiskey, and CB radios suffered from shifts in consumer needs and preferences.

Price Instability

When the creation of excess capacity results in price pressures, industry profitability may be short-lived, especially in an industry such as airlines or steel, in which fixed costs are high and economies of scale are crucial. However, profitability can be hurt if an influential competitor uses a visible, popular product as a loss leader to attract customers. CDs, a hot growth area in the late 1980s, fueled the overexpansion of retailers that were very profitable when they sold CDs for about $15. However, Best Buy, a home-electronics chain, decided to sell CDs for under $10 to attract customers to their off-mall locations. The result was a dramatic erosion in margins and volume and the ultimate bankruptcy of a substantial number of the major CD retailers. A hot

Chapter 4 Market/Submarket Analysis 73

growth area had spawned a disaster, not by a self-inflicted price cut, but by price instability from a firm that chose to treat the retailing of CDs as nothing more than a permanent loss leader.

Resource Constraints

The substantial financing requirements associated with a rapidly growing business are a major constraint for small firms. Royal Crown’s Diet-Rite cola lost its leadership position to Coca-Cola’s Tab and Diet Pepsi in the mid-1960s when it could not match the advertising and distribution clout of its larger rivals. Furthermore, financing requirements frequently are increased by higher than expected product development and market entry costs.

The organizational pressures and problems created by growth can be even more difficult to predict and deal with than financial strains. Many firms have failed to survive the rapid-growth phase because they were unable to obtain and train people to handle the expanded business or to adjust their systems and structures.

Distribution Constraints

Most distribution channels can support only a small number of brands. For example, few retailers are willing to provide shelf space for more than four or five brands of a houseware appliance. As a consequence, some competitors, even those with attractive products and marketing programs, will not gain adequate distribution and their marketing programs will become less effective.

A corollary of the scarcity and selectivity of distributors as market growth begins to slow is a marked increase in distributor power. Their willingness to use this power to extract price and promotion concessions from manufacturers or to drop suppliers is often heightened by their own problems in maintaining margins in the face of extreme competition for their customers. Many of the same factors that drew in an overabundance of manufacturers also contribute to overcrowding in subsequent stages of a distribution channel. The eventual shakeout at this level can have equally serious repercussions for suppliers.

KEY LEARNINGS

The emergence of submarkets can signal a relevance problem or opportunity.

Market analysis should assess the attractiveness of a market or submarket, as well as its structure and dynamics.

A usage gap can cause the market size to be understated.

Market growth can be forecast by looking at driving forces, leading indicators, and analogous industries.

Market profitability will depend on five factors—existing competitors, supplier power, customer power, substitute products, and potential entrants.

Cost structure can be analyzed by looking at the value added at each production stage.

Distribution channels and trends will often affect who wins.

Market trends will affect both the profitability of strategies and key success factors.

74 Part One Strategic Analysis

Key success factors are the skills and competencies needed to compete in a market.

Growth-market challenges involve the threat of competitors, market changes, and firm limitations.

FOR DISCUSSION 1. What are the emerging submarkets in the fast food industry? What are the

alternative responses available to McDonald’s, assuming that it wants to stay relevant to customers?

2. Identify markets in which actual sales and growth were less than expected. Why was that the case? What would you say was the most important reason that the bottom fell out of the dot-com boom in early 2000?

3. Why were some brands (like Google) able to fight off competitors in high-growth markets and others were not?

4. Pick a company or brand/business on which to focus. What are the emerging submarkets? What are the trends? What are the strategic implications of the submarkets and trends for the major players?

5. What considerations go into forecasting when dark chocolate will peak?

BEST DIGITAL PRACTICE

BeMyGuest: Experience Economy in Asia

Historically, middle-class Asian travelers seeking unique excursions within their own regions have found it difficult to connect with small to mid-size tour operators that lack the marketing budgets and infrastructure to reach them. Singapore startup BeMyGuest helped bridge the gap by creating a tours- and-activities online booking platform. Today, travelers can access over 15,000 experiences across 700 cities. The key to BeMyGuest’s scalability is effectively understanding the needs of the two submarkets it caters to: tour providers and travelers.

To tour providers, BeMyGuest’s value proposition is its spectrum of services. Specifically, the company offers four channels through which suppliers can market and advertise travel experiences. The first channel is its own website, bemyguest.com. In order to secure a listing, each supplier gives a free test of the travel experience they want to sell. Once the experience is verified as high quality, a BeMyGuest copyeditor adds a description and posts it to the site. A second channel available is the B2B Agents Marketplace. Created as a way for providers within the industry to connect with one another, the platform allows business and independent travel agents to browse and book activities and tours on behalf of their clients. Additionally, BeMyGuest has API (Application Programming Interface) integration tools that allow for seamless access to data for each travel experience. This has helped link supplier inventory to complementary travel engines in China, like Ctrip, as well as major regional airlines such as Air Asia. For businesses without the capabilities to implement an API, BeMyGuest has a Whitelabel Partnership in which they create a branded webpage and provide customer support in exchange for a commission from each booking. This breadth of service options

(continued)

Chapter 4 Market/Submarket Analysis 75

has resonated well with tour companies that often don’t have the means to invest in robust content management technology.

BeMyGuest also appeals to travelers. CEO and Founder Clement Wong optimized the user journey on bemyguest.com by focusing on data driven outlets like search, social listening, and focus groups that could provide insight into customer behavior and identify opportunities for improvement. As a result, the website has an easy-to-use interface that invites potential customers to browse travel experiences based on their personality types: whether they are, for example, an adventure seeker, culture finder, or indulger. Another component of the site that has delighted travelers is a tool that compares pricing, reviews of different activities, and the operating history of the tour companies, including how long they have been in business and any awards they have won. Women in particular, who make up two-thirds of BeMyGuest’s customer base, reportedly “love” this feature.

The company’s continued rapid growth in China today serves as a tangible example of the benefits marketers can gain by structuring business offerings to fit different submarkets.

Questions:

1. BeMyGuest is developing a two-sided market by facilitating the development of service providers and customers. What strategies have been most effective on each side of the market?

2. Are there any potential conflicts or additional sources of strategic opportunity between the two submarkets BeMyGuest targets? How should it manage these?

Sources: “Company Profile: BeMyGuest,” Fast Company, http://www.fastcompany.com/company/bemyguest

Clement Wong, “Launching a Travel Booking Startup from Singapore with Clement Wong, Founder & CEO of BeMyGuest,” February 14, 2014, Founders Grid, https://foundersgrid.com/travel-booking- singapore/

Kaylene Hong, “BeMyGuest Makes Buying Holiday Tours in Asia as Easy as Booking a Hotel or Renting a Car,” The Next Web, http://thenextweb.com/asia/2014/06/12/bemyguest-makes-buying- holiday-tours-in-asia-as-easy-as-booking-a-hotel-or-renting-a-car/

BEST GLOBAL PRACTICE

Cholula: America’s Hottest Sauce

In recent years the U.S. condiments and sauces market has been upended by one product: hot sauce. Since 2000, the category has grown 150%—more than BBQ sauce, ketchup, mayonnaise and mustard combined! Multiple factors are driving this evolution. Primarily, the increasing influx of Latin American and Asian immigrants has helped make spicy foods more mainstream. Hot sauce aficionados existed in pockets around the country for years, but the product has become prevalent in many households and restaurants. Second, Millennials have shown an increasing desire for exploring new and exotic flavors in their food. Research points to the changing palate preferences of this demographic, with individuals now valuing having a variety of hot sauce flavors and heat levels available at home and when eating out.

Among the numerous brands within the industry, Cholula has worked to establish itself as the most recognized Mexican hot sauce. The product was first introduced to the U.S. market in 1989 in

76 Part One Strategic Analysis

regions like Texas and Southern California that had larger Hispanic influences. Gradually though, distribution expanded nationally and Cholula appeared widely in both restaurants and grocery stores. Initially, the product was positioned alongside other Mexican food staples like taco mix and tortillas. While this placement strategy was crucial to kick-starting sales, management was cautious to avoid “pigeon-holing” the brand. In other words, the Cholula team wanted consumers to perceive the product as one that was instead versatile and could be used across different types of foods.

Cholula achieved this shift in brand perception through organic social media advertising. Knowing that the Millennial submarket responds well to peer influence and a sense of discovery, Cholula encouraged its fans to share descriptions and photos of their meals using the product in creative ways on social media.

Relying purely on word-of-mouth advertising has helped Cholula achieve 10 percent market share in the U.S. hot sauce category (Tabasco has 18%) and sell an average of 10 million bottles a year by 2015. The brand’s marked success in moving distribution from targeted Latin American markets to the condiment aisle in mass retailers shows the potential for international brands to meet the needs of emerging U.S. submarkets.

Questions:

1. Based on the information in the case and any outside resources, perform a profitability analysis of the hot sauce industry. What is Cholula’s biggest challenge?

2. Using outside resources, offer an assessment of the size of the hot sauce market in the U.S. Be prepared to defend your method for market sizing.

Sources: Elizabeth Segran, “Host Sauce, USA,” Fast Company, August 27, 2015, http://www.fastcompany.com/ 3050328/most-creative-people/hot-sauce-usa

Roberto A. Ferdman and Richie King, “The American Hot Sauce Craze in One Mouth-Watering Chart,” Quartz, January 28, 2014, http://qz.com/171500/the-american-hot-sauce-craze-in-one-mouth- watering-chart/

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C H A P T E R F I V E

Environmental and Strategic Analyses

I felt a great disturbance in the Force. —Obi Wan Kenobi, Star Wars

You can’t stop the waves, but you can learn to surf. —Jon Kabat-Zinn, MD, founder of Mindfulness-Based Stress Reduction

Marketing without data is like driving with your eyes closed. —Dan Zarrella, social media scientist

Thomson Corporation, in 1997, was a Toronto media company that owned 55 daily newspapers that were doing well.1 CEO Richard Harrington, however, observed several trends in the environment that caused him to move the firm away from newspapers. He anticipated the Internet was going to undercut classified advertising and cable television and the Internet were going to steal readers. Despite the fact that the company was profitable, he made the rather dramatic decision to divest newspapers and to move the firm into delivering information and services online to the law, education, healthcare, and finance industries. That decision allowed Thomson to thrive today while other newspaper-based firms are struggling. The decision was based on projecting and acting on environmental trends.

The focus in this chapter changes from the market to the environment surrounding the market. Being attentive to these broader environmental trends can have a make-or-break effect on companies. The rapid rise of the App Store and mobile technologies was critical to the entry success of 2009 startup WhatsApp and set the stage for it to gain 500 million active users by 2014, ultimately resulting in its acquisition by Facebook for $19 billion.2 On the other hand, a government regulation requiring new product labels can be the death knell for a small food company that must expend a large percentage of its profits to comply. External events can help or hurt companies of all sizes. The goal is to identify and evaluate trends and events that will affect strategy either. Getting in front of emerging trends also allows the firm to prepare strategies to defend itself against threats or, as Thomson did, to neutralize them.

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This chapter begins by examining environmental analysis. This broad topic is also covered in other strategy and strategic planning courses. Therefore, the focus here will be on trends emerging from technology, culture, business, government, and the economy that have implications for the market. Given an understanding of trends, the firm can move into three types of analysis: (a) impact analysis, which will help assess the relative importance of threats facing the firm; (b) scenario analysis, which will help the firm assess the meaning and impact of different environmental events; and (c) SWOT analysis, which compares environmental threats and opportunities with firm strengths and weaknesses to derive strategic actions.

ENVIRONMENTAL ANALYSIS Environmental analysis is by definition very broad and casts a wide net to catch different stakeholders and trends that may have implications for the firm. As a practical matter, the analysis requires discipline to make sure that it does not become an out-of-control fishing expedition that occupies time and generates reports, but provides little real insight and actionable information.

Although environmental analysis has no bounds with respect to subject matter, it is helpful to provide some structure in the form of five broad areas of inquiry that are often useful: demo- graphics, culture, business and technology, government/policy, and economic trends. The exact areas that should be monitored will vary depending on the business. For example, monitoring science developments will be critical to a pharmaceutical company but not important to a home- delivery food service. Exactly which parts of the external environment should be monitored is the first decision a company makes, and it should be revisited as the business changes.

Customer Trends

Customer trends can present both threats and opportunities. They have helped create fortunes for those companies able to take advantage of these trends and driven out less the fortunate. These trends can emerge out of the sheer force of demographics or involve more profound cultural shifts. The following sections discuss recent demographic, cultural, and business and technology trends occurring in customer markets.

Demographic Trends

Demographic trends can be a powerful underlying force in a market and can be predictable. Among the influential demographic variables are age, income, education, geographic location, and ethnicity. Consider the demographic shifts described in Figure 5.1.

Aging. The world population is aging more rapidly due to decreased fertility rates and people’s tendency to live longer. In 2015, 8.5 percent of the world’s population of 617 million people were aged 65 or older. The share of the population over age 65 is expected to continue to grow, hitting 12 percent in 2030 and 17 percent in 2050.3 This effect is expected to be even more dramatic in the United States with 20 percent of the U.S. population expected to be older than 65 by 2030.4

Changing Ethnic Mix. The United States is projected to become more racially and ethnically diverse in the coming decades due to both birth rate and immigration. Today, 14 percent of the U.S. population was born outside of the country, as opposed to merely 5 percent in 1965. By 2060, the non-Hispanic White

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Chapter 5 Environmental and Strategic Analyses 79

Cultural Trends

The cultural values underlying a market vary according to the unique history of a geography, which can be a region, country, state, or city. As customer behavior arises from this cultural soup, it is important that a business stays abreast of foundational and changing cultural trends for the markets it serves. Consider the cultural values of a country. According to the Hofstede cultural values measure, there are six dimensions of culture on which countries differ:

Power Distance: Societal comfort with unequal distribution of power between members of society.

Individualism versus Collectivism: Degree to which people primarily identify as individuals or as members of groups

Masculinity versus Femininity: Societal preference for achievement, competition, and toughness versus cooperation, caring, and quality of life

Uncertainty Avoidance: Level of discomfort with the unknown and ambiguity

Long-term versus Short-term Orientation: Preference for maintaining traditions and norms versus comfort with change

Indulgence versus Restraint: Societal acceptance of people’s desire to enjoy life and have fun.

population is expected to decrease from over 50 percent of the nation’s population to just 44 percent, and no ethnic group is predicted to have a majority share of the U.S. population. The population of those who identify as two or more races is projected to be the fastest growing over the next five decades, with the Asian population and Hispanic population being the second and third fastest-growing groups. By 2060, more than one-quarter of the U.S. population is projected to be Hispanic.5

Women in the Labor Force. Since the 1960s, American women have increasingly participated in the labor force and the gender pay gap has decreased. In 2011, 40 percent of households with children reported that the mother was the primary breadwinner. While the proportion of women in political and business leadership positions has risen, it remains small compared to that of their male counterparts.6

Shifting Family Structures. The marriage rate has been declining for decades, and the number of households with two-parents is declining in the United States. Simultaneously, divorce, remarriage, and cohabitation rates are increasing. The stereotypical roles of mothers and fathers are converging, in part because of the rise in the proportion of breadwinner mothers. Decreasing Middle Class. In 2015, the number of middle-class U.S. adults fell to 50 percent, while the lower and upper classes expanded. The income gap between middle- and upper-class Americans has also widened. In 1970, the wealthiest households held 29 percent of the U.S. aggregate household income; today, they hold 49 percent. Boomerang Generation. 29 percent of young adults have moved back in with their parents.7 This delays young adults’ need to purchase their own homes, contributing to U.S. homeownership rates in 2016 being at an all-time low.8

Figure 5.1 Demographic Trends Important to Customer Behavior

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Figure 5.2 shows how the U.S. and BRIC countries compare on these values. In addition to these foundational cultural values, cultural values change over time. Consider, for example, the trends in Figure 5.3.9

0

10

20

30

40

50

60

70

80

90

100

Power Distance Individualism Masculinity Uncertainty Avoidance

Long-Term Orientation

Indulgence

U.S. Brazil India China Russia

Figure 5.2 A Comparison on the United States and BRIC Countries on Hofstede’s Cultural Values

Me Nation. Consumers see themselves as the center of attention and crave self-expression and individuality. Those who previously admired celebrities, for example, now desire to become them, leading to a rise in the number of YouTube stars, reality shows, and talent competitions. Responsive firms offer products that can be hyper-personalized, as customer demands are satisfied through this type of engagement with brands. Power Play. Customers want to introduce fun, spontaneous aspects into their routine. Retailers are applying game mechanics, such as challenges, achievements, and rewards in order to engage customers. Responsive firms reward customers who frequently purchase with free products or encourage customers to visit their social media platforms to receive discounts. Visualization. Customers demand immersive experiences through interactive visual content. Examples of this include the Facebook Live feature, Google Hangouts, viral sharing of photo-shopped images with Tumblr, and Pinterest’s online pinboard. Taste for aesthetically pleasing designs is critical in many categories where customers seek a beautiful look to go with strong functionality. Transparency. Customers desire transparent and genuine experiences and want to have control over their lives. They are increasingly choosing to purchase products that align with their values, so firms must communicate details of their production processes, ethics, sustainability, and product quality in a manner that is easily accessible. One example of a response to this trend is TOMS One for One shoe donations. Simplification. Technology has made customers’ lives vastly simpler. Smartphones allow customers to communicate through social media, shop online, or use GPS trackers whenever and wherever they want.

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Chapter 5 Environmental and Strategic Analyses 81

Sustainability

A mega cultural trend worth examining in more depth is the green movement of the twenty-first century. Customers care a great deal about sustainability, or the impact of their purchases on the environment, and there are a variety of different ways that this concern influences their purchasing behaviors. For example, many customers have switched from conventional products, such as incandescent light bulbs, gas-fueled cars, and conventionally grown foods, to more eco-friendly ones, such as CFL or LED light bulbs, hybrid cars, and organic produce. Other customers consider how sustainable a firm’s business practices are when deciding whether or not to make a purchase. Still other customers are choosing to not purchase new products altogether, instead repairing old products or borrowing or trading products through organizations such as Freecycle.10

Importantly for firms, increasing numbers of customers—66 percent in 2015, up from 50 percent in 2013—report being willing to pay more for eco-friendly products.11 Some customers, most notably Millennials in the United States and a range of customers in developing countries, do pay more for eco-friendly products, but other customers’ actual willingness to purchase environ- mentally friendly products lags behind their purported support for them. For example, 26 percent of customers say they want more eco-friendly products on the market, but only 10 percent have actually bought these new products when they are made available. Companies seeking to compete on environmental benefits should carefully determine whether their target market’s interest equals their willingness to pay.

Firms must cater to this desire for instant, easier, and simpler customer experiences. PayPal, for example, allows customers to execute cashless payments and transactions. Additionally, with this instant access, customers are increasingly able to compare brands and prices. Responding firms are challenged to create more personalized suggestions in order to decrease the time customers spend making decisions. Snacking. Through technological advances, customers expect all aspects of their lives to be immediate, interactive, and intuitive. Customers now prefer to digest smaller portions of information, data, or entertainment and they prefer access to be immediate and free. Examples of this trend include blogs, YouTube videos, RSS feeds, Tumblr photos, and Tweets. New Networking. Communities can now be based on shared interest instead of location. Social media and online communities are thriving, and customers now digitally connect with a purpose, such as volunteering for a cause or participating in Kickstarter campaigns. Local Celebration. Customers are increasingly opting to purchase locally produced goods over products sourced from other countries. Customers prefer to support local communities, traditions, and culture because it gives them a sense of pride, belonging, and exclusivity. Responding firms offer locally sourced brands and products. My Tribe. There is growing affinity toward a social unit that is centered on an interest or activity and not bound by conventional social links. Harley-Davidson events, such as the annual rally in Sturgis, South Dakota, attract hundreds of thousands of participants. The Apple users group has been a strong part of Apple’s success in a PC world. The Internet has generated a host of communities and chat groups that play an influential role through information exchange and social networking. Renting Not Owning. There is a growing trend, especially among young customers, toward valuing access to products instead of owning them. Rather than seeing renting as a poor substitute for owning, many customers actually prefer the flexibility and pricing model of renting. This trend can be seen in the increasing use of Zipcar and BMW DriveNow that allow customers to use a car for a few hours, and companies, such as Spotify, that allow customers to listen to music without purchasing CDs.

Figure 5.3 Cultural Trends Important to Customer Behavior

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Business and Technology Trends

Business and technology trends represent opportunities to those firms in a position to capitalize and threats to firms which are not.

Big Data

The ability to capture and store data became possible in the 1950s and 1960s with large mainframe computers. Since then, the advent of the personal computer in the 1980s, the rise of the Internet in the 1990s, and expanded bandwidth into the 2000s have set up the ability to collect, store, and manipulate large data sets often referred to as big data. Supported by the “cloud” where data are now stored and accessed by customers and companies, big data is one of the megatrends of our era.

Firms in general and marketing teams in particular are swamped by data and are struggling to turn that data into insights, more valuable products and services, and better decisions. It is truly an avalanche that has many sources, some new and some ongoing. One distinguishing feature of these data is that they are at the individual customer level, which means that the company has a much richer understanding of customer behavior and the ability to act on it. For example, a bank achieved more than 600 percent ROI (return on investment) by using predictive analytics to more intelligently target customer offers. Among the sources of these data are Internet search and shopping records, social media activity, blogging participation, mobile phone usage behavior including opt-in records of GPS (Global Positioning System) locations, digital picture and videos, purchasing data, and much more.

A second distinguishing feature of big data is that it is often real time in nature, which means that companies are able to learn quickly if there are problems and work to resolve them. For example, social media activities help alert the firms to problems with their products and services, and credit card companies are able to alert their customers to the possibility of fraud by documenting purchases in real time and comparing to the customers’ purchase history patterns.

Firms trying to use “big data” to get an edge or just to keep up with competitors require a set of competencies. First, it is critical to be able to ask the right questions, both strategic and tactical, because with big data, questions are not obvious and the nature of the insights is often hidden. Finding the right questions requires a deep connection to customers achieved through interviews or visits where customers purchase and use products. Second, firms need to be competent in designing and interpreting an ongoing flow of experiments. The ability to learn in real time sets up an opportunity for companies to run small and numerous experiments to tune their strategies. Third, big data often presents big integration challenges because companies have social media data in one repository and purchase data in another. To get the 360-degree view of customers in communication, purchasing, and social activities, systems should be set up to capture and integrate customer data. Finally, companies need to be good at data storage, data handling, analytics, and the development of problem-driven statistical models. Without such capabilities, they can’t play the big data game.

Innovations

Trends, both market and environmental, can stimulate innovation. It is useful to distinguish between incremental, substantial, and transformational innovation. They differ in terms of how new they are and how much wealth they represent for the business. An incremental innovation makes the offering more attractive or profitable, but does not fundamentally change customer

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behavior, the value proposition, or the go-to-market strategy. In general, substantial innovations have ten times the impact of incremental innovations; the impact of transformational innovations is ten times greater again. Substantial and transformational innovations need to be detected and tracked by companies.

A transformational innovation often provides a fundamental change in the business model, likely involving a new value proposition and a new way to manufacture, distribute, and/or market the offering. It is likely to make the assets and competencies of established firms irrelevant. The advent of steam power, which ultimately spelled the end of sail-powered transport, was a transformational innovation. The automobile, Southwest Airlines, the business model of Dell Computers, smartphones, Amazon.com, Uber, and Cirque du Soleil represent innovations that have transformed markets. Transformational innovations often attract cus- tomers who had been the sidelines because the prior offering was too expensive or lacked some critical element.

Substantial innovations are in between in newness and impact. They often represent a new generation of products, such as the Boeing 747 or the iPad, that make existing products obsolete for many customers. Cisco introduced a videoconference technology called tele- presence that uses massive amounts of bandwidth to provide a high-fidelity experience and should expand the use of videoconferencing. In these cases, the basic value proposition and business model were enhanced but not changed. Substantial innovations are much more common than transformational innovations, but can still create major changes in the competitive landscape.

Innovations that are transformational or even substantial are often championed by new entrants into the industry, so it is important to monitor new, even small, firms and not let the large, established firms dominate the environmental analysis.12 Incumbent firms—especially successful ones—have incentives to protect and improve their profitable niches in the market by extending current offerings with incremental innovations. Their people, culture, and mix of assets and competencies are unlikely to support a transformational innovation. As a result, when transfor- mational innovations appear, the first reaction of incumbent firms is denial followed by discounting the new entrant’s ability to reach and convert the market. This skepticism is why horse-drawn buggy manufacturers never became automobile firms, telegraph companies missed out on the telephone, and 3M and others felt that the early and primitive Xerox copy technology would never replace heat-sensitive copier paper. Chapter 13 will discuss how the substantial and transformational innovation can define new subcategories and lead to enduring success.

Workplace

Online communication platforms have increased employees’ ability to work remotely.13 Thirty- seven percent of U.S. workers reported having used a computer to work from home. Office workers are especially likely to be able to telecommute with 44 percent of white collar professionals reporting working remotely at least occasionally. Remote work can be a boon for employees when it increases their flexibility, but employees’ ability to work remotely also means that they are increasingly expected to be “on call” for work outside of traditional business hours.

This blurring of the lines between work and leisure time is further augmented by the trend for companies to offer lifestyle “perks” to their employees. These perks range from onsite health care (Facebook), nap pods, and an errand running service (Google) to three catered meals a day and meditation classes (Twitter).14 These more extreme examples still are limited primarily to

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technology companies, but firms in a wider range of industries are adopting employee perks, which, they hope, can increase both employee satisfaction and productivity.

New technologies, such as Slack, an instant messaging system designed for internal team collaboration, are now widely used by employees for all types of instant messaging inside companies. Launched in August 2013, Slack grew to 4 million daily users by October of 2016. Slack also appears to be crossing over from business use to personal use as a social media platform.15

Another important trend, which has been facilitated by improved technology, is the growth of the “sharing” or collaborative economy. This term refers to a business model in which online technologies enable people to get what they need from each other rather than from centralized institutions. Sharing economy companies such as Uber, Airbnb, and TaskRabbit provide a platform, such as an app, that enables people who are looking for a service to connect with another person who is willing to provide it. Originally the domain of small start-ups, established companies have seen the potential in this economic model and are beginning to add sharing style services to their core offerings.16

Sustainable Businesses

The sustainability trend described earlier applies to business as well. In one study by MIT and Boston Consulting Group in which nearly 3,000 executives from 113 countries were interviewed, two thirds of the firms said that sustainability was critically important to being competitive.17 There are several drivers of “green.” One driver is concerns about global warming and resource depletion. Many firms feel a responsibility to be part of the solution, including Unilever and Walmart. Unilever’s CEO Paul Polman observed that climate change cost Unilever well over 200 million Euros in just one year and that is enough motivation to do something about the problem.18 In response, Unilever has set a goal to cut their environmental impact in half by 2030.19

A second driver is the ability of green programs to provide functional benefits to firms in the form of cost savings from reduced energy consumption. Firms are often surprised at the extent to which green programs pay off. Walmart, whose green story is told in the insert, discovered, to its surprise, that an ambitious environmental program was associated with meaningful, tangible cost savings plus a positive sales response to green products. A third driver is a desire to be respected by customers and employees, both of which value a relationship with a firm that they admire.

WALMART TURNS GREEN

In 2005 Walmart began to develop green programs, an amazing turnaround for a company that had prided itself on low costs and prices first and foremost.20 Through its partnership with the Environ- mental Defense fund and its own initiatives, Walmart has set and met numerous environmental goals over the past ten years.21 The firm has set the goal to create zero waste across its global operations. It is working to achieve this goal through projects such as reducing in-store plastic bag usage, and as of 2016, 81 percent of the materials from operations in the United States were diverted from landfills. However, Walmart’s most significant area of environmental impact is in how it can influence the thousands of

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Government/Policy Trends

The addition or removal of legislative or regulatory constraints can pose major strategic threats and opportunities for companies. For example, the ban of some ingredients in food products or cosmetics has dramatically affected the strategies of numerous firms. The impact of governmental efforts to reduce piracy in industries such as software (more than one-fourth of all software used is copied), CDs, DVDs, and movie videos is of crucial importance to those affected. Deregulation in banking, energy, and other industries can affect the nature and intensity of competition as firms enter and exit to take advantage of the change. The automobile industry is affected by fuel- economy standards, the luxury tax on automobiles, and incentives for electronic car purchases. Companies such as Amazon are dramatically affected by regulations requiring collection sales tax on products shipped.

Companies should track all legislative and regulatory activities that have positive and negative implications for their business, including local, state, national, and international developments. For example, Brexit will have significant implications for firms operating in the United Kingdom and the European Union and beyond. The influx of refugees from the Middle East and North Africa into Europe, the 2016 coup in Turkey, Russia’s annexation of Crimea, and increased tensions with Ukraine may provide both opportunities and constraints for firms operating or planning to operate in these regions. Tracking allows companies to engage in legal advocacy activities to

suppliers that produce and transport its products. Walmart both rewards suppliers who are already producing products in an environmentally friendly way by putting a Sustainability Leader badge on approved products and helps suppliers to shrink their environmental footprint. These assistance initiatives are wide ranging, from working with corn farmers to optimize their fertilizer use, to encouraging suppliers to use sustainably harvested palm oil to reduce deforestation, to improving energy efficiency in Chinese manufacturing facilities. Given Walmart’s footprint and influence around the world, these programs are likely to make a difference.22

Also in 2005, a brand repositioning initiative was launched that resulted in a new brand position in 2008. Research found that customers wanted value more than just low prices, value in the form of cleaner stores, better customer service, more high-quality products, and the lifestyle benefits of saving money. The result came together under a new slogan “Save money. Live better.” It helped provide an umbrella theme for the new Walmart and its sustainability program as well as organic foods, higher quality products, and improved store look and feel.

There are still hardcore Walmart critics, but it is clear that their intensity and breadth are visibly lessened. Articles “Green Project Making It Harder to Hate Walmart” and “Walmart’s Environmental Game Changer” show evidence of this change. By 2016, Walmart was in the top 7 percent of all brands in Y&R’s Brand Asset Valuator.23

Why did Walmart suddenly make such a U-turn? Three reasons. First, the CEO decided it was the right thing to do, based, in part, on the influence of an environmental professional who had vacationed with members of the outdoor-oriented Walton family. Second, a single-minded focus on costs and the resulting policies regarding employees, communities, and suppliers had generated extremely negative press attention that affected the company’s ability to grow and succeed. More communities were turning down Walmart stores, and 8 percent of Americans were committed to shopping elsewhere. Walmart executives knew they needed to take actions to improve the company image. Finally, to the surprise of the executives, many of the green programs were helping the bottom line.

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influence the nature of policy decisions. Discussed in more detail in the section Scenario Analysis, like any trend, government actions are not necessarily bad for business and may even be a source of competitive advantage for some firms more than others.

Economic Trends

Economic factors play a critical role in the effectiveness of a firm strategy. A very different strategy is needed when the economic climate is healthy than when it is under stress. Further, it is far better and sometimes critical to put strategies into place before a strong or weak economy hits. Of particular importance is to forecast and adjust to recessions, especially deep ones, because they can threaten firm survival. That means the balance sheet and cash position need to be buttressed, which, in turn, implies that firms need to cut budgets and programs, sometimes radically. Marketing is particularly vulnerable because its budget appears to be discretionary. However, as marketing is the firm’s connection to the customer, research has shown that while such cuts give a short-term boost to the bottom line, they are often damaging to long-term profits.24 Rather than cutting marketing budgets and programs across the board, think of a budget crunch as an opportunity to develop and nurture the effective and identify and defund the ineffective. The actual market impact of a budget reduction can be minimized by identifying and cutting support to budget areas in which marketing perform- ance is mediocre or worse.

Recessions can also provide opportunities for major changes in a company’s competitive advantage. First, some industries and offerings thrive in recessions. Firms that offer lower priced alternatives to preferred products witness increased sales during recessions. These can be direct substitutes for higher priced goods, such as private label products over name-brand products or products that fulfill customers’ needs in a similar way, such as Keurig single cup coffee pods rather than coffee drinks at Starbucks or Coleman camping gear rather than hotel room for a vacation getaway. Products that inexpensively satisfy customers’ needs to indulge also do well. For example, during the 2001 recession, Leonard Lauder, chairman of Estee Lauder companies, noticed that lipstick was selling very well. He hypothesized that when money is tight, customers substitute an inexpensive, but high-quality indulgence, such as lipstick, for a larger one such as new clothing or shoes, a phenomenon that has come to be known as “the lipstick effect.”25 In the service industry, there is increased demand for firms that upgrade, maintain, or repair existing equipment as customers prefer to repair than replace equipment when in tough economic times. For example, auto mechanics can do well during recessions as customers choose to repair their old cars rather than purchase new ones.26 Products that support frugality, such as Tupperware, which stores leftovers or allows customers to break up bulk purchases into meal-sized units, also do well when budgets are tight.

Second, a recession can provide an excellent platform to introduce products or marketing programs because the media environment is likely to be less cluttered and competitors will be less motivated and able to respond. Third, it is important to find ways to communicate value, often a necessity during tough economic times, without hurting the brand. Customers do become more price sensitive during recessions, but shouting price and deals is the wrong course because it announces that the brand is not worth the price. One way is to divert attention to value subbrands such as the BMW One Series or the Fairfield Inn by Marriott. Another is to bundle services to provide extra value at the same price, such as free shipping by Amazon or McDonald’s McPick 2. Still another is to demonstrate the value of quality—Bounty paper towels pay for themselves by doing more for the same price. Finally, the frame of reference can be changed—other products

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can become the comparison standard. For example, KFC’s Family Value Meal versus home cooking or Crayola’s 64 colors versus expensive toys.

Fourth, firms can benefit from spending on marketing in a recession. Spending when other companies are cutting costs can help a firm consolidate its gains or provide an opening for a new firm to enter the market. Firms with solid marketing fundamentals in place before a recession hits have the culture, competencies, and assets to treat the recession as an opportunity rather than a problem. In particular, spending on new product development during a recession is beneficial for firms to maintain their long-term technological advantage.27

Cultivating Vigilance

There is a strong tendency to fail to perceive or underestimate important trends or to miss the accurate prediction of future events.28 Just consider how the threats from digital photography were ignored at Kodak. It was a Kodak engineer who invented the digital camera in 1975, and Kodak had clear indicators as early as 1979 that that the market would gradually switch from film to digital over the next thirty years, but these warnings were ignored.29 One reason is that executives were focused on execution and had little attention span left for “might be.” Kodak’s executives encouraged innovation, but directed it toward the chemical side of film development rather than the digital side.30 Another reason is a natural perceptual bias toward ignoring or distorting information that conflicts with current strategies. This “confirmation bias” means that critical information is lost. Because Kodak’s business model was based on selling inexpensive cameras and expensive film, filmless digital cameras were regarded as “the enemy” rather than the future.31 Still another reason is the support of “groupthink” within the organization—it is awkward to point out that basic assumptions may be wrong. In the case of Kodak, being centered in the one-company town of Rochester, New York, further limited criticism of the company.

Research on organizational vigilance suggests several ways that leaders and organizations can improve. First, be curious, externally focused, and connected. What is happening in areas that will impact the business? Travel, observe, and interact with people of all types. Second, make every employee a listening post for the organization and create processes that allow the observance of even small signals from any sector to be shared in a low-cost manner and recognized in annual reviews. Third, develop a systematic set of processes for collecting, disseminating, and responding to information from the firm’s stakeholders. Johnson & Johnson has a strategy process termed Frameworks that looks at regulations, insurance coverage, and competitive moves and considers their implications. Related, make sure that all units inside the company as well as partners outside the company are communicating so that all the pieces of trends can be assembled in-house. Fourth, create discovery mechanisms. Texas Instruments holds a “Sea of Ideas” meeting each week to recognize emerging needs and innovation at the fringe of its business.32 One such meeting led to the development of a low-power chip for mobile phones. Finally, force a long-term perspective; get away from day-to-day executional issues and programs. Some firms create a separate division of the company that is shielded from the demand to create immediate value for the company in order to develop truly innovative ideas and seize long-term opportunities. For example, Google has a “moonshoot” research and development program, X, that is separate from Google Research and focuses on radical innovations, such as driverless cars, high-altitude Wi-Fi balloons, and glucose-monitoring contact lenses.33

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STRATEGIC ANALYSIS Uncertainty often emerges from environmental analysis. Before strategies are developed, two additional strategic analysis steps should be taken, each described in the sections that follow. First, to be manageable, strategic uncertainties need to be grouped into logical clusters or themes. It is then useful to assess the importance of each cluster in order to set priorities with respect to information gathering and analysis. Impact analysis is designed to accomplish that assessment. Second, sometimes the strategic uncertainty is represented by a future trend or event that has inherent unpredictability. When this is the case, information gathering and additional analysis will not be able to reduce the uncertainty. In that case, scenario analysis can be employed. Scenario analysis basically accepts the uncertainty as given and uses it to drive the development of two or more future scenarios. Strategies are then developed for each.

Impact Analysis

An important objective of environmental analysis is to rank strategic uncertainties and decide how they are to be managed over time. Which uncertainties merit intensive information gathering and in-depth analysis and which merit only a low-key monitoring effort?

The problem is that dozens of strategic uncertainties and many second-level strategic uncertainties are often generated in environmental analysis. These strategic uncertainties can lead to an endless process of information gathering and analysis that can absorb resources indefinitely. A publishing company may be concerned about cable TV, lifestyle patterns, educational trends, geographic population shifts, and printing technology. Any one of these issues involves a host of subfields and could easily spur limitless research. Unless distinct priorities are established, external analysis can become descriptive, ill-focused, and inefficient.

The extent to which a strategic uncertainty should be monitored and analyzed depends on its impact and immediacy. The impact of a strategic uncertainty is related to (a) the extent to which it involves trends or events that will impact existing or potential businesses; (b) the importance of the involved businesses to the overall firm; (c) the number of involved businesses; and (d) the likelihood of impact on the company. The immediacy of a strategic uncertainty is related to (a) the probability that the involved trends or events will occur; (b) the time frame of the trends or events; and (c) the reaction time likely to be available to respond compared with the time required to develop and implement appropriate strategy. Each of these is now discussed in more detail.

THE COCA-COLA COMPANY AND WATER: FROM RISK TO OPPORTUNITY34

The Coca-Cola Company started its Global Water Initiative in 2002. Originating in a ten-person strategy think tank the company created to study long-term challenges, the goal of the initiative was to understand the nature and impact of business risks related to water—an essential ingredient in all Coca-Cola products. Around the same time, Coca-Cola began receiving negative press around water issues. For example, activists claimed the company was consuming too much water and was creating conflicts with local municipalities around the world. In India, Coke bottles were smashed on the steps of Parliament and the company was accused of polluting farms with a byproduct from its plants. By

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2001, the company recognized water quantity and quality as one of the biggest risks to the Company and cited it in its 10-K filing with the Securities and Exchange Commission.

Thethinktankbeganbyassessingitswateruseandassociatedrisksandthensetouttoensurethatthis assessment was accurate by working with plant managers across the Coca-Cola network. While the company historically had focused on operational issues such as water efficiency and wastewater manage- ment, it became clear that there were also many systemic issues in the watersheds and local communities whereitoperated.Toensureitwasfocusedonthecorrectrisks,thecompanytooktwoboldsteps.Thefirst was to interview over 200 water experts, local officials, and company employees around the world to understand the emerging water challenges. Because water problems are so diverse, it was important to understandthelocalproblemsfacingthecompanyandtodevelopcustomizedsolutionsdependingonlocal priorities—from sanitation to watershed protection to groundwater depletion and contamination. By listeningtolocalstakeholdersandcompanyemployeeswhofacedthesechallengeseveryday,thecompany developedariskmanagementmethodologytoidentifythe100riskiestplantsaroundtheworld.Riskswere assessed and prioritized on the basis of empirical evidence about both physical and social aspects of water use.Incontrast tothe originalfocusof internalwater use—efficiencyand wastewater management inside the plant walls—the risk assessment revealed that the biggest threats to company profits and reputation were related to degrading watersheds and social conflicts with other users.

After the risks were identified, a series of two-day workshops was organized with company employees and bottler partners around the world to share the findings and to plan effective mitigation strategies. This was a two-way learning process whereby Coca-Cola could refine its understanding of water challenges and set priorities and the local partners could better understand and address the water risks they were facing. It also created partnerships with local communities more than an operational plan for Coca-Cola. Based on the risk assessment, it became clear that the company needed to pay more attention to the systemic water issues affecting watersheds and communities and begin to develop metrics and support to actively mitigate these challenges. Therefore, phase two of the water initiative was focused on supporting community water partnerships. Local company divisions and bottlers used the risk assessment to define new goals of improving water sustainability in their watersheds. Of course, the company couldn’t do this alone; it required a proactive approach of forming partnerships with local NGOs, governments, and other stakeholders to create more systemic interven- tions. By forming alliances with organizations such as WWF and USAID, the company was able to bring attention and resources to address pressing water problems. Interestingly, the risk assessment process shifted the company from a narrow and reactive approach to a much more proactive and collaborative strategy. To reinforce this broader approach, Coca-Cola developed the following water goals:

■ Reduce: By 2020, improve water efficiency in manufacturing operations by 25 percent compared to 2010.

■ Recycle: Treat wastewater in 100 percent of bottling plants to a level that can support aquatic life.

■ Replenish: Facilitate water to communities and watersheds to produce volumetric benefit equivalent to global water production volume by 2020.

■ Manage Risk: Assess water quality and quantity at every plant “to make sure we do what we can to avoid adversely affecting the ability of others to access water.”

In an attempt to maximize its positive impact on water resources globally, Coca-Cola also helped to launch multistakeholder efforts such as the CEO Water Mandate and the Global Water Challenge. It extended its water efforts beyond manufacturing to address sustainability challenges in its supply chain, for example, by helping to launch the Better Sugarcane Initiative (now Bonsucro). In establishing its “Replenish” goal, the company aspired to be a net positive contributor to water sustainability globally. In August 2016, the company announced that it had replenished 115 percent of its operational water use through community and watershed partnerships, five years before its stated deadline.

90 Part One Strategic Analysis

Impact of Strategic Uncertainties

Each strategic uncertainty involves potential trends or events that could have an impact on present, proposed, and even potential businesses. For example, trends in the microbrewery market can impact a beer firm’s proposed microbrewery entry and its current imported beer offering. A trend toward natural foods may create strategic uncertainties while also presenting opportunities for a sparkling water product line for Coca-Cola Inc. The impact of a strategic uncertainty will depend on the importance of the impacted business to a firm. Some businesses are more important than others. The importance of established businesses may be indicated by their associated sales, profits, or costs. However, these metrics might need to be adjusted to account for the future growth potential in such businesses. The number of involved businesses can also be relevant to a strategic uncertainty’s impact. The higher the number, the greater the impact of the uncertainty. Finally, if there is a low probability of the event occurring, this reduces the expected impact. For example, although a bill introduced to Congress could reshape a business, if trends show no support from members, the expected impact of the legislation is low.

IMPACT OF NEW TECHNOLOGIES

It can be important, even critical, to manage the transition to a new technology. The appearance of a new technology, however, even a successful one, does not necessarily mean that businesses based on the prior technology will suddenly disappear. A group of researchers at Purdue studied fifteen companies in five industries in which a dramatic new technology had emerged:35

■ Diesel-electric locomotives versus steam ■ Transistors versus vacuum tubes ■ Ballpoint pens versus fountain pens ■ Nuclear power versus boilers for fossil-fuel plants ■ Electric razors versus safety razors.

Two interesting conclusions emerged that should give pause to anyone attempting to predict the impact of a dramatic new technology. First, the sales of the old technology continued for a substantial period, in part, because the firms involved continued to improve it. Safety-razor sales have actually increased 800 percent since the advent of the electric razor. Thus, a new technology may not signal the end of the growth phase of an existing technology. In all cases, firms involved with the old technology had a substantial amount of time to react to the new technology.

Second, it is relatively difficult to predict the outcome of a new technology. The new technologies studied tended to be expensive and crude at first. The most spectacular erroneous forecast was attributed to Thomas Watson, the CEO of what is now IBM, who predicted in 1943 that the total world market for computers is maybe five. New technologies also sometimes start by invading submarkets, and it can be hard to imagine the full market potential. Transistors, for example, were first used in hearing aids and pocket radios.

Chapter 5 Environmental and Strategic Analyses 91

Immediacy of Strategic Uncertainties

Events or trends associated with strategic uncertainties may have a high impact, but such a low probability of occurrence that it is not worth actively expending resources to gather or analyze information. Similarly, if occurrence is far in the future relative to the strategic-decision horizon, then it may be of little concern. Thus, the harnessing of tide energy may be so unlikely or may occur so far in the future that it is of no concern to a utility company. Finally, consider the reaction time available to a firm compared with the reaction time likely needed. After a trend or event crystallizes, a firm needs to develop a reaction strategy. If the available reaction time is inadequate, it becomes important to reinvest and anticipate emerging trends and events better so that future reaction strategies can be initiated sooner.

Managing Strategic Uncertainties

Figure 5.4 suggests a categorization of strategic uncertainties for a given business. If both immediacy and impact are low, then a low level of monitoring and analysis is recommended. If the impact is thought to be low but the immediacy is high, the area may merit monitoring and analysis. If the immediacy is low and the impact high, then the area may require more in-depth monitoring and analysis and contingent strategies may be considered but not necessarily developed and implemented. When both immediacy and potential impact of the underlying trends and events are high, then an in-depth analysis will be appropriate, as will be the development of reaction plans or strategies.

Scenario Analysis

Scenario analysis can also help firms deal with strategic uncertainties. The difference between impact analysis and scenario analysis is that instead of investing in more information search and analysis to reduce uncertainty, the firm creates a small number of environmental scenarios, assesses their likelihood and impact, and then uses this analysis to develop or test potential strategies.

There are two types of scenario analyses. In the first type, strategy-developing scenarios, the object is to provide insights into future potential environments and then use these insights to evaluate existing business strategies and stimulate the creation of new ones. Such analyses can help create contingency plans to guard against disasters—an airline adjusting to a terror incident, for example, or a pharmaceutical company reacting to a product safety problem. They can also suggest

Immediacy of Threats

Low High

Impact of

Threats

High Monitor and analyze; long-term contingent strategies outlined

Monitor and analyze in more depth; perform scenario analysis and develop contingent

strategies in depth

Low Monitor for changes; low investments

Monitor and analyze for changes; outline a short-term response

Figure 5.4 Impact Analysis

92 Part One Strategic Analysis

investment strategies that enable the organization to capitalize on future opportunities caused by customer trends or technological breakthroughs.

In the second type of analysis, decision-driven scenarios, a strategy is proposed and tested against several scenarios.36 The goal is to challenge the strategy, thereby helping to make the go/ no-go decision and suggesting ways to make the strategy more likely to withstand environmental forces. If the decision is to enter a market with a technology strategy, alternative scenarios could be built around variables such as marketplace acceptance of the technology, regulations, and competitor response.

In both analyses, a scenario analysis will involve three general steps—create scenarios, relate those scenarios to existing or potential strategies, and assess the probability of the scenarios (see Figure 5.5).

Step 1: Create Scenarios

Strategic uncertainties can drive scenario development. The impact analysis will identify the strategic uncertainty with the highest priority for a firm. This source of uncertainty should be the focus of the scenario. A manufacturer of a medical imaging device may want to know whether a technological advance will allow its machine to be made at a substantially lower cost. A farm equipment manufacturer or ski area operator may believe that the weather—for example, whether a drought will continue—is the most important area of uncertainty. A server firm may want to know whether a single software standard will emerge or if multiple standards will coexist. The chosen uncertainty could then stimulate two or more scenarios.

When a set of scenarios is based largely on a single strategic uncertainty, the scenarios themselves can usually be enriched by identifying related events and circumstances. Thus, an inflation-stimulated recession scenario would be expected to generate a host of conditions for the appliance industry, such as price increases and retail failures. It is sometimes useful to generate scenarios based on possible outcomes: optimistic, pessimistic, and most likely. The consideration of a pessimistic scenario helps test existing assumptions in a firm’s strategic plan. The “what-if” exercises in a scenario analysis provide a nonthreatening way to consider the possibility of clouds or even rain on the picnic.

Often several variables are relevant to the future period of interest. The combination can define a relatively large number of scenarios. For example, a large greeting-card firm might consider three variables as important: the success of small boutique card companies, the creation and sharing of e-cards, and the nature of future distribution channels. The combination can result in many possible scenarios. Experience has shown that two or three scenarios are the ideal number with which to work; if a larger number is used, the process becomes unwieldy, and any value is largely lost. Thus, it is important to reduce the number of scenarios by creating a small set that ideally includes those that are plausible/credible and those that represent departures from the present substantial enough to affect strategy development.

Create Scenarios

Estimate Scenario

Probabilities

Relate Scenarios to Existing or Proposed Strategies

Figure 5.5 Scenario Analysis

Chapter 5 Environmental and Strategic Analyses 93

Step 2: Relate Scenarios to Strategies

After scenarios have been identified, the next step is to relate them to strategy—both existing strategies and new options. If an existing strategy is in place, it can be tested with respect to each scenario. In which scenario does the strategy do best? How bad will the strategy perform if the wrong scenario emerges? What will its prospects be with respect to customer acceptance, competitor reactions, and sales and profits? Could it be modified to enhance its prospects?

Even if the scenario analysis is not motivated by a desire to generate new strategy options, it is always useful to consider what strategies would be optimal for each scenario. A scenario by its nature will provide a different perspective than the status quo. Any strategy that is optimal for a given scenario should become a viable option. Strong parts of suboptimal or infeasible strategies can also be harvested for use in future strategies.

Step 3: Estimate Scenario Probabilities

To evaluate the effectiveness of different alternative strategies, it is useful to determine the scenario probabilities. What is the probability of a scenario emerging? Experts could be asked to assess probabilities directly. A deeper understanding will often emerge, however, if causal factors underlying each scenario can be determined. For example, the construction equipment industry might develop scenarios based on three alternative levels of construction activity. These levels would have several contributing causes—interest rates, availability of funds to customers in the home building sector (which, in turn, would depend on the emerging structure of financial institutions and markets), and level of government spending on roads, energy, and other infrastructure areas.

SWOT Analysis

Environmental analysis identifies a host of many potential threats and opportunities. The challenge is to determine which are most relevant for the firm’s business and to prioritize them. Both impact and scenario analyses can help the firm develop initial answers. However, even with similar answers from these analyses, not all companies should respond to all environmental events. Whether and how a company responds will be a function of the nature of the environmental activities and the company’s own strengths and weaknesses. A SWOT analysis is a framework that guides such decisions. SWOT analysis examines a set of environmental trends classified company strengths (S) and weaknesses (W) and external opportunities (O) and threats (T).

Firm Strengths and Weaknesses

In developing or implementing a strategy, it is important to perform an internal analysis of the firm. This analysis follows the same checklist of strengths and weaknesses used to examine competitors in Chapter 3 (see Figure 3.4) and will not be reviewed in depth again here. There are more than three dozen organized under the categories of innovation, manufacturing, financial, management, marketing, brand equity, and customer base. This checklist is a good place to start when analyzing whether the company can respond to a threat or opportunity or whether it needs to build new assets and competencies to do so. In addition, the Appendix A contains other financial and nonfinancial criteria important to an internal analysis of the firm that should be used in this assessment.

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Each asset or competence relevant to the business should be evaluated as to its strength and impact. Is it dominant in that it provides a point of advantage that has endured and is likely to remain so in the future? The service delivery capability of Disney theme parks, for example, is so superior that other firms study its operation. Is the organization willing to invest to make the asset or competence dominant into the future? Certainly, Disney has shown this willingness over many decades. The investment commitment needs to be factored into the financial resource picture. It may mean that resources for new ventures will be limited.

Is it strong but vulnerable? Are others catching up? Should the firm invest to attempt to regain a dominant position so that it is a point of advantage? If so, what program at what cost is implied? Or should the firm retreat so that the asset or competence is simply a modest advantage over some competitors and a point of parity with respect to others? Is the asset or competence adequate, a point of parity? Is it strong enough so that customers do not avoid the firm because of it? If so, is that a satisfactory long-term position? Can advantage be achieved on other dimensions? What investment is implied to maintain the current strength so that it does not become a point of disadvantage? If Target, for example, can deliver quality adequate enough so that customers do not use a quality judgment as a reason to exclude Target from their consideration set, the battle will shift to other dimensions on which Target is likely to excel. Is the asset or competence a liability? Is it holding back the firm from gaining and retaining customers?

External Threats and Opportunities

Imminent threats with high impact should drive a strategic imperative, a program that has the highest priority. If there is a visible quality problem (such as contaminated Perrier water or defective Bridgestone tires on Ford Explorers), fixing it and thus addressing the associated threat needs to be a high priority. When the threat is of low impact or is not immediate, a more measured response is possible. The most extreme threat is one that potentially makes the business model obsolete. Because of the decline in the use of printers, HP has seen its cash cow, printer supplies, declined with rather troubling strategic implications. AOL, with its “You’ve got mail” greeting and a route to the Internet for newbies and the intimidated, had a dominant business model with some 35 million subscribers. However, it failed to respond to the fact that its customers eventually obtained more sophistication and better equipment. AOL was in a position to be a successful social network Internet company but instead watched others such as Facebook assume that role and allowed its value proposition to erode. Recognizing the threat to the business model in a timely fashion and making the organization responsive might have led to a very different outcome for AOL.

Threats can come in the form of a strategic problem or a liability. Strategic problems, events, or trends adversely affecting strategy generally need to be addressed aggressively and corrected even if the fix is difficult and expensive. Strategic liabilities—the absence of an asset (such as good location) or competence (for example, new product skills)—usually require a different response. A business often copes over time with a liability by adjusting strategies in a way that neutralizes that liability. A firm that lacks new product competencies might engage in a systematic product acquisition strategy.

An opportunity similarly can be evaluated as to whether its impact will be immediate and major. If so, the organization should be set up to move quickly and decisively. One study found

Chapter 5 Environmental and Strategic Analyses 95

that most organizations only get faced with a “golden opportunity” once or twice a decade. The mark of a firm that can adapt to new conditions and still come out a market leader is recognizing and reacting to such opportunities. Opportunities that have a low impact or are in the future may justify serious investment and perhaps an experimental entry into a new business area to gain information, but the resource commitment is likely to be more modest.

In general, lost opportunities are costly and common. As Drucker wrote in several forms, “Managers need to spend more time on opportunities and less on solving problems.”

Combining Elements in a SWOT Analysis

The goal of this analysis is to identify the firm’s net ability (strengths – weaknesses) to defend itself against current and emerging environmental threats or to offensively exploit opportunities in the environment. Take the example Gillette versus Dollar Shave Club (DSC). DSC took advantage of lower barriers to entry to reach markets through Internet channels instead of traditional retail channels when it was founded in 2011. DSC began as a subscription model that delivered a razor and an ongoing supply of blades to buyers’ (mostly men) homes. Billed as a “club” and touted through engaging Internet ads that target men’s desire to have a simple shaving experience and forgo the retail experience (“shave money, shave time”), DSC grew to 5 percent market share within its first five years of business.37 Other new entrants followed, and lingering effects of the great recession made the monthly fees ease some of the financial burden facing many customers. It is likely that P&G, maker of Gillette, considered this entrant and the larger trend a threat. However, P&G’s considerable branding competency, its strong relationships with the retail channel, its financial resources, and Gillette’s long-standing reputation and many loyal followers will help P&G defend its 60 percent market share. As a weakness, Gillette is a well-established brand that is not as contemporary as the Internet startups entering the market. Further, the high price of a Gillette razor is a vulnerability. A SWOT analysis would consider these facts and other potential scenarios that might emerge. How will trade agreements with China or South Korea, where DSC manufacturers its products, affect its price? Will DSC enter traditional retail markets like three-year-old Harry’s Razor Company recently entered Target and stole 10 percent market share from P&G?38 Will it be purchased by a major competitor that can improve its reach? How well can P&G defend itself in these different scenarios? Is there an opportunity for P&G to enter the online shave club business with an entrant of its own? In fact, DSC was bought by Unilever in 2016 for 1 billion dollars and P&G entered with gilletteshaveclub.com but at considerably higher prices than DSC.

FROM ANALYSIS TO STRATEGY In making strategic decisions, inputs from a variety of assessments are relevant, as the last several chapters have already made clear. However, the core of any strategic decision should be based on three types of assessments. The first concerns firm strengths and weaknesses. The second evaluates competitor strengths, weaknesses, and strategies because a company’s strength is of less value if it is neutralized by a competitor’s strength or strategy. The third assesses the market and environmental context, including the customers and their needs, the market, and the larger environment, in order to determine how attractive the selected market will be, given the business strategy.

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The goal is to develop a strategy that exploits business strengths and competitor weaknesses and neutralizes business weaknesses and competitor strengths. The ideal is to compete in a healthy, growing industry with a strategy based on strengths that are unlikely to be acquired or neutralized by competitors. Figure 5.6 summarizes how these three assessments combine to influence strategy.

GE’s decision to sell its small-appliance division illustrates these strategic principles. Small appliances were a part of GE’s legacy and linked to its lamp and major-appliance product lines in the minds of retailers and customers. The small-appliance industry was not profitable, however, in part because of overcapacity and retailer power, which cut into GE’s margins. Also, cost pressures contributed to a reduction in product performance and reliability. Further, GE’s strengths, such as its technological superiority and financial resources, were not being leveraged in the small- appliance business, as any innovation could be copied. Thus, GE decided that a strategic fit did not exist and it sold the small-appliance business to Black & Decker.

KEY LEARNINGS

Environmental analysis of technology, customer, political, and economic trends can detect opportunities or threats relevant to an organization.

Impact analysis involves assessing systematically the impact and immediacy of the trends and events that underlie each strategy uncertainty.

Scenario analysis, a vehicle to explore different assumptions about the future, involves the creation of two to three plausible scenarios, the development of strategies

• Product Market Decisions • Value Proposition • Assets and Competencies • Functional Strategies and Programs

Company Strengths and Weaknesses

Competitor Strengths and Weaknesses

STRATEGY DEVELOPMENT

Assessment of Environmental

and Market Context

Figure 5.6 Structuring Strategic Decisions

Chapter 5 Environmental and Strategic Analyses 97

appropriate to each, the assessment of scenario probabilities, and the evaluation of the resulting strategies across the scenarios.

SWOT analysis combines an environmental assessment with an examination of firm strengths and weaknesses to assist in the development of firm strategy. It can be used to help companies determine which opportunities they should exploit, which threats they can manage, and which assets and competencies may need to be built in order to take such actions.

FOR DISCUSSION 1. What did the tablet replace? What will replace (or has replaced) the tablet? 2. Perform a SWOT analysis for The Coca-Cola Company in the soft drink category.

What are the biggest threats and opportunities? What are Coca-Cola’s relevant strengths and weaknesses? What strategic actions are necessary for the company to thrive by 2025?

3. Develop a scenario based on the proposition that hydrogen-fueled cars will continue to improve and take 15 percent of the automotive market in a few years. Analyze it from the point of view of an energy company such as Shell or a car company such as Mercedes.

4. Pick a start-up you admire. What are the major trends emerging from an environmental analysis? What are the major areas of uncertainty? How would a major company in the industry handle these trends and uncertainties? How do you predict the start-up will respond?

5. Focusing on the airline industry, develop a list of strategic uncertainties and possible strategic actions.

6. Visible criticism has been leveled at the bottled water industry, including the claim that their product is not better than tap water in many locales (some brands are even said to have an unpleasant aftertaste) and that the plastic bottles are carbon costly to make and are not biodegradable. What programs would you consider to combat these arguments if you were PepsiCo, the maker of Aquafina, or The Coca-Cola Company, the maker of Dasani?

BEST DIGITAL PRACTICE

Kraft Mac and Cheese: A Stealth Marketing Approach

A trend that has a critical impact on the consumer packaged goods industry in recent years is consumers’ desire for simpler, more transparent, and more natural ingredients. Many companies have responded by publicly stating their intentions to remove artificial coloring and preservatives from long- standing brands and then repositioning the product as “clean” or “pure” within the market. While this strategy aligns well with trends, it risks alienating individuals who are used to purchasing goods based on more intangible factors such as nostalgia, predictability, and even taste.

98 Part One Strategic Analysis

Kraft used a novel approach to handling these shifting consumer preferences. To stay competitive within the category, the company realized it had to rethink the product formula of one of its superstar brands, Kraft Mac and Cheese. However, management knew it was crucial to make changes without tainting elements of the product that consumers had come to expect. For generations, individuals had associated Kraft Mac and Cheese with its orangish hue and smooth sauce consistency. Kraft made it a point to carefully maintain these identifying attributes as it eliminated ingredients and removed artificial dyes.

The aspect of Kraft’s strategy that was a real differentiator though was how it rolled out the reformulation. Rather than advertising the measures the company had taken to make its product more natural—common practice among competitors—Kraft simply didn’t say anything. Studies have shown that even the mention of a new formula can cause consumers to perceive flavor to be different, so Kraft chose not to call attention to the change.

After consumers had accepted the new formula, as evidenced by sales remaining stable, Kraft launched a digital campaign to announce the adjustment. The campaign tagline “It changed. But it hasn’t” was featured in 15- and 30-second online video spots. Tongue-and-cheek lines such as “We’d invite you to try it, but you already have” were incorporated into digital display ads, promotions through channels like Pandora radio and Snapchat, and magazine print. Kraft also encouraged fans to share their experiences with the product on social media using #didntnotice and offered giveaways to encourage postings.

Kraft’s ability to make a fundamental change to an iconic product without consumer backlash is a testament to its thoughtful marketing approach. Quietly testing the waters in a landscape of uncertainty can help companies anticipate reactions to significant product changes that ultimately help them stay one step ahead.

Questions:

1. Develop a scenario in which Kraft’s strategy might have backfired. How might Kraft have prepared for this possibility?

2. How should Kraft respond to the demographic trends examined in the chapter?

Sources: Martha C. White, “Kraft Reveals Revamped Mac and Cheese, 50 Million Boxes Later,” The New York Times, March 20, 2016, http://www.nytimes.com/2016/03/21/business/media/kraft-reveals-revamped- mac-and-cheese-50-million-boxes-later.html?_r=2

Justin Bariso, “How Kraft Used Psychology to Make Its Mac and Cheese Go Viral,” Inc., March 21, 2016, http://www.inc.com/justin-bariso/kraft-just-changed-its-classic-mac-and-cheese-and-used-psy- chology-to-ensure-its-.html

BEST GLOBAL PRACTICE

How Airbnb Managed Uncertainty in the Sharing Economy

From creating new value to disrupting existing businesses, the rise of the sharing economy has had a major impact on the hospitality and transportation industries. Built on the concept of exchanging goods via an online marketplace, the sharing economy allows individuals to seamlessly move between

(continued)

Chapter 5 Environmental and Strategic Analyses 99

acting as buyers and sellers. Emerging companies such as Uber and Airbnb have been winners in this sharing model, creating uncertainty for traditional incumbents such as taxis and hotels. Yet their success hasn’t been without challenges, particularly when it comes to navigating the nuances of local markets.

Airbnb, an online and user-friendly platform that allows “hosts” to list their homes as a destination, was founded in 2008 with the intention of connecting people to unique travel experiences at any price point. Within three years it had reached 1 million bookings, prompting CEO Brian Chesky to more seriously consider opportunity outside of the United States. One of his initial targets was Paris, and the company slowly began scaling operations within the City of Light.

Initially though, Airbnb encountered several significant barriers with Parisian housing regulations. Hotel groups and local authorities launched a series of oppositions against the company, voicing concerns about Airbnb’s impact on the local economy and the number of long-term housing options in the city. Specifically, in a city already prevalent with tourists, activists feared that allowing Airbnb to expand without any restrictions would drive permanent residents away, thus completely transforming quintessential parts of the city.

To help alleviate these apprehensions, Airbnb decided to open an office in Paris in 2012. Listings were starting to increase at a rapid pace, and the company knew its continued presence in the region was contingent upon building more positive in-person relationships with regulators. In making inroads, Airbnb focused on educating the French government on one of the key benefits it brings to the table— an influx of travelers (and more revenues) to the city.

After several rounds of negotiations, Airbnb eventually reached a set of agreements. Among them, residents are not permitted to rent out their properties for more than four months in a year. Apartments are also subject to regular, unannounced inspections, and individuals found in violation of local law are heavily fined. Additionally, Airbnb started collecting a tourist tax on behalf of Parisian authorities.

Today, Airbnb has over 50,000 listings in Paris and the company estimates that between 2012 and 2013 it generated approximately $240 million in economic activity in Paris and supported over 1000 jobs. Airbnb’s strategic approach to managing risk in geography with sometimes unclear regulatory challenges was integral to its growth.

Questions:

1. Should Airbnb replicate its Paris strategy in other major European markets? Why and why not?

2. How should Airbnb prepare to manage the emerging cultural trends listed in the chapter? How should Brazil’s cultural values influence its strategy in this country?

Sources: Mark Scott, “What Uber can Learn from Airbnb’s Global Expansion,” The New York Times, July 7, 2015, http://www.nytimes.com/2015/07/08/technology/what-uber-can-learn-from-airbnbs-global-expansion. html

Elena Berton and Katharina Wecker, “Europe Cracks Down on Airbnb, Other Room-Sharing Sites,” USA Today, July 7, 2015, http://www.usatoday.com/story/money/business/2015/07/06/europe-airbnb- room-sharing/29263881/

“Airbnb Economic Impact,” http://blog.airbnb.com/economic-impact-airbnb/

Sam Schechner and Matthias Verbergt, “Paris Confronts Airbnb’s Rapid Growth,” The Wall Street Journal, June 25, 2015, http://www.wsj.com/articles/SB12147335600370333763904581058032 330315292\

100 Part One Strategic Analysis

P A R T T W O

CREATING, ADAPTING, AND IMPLEMENTING STRATEGY

C H A P T E R S I X

Creating Advantage: Customer Value Leadership

Price is what you pay. Value is what you get. —Warren Buffett

Strategy 101 is about choices: You can’t be all things to all people. —Michael Porter, HBS professor, founder of The Monitor Group

Ever since Morton’s put a little girl in a yellow slicker and declared, “When it rains, it pours,” no advertising person worth his or her salt has had any excuse to think of a product as having parity with anything. —Malcolm MacDougal, Jordan Case McGrath & Taylor

Our attention now shifts from strategic market analysis to the development of strategy. What value will the firm offer and in what product markets will it compete? How will it compete, and what assets and competencies will be important to its sustained competitive advantage? Will it lead or follow? How will it develop strong customers and brands, and how will these assets be leveraged over time to grow the business? What investments and disinvestments should be made to improve company success over time?

The next 12 chapters in this book are portrayed in Figure 6.1. This chapter discusses alternative value propositions that can be adopted by the company and the importance of achieving customer value leadership. Chapters 7 and 8 focus on the all-important role of the customer relationship, including building and managing strong customer relationships and managing customer equity for long-term profits. Chapters 9 and 10 consider how to create valuable brands and to develop a key asset, brand equity.

The following four chapters present growth strategies—energizing the business (Chapter 11), leveraging the business (Chapter 12), creating new businesses (Chapter 13), and managing global strategies (Chapter 14). Chapter 15 discusses setting priorities among business units and managing investment and divestment decisions for future growth.

Chapter 16 examines the organizational challenges underlying the implementation of market- ing strategy and offers solutions in the form of developing a customer-centric organization. Finally,

103

Chapter 17 examines how strong marketing assets in the form of strong customer relationships and brands produce value for the company.

ALTERNATIVE VALUE PROPOSITIONS Companies choose from a variety of ways to offer value to customers. Look at any market and you will observe an array of different types of offerings that are more or less attractive to different types of customers. This is a sign of a healthy marketplace. However, a closer look reveals a fairly common set of different types of customers and value propositions across markets. Three broad groupings exist—companies that compete on performance value, companies that compete on price value, and companies that compete on relational value. Each of these types of value is defined and different varieties within each broad grouping are outlined.

Performance Value

For performance value, the value proposition is all about having the best product or service offering, usually at a price premium. Performance value can take many forms but they all focus on peerless quality. This is not “quality” in the narrow sense of compliance with standards but in the broad sense of fitness for customer use. Customers who buy these products value this exceptional

Chapter 6 Creating Advantage:

Customer Value Leadership

Chapter 7 Building and Managing Customer Relationships

Chapter 8 Creating Valuable

Customers

Chapter 9 Building and Managing

Brand Equity

Chapter 10 Toward a Strong

Brand Relationship

Chapter 11 Energizing the Business

Chapter 16 Harnessing

the Organization

Chapter 12 Leveraging the Business

Chapter 13 Creating New Businesses

Chapter 14 Global Strategies

Chapter 15 Setting Priorities for

Businesses and Brands

Searching for Sustainable Advantage

Growth Strategies Implementing Strategy

and Producing Firm Value

Chapter 17 How Marketing Activities Create

Value for Companies

Figure 6.1 Remaining Chapters in the Book

104 Part Two Creating, Adapting, and Implementing Strategy

quality and are willing to pay for it. To compete on performance value, the company must ensure that its products or services exceed customer expectations on valued performance attributes or benefits. There are five key types of performance value that dominate markets, which are discussed here.

Functional Quality

This is the most basic and straightforward type of quality—the product performs its basic function extremely well. The product works better or lasts longer than competitors, and customers are willing to pay for this type of quality. This type of performance value is why so many buyers of earthmoving equipment are attracted to Caterpillar and auto enthusiasts to BMW cars. Another example is Darn Tough socks. Darn Tough’s mission is to “Create the world’s best socks and stand behind them unconditionally.” The company knits its socks using 100 percent merino wool on small needle, fine-gauge knitting machines to produce durable, high-density socks—without the bulk. To back up this quality, it offers a lifetime guarantee. By producing a product that performs its basic function extremely well, the company can charge high prices for its socks—the least expensive socks are $15 for a single pair, compared to other companies that sell packs of ten pairs of standard socks for $15 or less! Customers seem to agree with Darn Tough’s claim that its socks are “the most comfortable, durable and best fitting socks you have ever owned.”1

Innovation Quality

This type of quality focuses on offering novel sources of value that are not currently available in the marketplace. Companies such as Medtronic, 23andMe, and Tesla qualify. Medtronic dominates the market for implanted cardiac devices, such as pacemakers for treating patients whose heartbeats are too slow and defibrillators for patients whose heart rates are too fast. It has a long history of bringing new technology and performance-enhancing improvements to market ahead of its competition. 23andMe is a genomics and biotechnology company that offers a home- based saliva kit that is sent to a lab where DNA information is analyzed and compiled into reports, including ancestry, carrier, and DNA traits related to health. Tesla burst onto the scene in 2008 with the first all-electric car to use lithium-ion battery cells and the first to travel 200 miles per charge.

Design and Fashion Quality

The focus here is on an outstanding aesthetic or style. Hermes Paris makes the Hermes Birkin handbag that offers incredible design features, including exotic leathers, a goat-skin lining that matches the color of the outside of the bag, and hardware plated in gold or palladium to prevent tarnishing. Handmade in France by expert artisans, each is a reflection of outstanding craftsman- ship and is one of the most expensive bags in the world (retailing between $11,550 and $150,000!). Both the design of the bag and its cachet in communicating a sense of fashion (enhanced by the fact that the company produces a limited number), contribute to its status as a fashion statement. As noted by the company, “Because of the slow manufacturing process and difficult task of procuring the best textiles, only a limited number of Birkins are made each year, adding to the exclusivity that can drive up prices, particularly those in the resale market.”2 The bag is usually only made available to Hermes boutique brand loyal and high purchasing customers, which also improves its fashion status.

Chapter 6 Creating Advantage: Customer Value Leadership 105

Service Quality

Performance value can also be achieved through service quality—which is usually a collection of intangible and tangible sources of value. Consider the exceptional service of Singapore Airlines. With Ferragamo toiletries, Givenchy blankets, pillows, and pajamas, meals like Lobster Thermi- dor, en suite cabins on some planes, tuck-in service, and exceptionally polite and kind flight attendants, it is no wonder the airline was named the best international airline in the world.4

Research has shown that, in general, service quality is based in large part on the perceived competence, responsiveness, and empathy of the people with whom customers interact.5

Social Responsibility Quality

Here the focus is on developing products and services that contribute to larger societal outcomes. Dove’s Campaign for Real Beauty offers reasonable quality products that are positioned to focus on a personal and individualized sense of beauty that is not premised on media stereotypes. Products are rarely shown; instead, media on and off the web challenge women to think beyond standard ideas about beauty. High-impact campaigns include Dove’s “Evolution,” “Little Girls,” “Real Beauty Sketches” and most recently the powerful “My Beauty My Say”—all of which draw attention to the brand’s social role. These campaigns are complemented by contributions to workshops and programs for girls. Toms Shoes offers a standard canvas or cotton slip-on shoes for a price premium. The premium supports the company’s One for One® business model in which the company promises to deliver a pair of new, free shoes to a needy child for the sale of every pair of

MUJI NO-BRAND DESIGN3

Since its founding in 1980, the Japanese retailer Muji has gradually expanded its global footprint. In 2015, the company grew its sales 18 percent, earning over $2 billion in revenue from more than 700 stores worldwide. Muji, short for Mujirushi Ryohin, is represented by four characters that mean “no-brand quality goods.” Initially, Muji included only 40 different food and household products. Today, it sells more than 7,000 items ranging from furniture to soap.

The Muji philosophy is to deliver functional products that strive not to be the best, but “enough.” Superfluous features and attributes unrelated to function are typically omitted. Muji can be described as a reaction to the glitz of Tokyo’s Ginza and other shopping districts filled with brand after brand, each trying to be more upscale than the last. During a visit to a Muji store, customers encounter simple products with simple designs in a noncommercial atmosphere.

Fewer features lowers prices as does the company’s attention to things like packaging (most of Muji’s paper products are unbleached), which are cheaper in bulk. This low price strategy helps Muji compete with big-box home goods retailers as well as other casual clothing stores—it is at or above parity on price (low price) for these categories.

At the same time, Muji’s emphasis on no-brand and simplicity gives it a point of differentiation in the performance area. The simple designs are, in fact, stylish in a strangely utilitarian way. Some customers even view its no-brand approach as a type of social responsibility, which adds further value. Finally, although generic patterns are used, pleasing design elements are offered to keep these offerings above what most big-box stores can offer. For example, the store provides self-expressive benefits such as a station called “Muji Yourself” where customers can decorate notebooks with stamps or have clothes embroidered.

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shoes at retail. The company has been very successful as evidenced by its Moody’s valuation of $392M.6 This business model has inspired other startups, such as Warby Parker, to adopt a similar approach.

Price Value

In nearly every market, from appliances to economy sedans to toothpaste to booksellers to brokerage services, there will be a customer segment that is motivated by price. Even in high-end markets such as luxury sports sedans, some brands (e.g., Acura) will stake out a value position. During recessionary times, the “value segment” can become especially large.

These companies do not compete on quality or innovation, nor do they cultivate close relationships with their customers. Instead, they provide reliable products or services positioned in the middle of the market space at the best price. The best price is seldom the “cheapest,” but offers the lowest total life cycle cost to the customer.

Exemplars such as Vanguard Group, IKEA, Aldi (a European discount grocery), and Walmart work on all the factors that customers consider when comparing total cost, such as (1) product reliability that lowers further costs of ownership by avoiding repairs and down-time, (2) reliable service that reduces annoyance and uncertainty about delivery or reliability, and (3) convenience and availability that makes shopping easier. But at the top of the list is always the price paid. Thus, the mutual fund giant Vanguard uses index funds that mirror the overall stock market and a bare-bones corporate structure to charge only 0.3 percent of assets for annual expenses. This is far below the average domestic stock fund that charges approximately 1.5 percent for expenses.

There are many routes to price value leadership, all of which include a no-frills product or service. The two most prevalent are applying highly disciplined cost management and using superior pricing acumen.

Disciplined Cost Management

These firms sell high volumes of standard products to gain the cost savings from economies of scale. They gain efficiencies by converting their large volumes into experience curve cost-savings benefits. But scale is not enough; further discipline is needed to limit variety and avoid product line proliferation. It also means minimizing every element of overhead and installing a frugal culture. Facilities are usually simple, which sends a clear signal to customers. Procedures are highly standardized and tight cost controls are in place. All firms need cost controls to keep costs in line, but companies competing on price value should be more thorough, rigorous, and less accepting of cost variances.

IKEA competes on price value by staking out a “low price with meaning” position in the fragmented furniture market. Most furniture retailers offer a wide selection of brand-name items with lots of sales help. IKEA’s self-serve value proposition eliminates these familiar elements. IKEA does not provide in-store sales assistance and requires customers to do everything from taking their own measurements to pulling their own furniture off warehouse pallets. Customers have to transport their purchases home and assemble them. Costs are further reduced by limiting furniture to modern Scandinavian designs and manufacturing in low-cost countries. Product design is utilitarian, and IKEA makes no pretense that its products will last forever.7 Yet IKEA is not a low-end big-box store selling cheap furniture from dingy warehouses in out-of-the-way locations. Its showrooms have a cheerful, airy, modern ambiance with unexpected amenities such

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as playgrounds for children and cafes. This means that, overall, IKEA measures up on very basic service features of the retail experience while offering rock-bottom prices.

Superior Pricing Acumen

To be able to offer the best price, a company competing on price must have a well-defined pricing capability and deep insights into the price sensitivity and behavior of its target segment. This is how Progressive Corporation became one of the most profitable auto insurance companies in the United States. Auto insurance is a necessary, but not desirable, purchase for most customers. Most states require that all car owners carry some form of liability insurance. The net effect is that most customers are highly price sensitive and put the most weight on the annual premium cost rather than service benefits, such as the timeliness of processing claims or the location of agents.

Progressive employs a superior data mining and analysis capability to accurately assess the risk—and thus the expected cost—of each customer. It then uses highly targeted pricing schemes to attract profitable customers and discourage unprofitable ones. It is able to find customers who competitors are systematically over-charging and then undercut these prices. This strategy has required a long-term investment to create massive data archives on customer characteristics and behavior that competitors are so far unable to match. Progressive uses sophisticated algorithms to extract insights from its data, such as getting a ticket for “failure to yield” warrants a higher premium increase than does getting a ticket for “speeding.”

Relational Value

Companies focusing on relational value are unlikely to offer the lowest price or the latest performance features. Instead, these companies offer their customers a more customized set of solutions. They do this in a variety of ways depending on the market. Sometimes it is through customer intimacy and personalization; in other cases, customer collaboration or a best total solution is important.

Companies competing on relational value have several things in common. First, their relationships with their best customers are unusually tight, with mutual trust based on shared understanding and commitments. Second, they have broadened their offerings far beyond their core product to include customer information and training, complementary products, support services, and financing as required. They compete on scope rather than scale—meaning they offer a range of products and services to customers instead of focus on selling a few more standardized offerings. Third, their customers think they are getting offerings that have been tailored to their needs. It may be fully customized or simply personalized. This is not the “one size fits all” approach of price value.

Take for example how Texas Instruments has prevailed over Intel in the market for semiconductor chips for portable electronic devices by cultivating a relational approach to value with its customers.8 It does this by acting as the design lab for realizing their customers’ ambitions. A relationship with Nokia provided the template for this strategy. Texas Instruments customized its chip to Nokia’s cell phone software, which enabled the fast processing of large amounts of digital information and became the core of a new generation of Nokia cell phones. The strategy of working closely with aspiring companies was further refined when Texas Instruments provided the tailored light-processing chips that helped Samsung Electronics enter the large screen, high- definition TV market. Texas Instrument’s ability to direct its development efforts toward meeting

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customer design challenges also helped advance its own technology and enabled it to enter other device markets.9,10

These common features conceal huge differences in how relational value is delivered in different markets. Customer relationship management (CRM) approaches are used by firms like Fidelity Investments that serve mass markets with millions of customers. Comprehensive solution management approaches are applied by firms like Rolls-Royce when complex systems are sold to a small number of very valuable customers. Of course, there are many markets that use some of each approach.

Customer Relationship Management

The essence of CRM is customizing products and services for each particular customer. More precisely, it is a cross-functional process involving a continuing dialogue with customers, managing across all customer touch points, and offering personalized treatment for the most valuable customers. These firms harness digital technologies to cost-effectively have dialogues with customers and gain a comprehensive view of each customer, including their profitability. Fidelity Investments repositioned itself with a strategy of providing affluent investors with credible advice and investment solutions tailored to the individual investor’s situation and delivered with excep- tional service to meet specific needs. This required careful identification of customer segments to nurture, the formation of dedicated service models and offerings for each segment, and personalized education and guidance appropriate to the profit potential of each segment. For example, Fidelity uses a “digital advisor” for clients with as little as $5,000 to invest, while clients with at least $50,000 invested have access to an investment professional.11 For its wealthiest clients with more than $5 million in assets, Fidelity Investments launched Fidelity Private Wealth Management in 2012. These clients are provided with a team of five financial professionals, led by a wealth management advisor.12

Comprehensive Solution Management

Solutions are bundles of products and related services that create value greater than the sum of their parts.13 To offer a real solution, and not just a repackaging of existing products and services, four criteria must be met:

Each solution is co-created with customers.

It is therefore tailored to each customer.

The relationship between customer and supplier is unusually intimate.

Suppliers accept some of the risk through performance-based or risk-based contracts.

Like CRM best practices, the aim is to form a one-to-one learning relationship. This requires relationships that are much deeper and broader than those enabled by CRM with social and information connections across many levels and functions of each partner organization. This is only feasible with high-value, long-term customers who warrant sizeable investments of time and energy and are also willing to make reciprocal commitments. Customers who are partners can gain from such intimate relationships in several ways. Overall costs may be lower and the quality higher when interacting with a single supplier for multiple activities. They may see benefits from superior performance through preferred access to the latest technology. Their risks may be reduced by sharing them with the supplier.

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For example, Asea Brown Boveri, better known as ABB, had charged customers a daily rental fee for drilling pipe used on ocean-based oil and gas rigs. The customer was responsible for managing the delivery of equipment to drilling sites in the countries around the world, which is often very expensive and complex to navigate. ABB saw an opportunity to shift the emphasis away from price to a focus on service by charging customers for services to get the pipes to the wells (including navigating customs and import bureaucracies). Because ABB was doing this for many of its customers across more than 100 countries, it was able to gain efficiencies in the importation process and lower the overall costs for its customers.

Another example is Rolls-Royce, the global market leader for commercial jet engines that powered half of the wide-bodied passenger jets built in 2016. It overcame formidable competitors like GE and Pratt & Whitney with an engine design that was more costly to make, but that can be customized to a far wider range of aircraft designs than its rivals. But beyond supplying an excellent product, Rolls-Royce introduced an after-sale support option that addressed customers’ concerns about engine maintenance costs. In this approach, Rolls-Royce’s airline customers don’t actually buy the engines. Instead, as part of the “Power by the Hour” program, customers pay a fee based on the number of hours flown. In exchange for this fee, Rolls-Royce handles all maintenance, repairs, and replacement expenses. This personalized service amounts to customer savings while also allowing the customer to focus on their own business—not on jet engine maintenance. Every function of each engine is continuously monitored while it is in the air to get an early warning of a service need. This means fewer emergency repairs. The monitoring also provides Rolls-Royce with important information that enables product improvements.14 As the COO noted, “You could only get closer to the customer by being in the plane.”15

CUSTOMER VALUE LEADERSHIP Although a value proposition is essential for competing on customer value, it is hardly sufficient. True customer value leaders work to stand out on one source of value—such as how Toms Shoes stands out on social value—while performing at least at parity on other important sources of value. The shoes perform the basic functions of footwear, use reasonable quality materials, and are sold at prices similar to other types of casual shoes (despite giving away one pair).

To understand this approach to value, think about each type of value as a vector—a continuum upon which all offerings in a given industry can be placed by customers (see Figure 6.2). These are

Performance Value

Price Value

Relational Value

Parity position

Figure 6.2 The Three Value Vectors

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the three general types of value that customers use when making choices among competing alternatives. Will their bottled water be a premium offering such as Evian or Gerolsteiner, a standard option in a Dansani or Aquafina offering by The Coca Cola Company and PepsiCo, or a bottled water subscription service brought to customer’s homes from Endless Waters or Crystal Springs? In the minds of prospective customers, each of these water brands has a position that is above, below, or at parity on each vector.

Customers judge the relative positions of the offerings in their consideration set—the set of offerings from among which they will select. To make a decision, they weight the vectors according to what is most important to them—for some customers this will be price value, for others performance or relational value. Importantly, what brands end up in the consideration set for comparison can, of course, be offerings from same category. For example, Perrier, Dasani, and Aquafina all compete head-on in the bottled water category. In other cases, the consideration set might include brands in related categories that fill the same need—in other words, water competes with other soft, sport, and fruit drink categories because they all have a claim on customer’s “share of thirst.”

Parity Performance

Each vector has a parity position. Parity is a customer-driven concept. The question is not whether there is an actual difference between competitors on a specific axis. It is whether customers perceive a meaningful difference. Companies often deceive themselves, believing that their carefully managed differentiation efforts matter to, or are even noticed by, customers. Parity is the level of performance that must be met if customers are to judge a firm’s offering as credible. This parity level is more than just the minimum requirements for playing the game. Instead, it usually means at least a moderate, and often high, level of perceived competence reached by most competitors. Customers do not see a meaningful difference among offerings clustered around a parity position.

How does a firm judge whether its offerings are at parity? The arbiter is always the customer, including customers who buy from the firm now, those who have never bought from the firm, and those who may have stopped buying from the firm. Companies should ask two questions to make this determination. The first question to ask is “Which alternatives are in the customer’s consideration set?” For example, Saks and Neiman Marcus are competing in a different market than Walmart or Dollar General. Understanding what alternatives are in the set will help the company get a better understanding of how it fares from the customer’s perspective.

The second question is “How do the firm’s offerings compare to competitors?” Do the firm’s offerings stand out or just measure up? One way to assess parity is to ask a sample of customers to rate the firms or brands on key features and benefits. The rating scale could ask, for example, whether Hewlett Packard desktop copiers are ahead, equal, or behind competitors on print quality, technical support, price, speed, and so forth. The comparisons could be against the market leader and/or against top competitors for a certain segment of customers. A consistent rating of equality across offerings in a category is evidence of parity.

When competitive alternatives are all seen as close to parity on all three vectors, the market is essentially “stalemated” as no leader is established on any value vector. Without meaningful differentiation, the conversation between buyers and sellers usually deteriorates to a negotiation about price. The resulting downward pressure on margins means that few firms have profits that exceed their cost of capital.

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Points of Parity, Points of Difference

Meeting customers’ basic expectations keeps an offering in the running to be selected. However, this position does not lead to a high probability of purchase. Chances increase when the offering has a point of difference on one vector while measuring up to basic expectations on the other two. If, for example, a customer values health when selecting bottled water, the German brand Gerolsteiner with very high levels of minerals and glass bottle truly stands out as shown in the depiction of its position in Figure 6.3. Its premium price reflects this performance value. For customers who do not value home delivery and are willing to buy the product during normal shopping trips, the brand achieves points of parity on relational value.

Few markets are as undifferentiated as refined sugar. Brand names are weak, the soft-drink, baked goods, and retail customers are powerful and insist on dual-sourcing, and the market is barely growing. Two big competitors—Redpath and Crystal—were locked in a stalemate, which was reinforced by a mindset that emphasized scale and production efficiency to drive down costs. Both rivals competed on price value with the same products and similar sales approaches. Customers got the message and based their purchasing decisions solely on price and delivery terms.

To escape the profit-draining stalemate, C-suite members at Redpath Sugar decided to talk with the company’s 17 largest customers to understand their needs and uncover new insights upon which the company might compete. The results were discouraging—they discovered that the two suppliers were considered equally competent, but no different—but also encouraging because the research uncovered evidence that customer needs were changing. Customers wanted shorter production runs, faster deliveries, more varieties of product and packaging, and smaller inventories on hand. None of these emerging requirements could be met with the current business model that focused on large refineries, centralized warehouses, and scale economies.

Redpath’s selection of a relational value strategy, based on partnering to manage the customer’s total requirement, was obvious in retrospect, but daunting in prospect. The necessary changes in the supply-chain (more decentralized warehousing and just-in-time dispatching and delivery) and the tracking systems required a different mindset and significant investment (a $40 million modernization and capacity expansion project).16 Many of the traditional sales- people struggled to adapt to the sophisticated solutions approach to selling. The new strategy was validated within two years, however, as customers slowly integrated their production process with the company’s logistics system and gave Redpath a growing share of their requirements because of the overall associated cost savings they experienced.

Gerolsteiner’s position

Performance Value

Price Value

Relational Value

Parity position

Figure 6.3 Gerolsteiner’s Performance Value Leadership Position in the Bottled Water Category

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Evolving Value Propositions

As growth slows, the struggle for competitive position intensifies, and the strategies of incumbents start to converge and accelerate. There is a well-known herd mentality among incumbents that leads to continuous jockeying to reestablish “points of parity” along the value vectors. It is not enough for a mid-tier hotel to offer cable TV and room service; it must offer premium coffee makers and down duvets to meet the competition. From toothpaste to credit cards to orthopedic devices, the degree of perceived differentiation steadily diminishes due to the relentless process of imitation.

Keeping pace with rivals in a market is a requirement for staying in the game. Falling noticeably behind on any one of the three value vectors erodes the overall customer value position. One effect of everyone keeping pace is that the parity level on each vector steadily moves outward: performance improves, real prices drop, and service is better. Parity becomes an escalating target. As the Whole Foods co-founder and Chief Executive Officer John Mackey said of the pressure traditional supermarkets are putting on its organic and natural foods business “Our competitors are not standing still.”18

As parity advances on all three vectors, companies have to spend more just to stay in the game. Customers, especially business customers with dedicated purchasing resources, are more informed and more willing to play one competitor against another. As customers’ expectations

SLACK: IMPROVING THE EXPERIENCE OF WORKPLACE COMMUNICATIONS17

Businesses increasingly rely on enterprise social network platforms to connect and drive collaboration between employees. Among the fastest growing is Slack—a messaging/group chat/document-sharing application. Both the desktop and mobile versions of the software allow teams to chat in online channels with conversations divided by subjects.

Since the company’s launch in late 2013, Slack has attracted hundreds of clients, including Comcast, Zappos, Expedia, and even NASA. With daily users at an all-time high of 2.7 million and a valuation of $3.8 billion in 2016, Slack is poised to completely redefine workplace communications.

Several factors have been instrumental in accelerating Slack’s growth. First, the software development team made customer feedback integral to the process. In beta testing, for example, the company gathered input on product look and feel in waves, gradually expanding the batch of users each time. This enabled Slack to identify and prioritize the development of features that were resonating with end users. Another factor was management’s thoughtful approach to scaling the product. Early on, Slack realized that client buy-in was contingent on teams of employees “saying yes” to the software. So, the company developed training materials and other resources that helped users work through common adoption barriers.

A final factor was Slack’s decision to infuse superior customer experience into its offering. Its software features a personal level of human touch: it may greet a user with, “What a day! What cannot be accomplished on such a splendid day?” or an amusing comment such as “Please use Slack responsibly.” Slack also allows users to seamlessly sync information across multiple devices, providing quick transitions and follow-ups from conversations. Finally, Slack sets a high bar for its customer service. A dedicated team tracks both good and bad customer comments that come through Twitter or the in app “help” function—and responds to every single one. The team views every interaction as an opportunity to improve its offering features to innovate and engage its users with excellent experiences.

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about acceptable performance on each attribute rise, they are less willing to accept below parity performance on any vector. These pressures require firms to pay attention to all three value vectors, not just the value vector they seek value leadership on. Performance value leaders can’t allow prices and costs to be badly out of line or their service to be viewed as unacceptably poor. If they do, such leaders will be forced to offset the deficiencies in the total value of their offering by lowering prices.

MANAGING FOR CUSTOMER VALUE LEADERSHIP How does a company achieve and maintain a position of customer value leadership? Three steps are important—selecting a focus and not trying to be all things to all customers, aligning the business model, and creating strategic synergies when possible.

Selecting a Focus and Making Tradeoffs

Customer value leaders don’t try to straddle multiple value vectors. They accept the familiar adage “you can’t be all things to all people.” Many executive teams initially reject this premise because they don’t want to make choices that limit the markets they can serve. This delusion is dangerous on two grounds. To begin, both customers and employees are likely to be confused about the positioning of the firm. The brand message is murky, the selling appeals lack consistency and clarity, and the product or service bundle is a series of compromises. C.J. Bruno, VP and General Manager of Marketing and Sales for Intel Americas, famously referred to this approach as “peanut butter marketing”—marketing spread too thinly over the marketplace. Such a strategy is not only tepid in its communication with the marketplace, but it is also vulnerable to attacks by more focused competitors.

Pharmacy giant CVS made a strategic decision to compete as a health-care provider by offering in-store clinics. Selling tobacco was too inconsistent with this aspiration, so the company dropped tobacco products from its stores in 2014. This decision is estimated to have cost the company about $2 billion per year. Financial results show that net revenues did not grow as fast in 2015, the year after the decision. However, longer-term growth has shown that CVS has achieved a strong position in the emerging pharmacy clinic industry and that this has offset its losses in tobacco sales. Such decisions require vision and courage on the part of leaders: Vision to understand where markets are moving and where the company should make its biggest bets and courage to make the tough choice to not spread the firm over too many opportunities.

Aligning the Business Model

If the value proposition is what the company offers to the target segment, then the business model is how the business profitably fulfills this promise. Effective business models are tightly synchro- nized to fit the value proposition—not the other way around! What distinguishes Edward Jones from Chase and Wells Fargo is a strategy of providing relational value based on placing one financial adviser in a conveniently located in strip mall and suburban offices rather than a team of advisors in a more central location. Each advisor works deeply with clients offering personalized attention and advice that is difficult to achieve when spread across advisors. As the head of talent

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notes, “You deeply serve clients by having a meaningful relationship with an appropriate amount of families that you focus on.” The solo advisor status also means that advisors must be entrepre- neurial and build the business through referrals from current advisors and by advertising in local markets.

Good business models answer two enduring questions. First, what is the value-creating system—what business activities are necessary to create the value we promised our customers and who will perform them? Second, what is the value-capture system—how does the company make money while creating value for its customers?19

The Value-Creating System

This comprises all the activities the firm performs to create and deliver customer value, from basic inputs to create products and services to the channels used to sell, service, and distribute an offering. It represents firm choices of (1) which activities to perform and (2) who performs them— whether it is the firm or a partner.

The question of which activities to perform is essential. What activities are essential to create the value the company has promised the customer? Starbucks has a well-orchestrated set of activities for opening a new store—from location selection, store design, and barista training— that are a winning recipe. Whatever activity, the companies need strong competencies in those activities to ensure that value is created consistently and effectively. Each competency, whether it is outstanding scientific invention, brand management, order fulfillment, pricing, or talent acquisition, is a complex bundle of skills and knowledge and systems exercised through a distinct organizational processes. There are, however, only a few core competencies within each business that really contribute to the creation of superior customer value. These should be lavished with management attention because they are so essential to the strategy. What sets Marriott Hotels apart from its peer competitors is a service operations capability performed with a fanatical attention to detail. This begins with recruiting and hiring and continues through every hotel operation. The payoff is a consistently superior service—Marriott customers seldom have unpleasant surprises. Marriott’s other capabilities are done well enough to keep it in the game but are not the basis of the company’s advantage.

The question of who performs the value-creating activities is increasingly pressing as firms evolve toward leveraging networks of intermediaries and partners. Consider Li & Fung, the Asian trading company that supplies more than $18 billion a year in clothing, toys, and other products for top U.S. brands, but does not own a single factory. Instead, Li & Fung’s customers outsource their production to Li & Fung, which in turn, outsources it to a network of over 15,000 suppliers around the globe. This gives Li & Fung incredible flexibility and speed that customers value. These benefits, however, come with some loss of control. If that loss affects whether the value proposition is fulfilled, the company’s value-creating system begins to break down and should be redesigned.

Thus, a company must carefully consider whether it will create the value (often called a “make” strategy), buy another company that can do so (a “buy” strategy), or form an alliance with another company to create the value (an “ally” or “alliance” strategy). A make strategy is the most expensive and should only be undertaken if the company has the right assets and competencies. A buy strategy is also expensive because the knowledge and skills have to be bought. However, the company now fully controls these activities—the challenge is to manage the integration with the new company. An ally strategy is the least expensive, but the company also encounters the costs and challenges of managing the partnership to meet its objectives.

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Value-Capture Mechanisms

The business model must also account for how the firm will capture profits. These value-capture mechanisms are the “monetizing” part of any business model. They include the ways the firm gets paid and the choice of fixed and variable costs built into the investments the firm makes to create the value. These together determine the pattern of cash flows. There is a high degree of complementarity between value creation and value capture, as when Gillette subsidizes the price of razors to sell more profitable replacement blades.

Zara, the international clothing retailer, is a fashion imitator that uses a business model often referred to as “fast fashion.” Its value-creating system is built on a well-tuned system of designers who observe and quickly copy fashion and a manufacturing system that creates and moves clothing quickly into centrally located stores all over the world. Store managers and retail systems provide fast feedback on customer purchases, which feeds designers with ideas. The firm captures value because the clothing, often supplied in small batches to create a sense of scarcity, sells fast and no inventories are held. Prices are low, but discounts are rare. Value is also captured because stores don’t advertise but use central locations to attract customers and remind them to visit often for the latest fashion additions.

Coordinating the Business Model Elements

A business model is best designed as a whole, rather than the sum of isolated and separate decisions about pricing or outsourcing. To ensure the whole is greater than the sum of the parts, a company needs to:

Create a tightly bound relationship between the value proposition elements and the business model elements. Zara has done this masterfully with the value proposition benefitting from the business model and the business model getting clear direction from the value proposition. This deep integration is often referred to as strategic complementarity because there is a positive synergistic effect between the two elements. Remain immersed in deep customer and competitor insights. Many business models fail because they get out of sync with customer needs or are trumped by a competitor with a better solution. Align metrics and incentives. These should be tailored to the business model to measure and reward key value-creating and value-capture activities. For example, Edward Jones should reward advisors for increasing their share of clients’ investments as well as new client acquisition—both support its business model, which is based on a single advisor acquiring and developing strong and long relationships with clients in a local area.

Creating Strategic Synergies

Aligning business model elements is one critical synergy the company should create. There are many others that improve marketplace performance and the bottom line. Technologies in one business can become innovations in another. For example, a core element in the GE strategic vision has always been to achieve synergy across as many of its businesses as possible. The gas turbine technology that GE pioneered facilitated the development of its aviation business.

Sony exploits synergy across its product line by showcasing them together in stores and even on Celebrity Cruise ships. The ships are outfitted with Sony entertainment products, including

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television screens, movie theaters, and sound equipment. The result is an integrated package that helps create and reinforce Sony’s brand of providing high-quality and technologically advanced entertainment.

Synergies can be generated by leveraging assets and competencies for multiple uses. Amazon leverages its warehouses, ordering, and distribution systems by allowing other firms to use its system. Services such as Elastic Compute Cloud (EC2) provide developers with computing capacity in the Amazon Web Services Cloud. Amazon allows third parties, even competitors, to sell products and use fulfillment services in the Amazon Marketplace. Both generate more margin and scale for Amazon’s fixed assets. In the same way, Disney leverages its brand and its connection to kids and family over a wide variety of owned and licensed offerings including Broadway shows and cruise ships.

Companies should seek synergies such as these when creating its strategy. Leveraging existing assets, competencies, and offerings generates more value for the company. Such synergies are also important because they make it harder for competitors to imitate the company. The scale and scope of strategy that synergy is built on cannot be easily copied by rivals.

Monitoring Morphing Market Boundaries

The traditional strategy playbook of 20 years ago was anchored on fixed and well-defined markets— competitors were familiar and stable, and product functions were well-defined and distinct from adjacent categories. These arbitrary product-market boundaries were enshrined in industry statistics and marketing research tracking systems that offered a reassuring picture of continuity.

As markets evolve, though, firms find themselves in increasingly dynamic and competitive environments. In the new game, market boundaries have evolved from fixed to fuzzy. Competition to satisfy customers’ requirements comes from unexpected places—especially in the fast- converging computing, telecommunications, and entertainment industries. Digital technologies have created many unlikely competitors, such as phones substituting for watches, people’s homes substituting for hotels, and video conferencing software substituting for business travel.

There are also complex role reversals with customers becoming competitors and vice versa. For example, General Motors is a customer of Apple’s Carplay—a feature that enables users to connect an iPhone while driving and get directions, make calls, send and receive messages, and listen to music using voice commands and the built-in display and controls of supported vehicles— even as Apple is emerging as a competitor in the autonomous car market.

Globalization further intensifies and complicates the competition for customers. Plummeting communication costs and diffused manufacturing capabilities permit the entry of hordes of low- cost competitors into many industries. As emerging market firms build their capabilities, they expand their global reach. Some foresee a world where companies from every part of the world compete with each other in every market around the world. Products and services flow from many locations to many destinations, and firms that do not solidify value leadership will soon find customers being enticed away by competitors that were not even on their competitive radars.

Adapting to Changing Market Realities

Given changing market boundaries, it is essential that companies be open to adapting their strategies over time. The balance between strategic stubbornness, in which the company is too wedded to its current strategy, and strategic drift, in which the company is too easily pulled off

Chapter 6 Creating Advantage: Customer Value Leadership 117

track by marketplace changes, is an ongoing challenge for leaders. Stubbornness is often borne from strategic investments companies have made in building assets and competencies to compete in a market and from the mental models that get formed from repeating market activities over time. When this happens, marketplace changes are simply missed or seem too difficult to act on. Drift arises from being overly reactive to competitor activities that challenge the company’s business. The most important part of this balancing act is to remain resolutely focused on staying relevant to customers. This perspective ensures that companies will remain aware of the most important market changes and be unwilling to stand by outdated assets and competencies that do not serve the market any longer. There are many companies that had others “eat their lunch” because they would not eat it themselves, including Kodak, Blockbuster, Motorola, and Borders Books.

KEY LEARNINGS

There are three main types of value that companies offer customers: (1) performance value, or having the best product or service offering, (2) price value, or having the lowest price over the life cycle of the product, and (3) relational value, or being able to offer customers a customized offering or solutions.

To achieve customer value leadership, companies should strive to be exemplary for one type of the value proposition, and at parity, or at the level of performance that must be met for customers to judge the firm’s offering as credible, for the other two types. Companies should not try to be all things to all customers and instead should focus on having a clear and specific value proposition.

A company’s business model, or how the firm creates and captures value from the target segment, should be aligned to meet the firm’s desired value proposition.

A company can create synergies by leveraging its assets for multiple uses and by aligning its business model elements.

FOR DISCUSSION 1. Compare and contrast how your local grocery would position the pre-made meal

area of its store if it were trying to excel on performance, price, or relational value. What value proposition do you recommend as the path to sustainable competitive advantage?

2. Home Depot has decided that it wants to adopt a relational value proposition. What business model should Home Depot adopt to support this strategy? Include in your answer a discussion of whether a CRM or comprehensive solution management system would be more appropriate.

3. Discuss one company that you think is compromising its strategic success by focusing on too many different customers. What changes do you recommend?

4. What are the value-creation and value-capture mechanisms that Amazon uses in its business model? How consistent are these with its value proposition?

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5. What synergies can LinkedIn exploit? Discuss several opportunities that exist for the company now and as it might grow. Consider how synergies with Microsoft, its parent, affect your choices.

6. What company is threatened by morphing product boundaries? What strategies should it take to protect its value in the marketplace?

BEST DIGITAL PRACTICE

CVS: In the Healthcare Business

In 2014, CVS made headlines when it decided to ban tobacco products from stores. Despite projected annual revenue losses of up to $2 billion, CVS believed this was an important step in shifting consumers’ perceptions of who it is as a company. Rather than being identified as a national retail chain, CVS wanted its brand to be known for helping people lead healthier lives. With the healthcare industry placing a greater emphasis on improving outcomes, reducing chronic diseases, and controlling costs, CVS saw an opportunity to more effectively enter the health space and differentiate itself from competitors. CVS believed that removing tobacco products would cement its strategic commitment to health and wellness.

CVS continues to deliver on this goal today in several ways. To more accurately brand its position, the company has adjusted its corporate name to CVS Health. CEO Larry Merlo sees the name change as a way to double down on the organization’s mission. Management has also made significant investments in technological innovations that offer CVS several sources of sustainable competitive advantage:

■ CVS Pharmacy App: This serves as the hub of the consumer’s digital healthcare experience. App users can set medication reminders, scan a picture of their insurance card, and scan prescription labels to trigger auto-refills. Aimed at increasing compliance with prescriptions to medications, these tools ensure patients get and stay on the proper treatment.

■ IBM Partnership: CVS is working with IBM’s artificial intelligence software program, Watson, to prevent health crises before they happen. By analyzing medical utilization and patient behavior data to predict which customers are potentially at risk and may need medical interventions, CVS is able to serve its customers more effectively.

■ Telehealth Pilot: As site of care expands beyond the physician’s office, CVS is piloting telehealth capabilities that allow patients to interact with providers from their homes. Additionally, brick- and-mortar MinuteClinics may offer virtual consultation options in the near future.

CVS’ significant investment in digital solutions has led to usability among approximately one-third of its customers, and adoption is expected to continue to increase. Perhaps more importantly, it has helped the company reposition itself as a serious player in healthcare and to build a foundation for solid future growth.

Questions:

1. What type of value does CVS Health offer to the market? Was it necessary to ban tobacco from its stores to make this strategic move?

2. What strategic synergies should CVS Health exploit to improve its effectiveness in this market? (continued)

Chapter 6 Creating Advantage: Customer Value Leadership 119

BEST GLOBAL PRACTICE

Tetra Pak

In the developing country of Bangladesh, reliable electricity and a solid infrastructure for food distribution are hard to come by. As a result, families struggle to gain access to foundational nutrition products, like milk. Fortunately, Swedish company Tetra Pak developed a type of sterilized milk that fits the people of Bangladesh’s needs remarkably well—it does not need to be refrigerated and has a six to nine month shelf life. Despite an outstanding product, Tetra Pak foresaw two key adoption hurdles—disorganized local milk production and a lack of consumer awareness about the benefits of sterilized milk. To overcome these barriers, Tetra Pak decided to adjust its value proposition to emphasize a different benefit around which other stakeholders would rally—food safety.

Tetra Pak’s first initiative was to fix the broken dairy production and distribution system in Bangladesh. In partnership with the country’s largest food grower and processor, PRAN, Tetra Pak established regional Dairy Hubs aimed at strengthening the entire value chain. This involved helping farmers understand how to care for their cattle better to improve the health and sanitation of the milk. Once in place, the partnership put a more efficient distribution process in place that involved collecting milk from farms twice a day and transporting it in insulated trucks so that it remained fresh and sterile. Through these efforts, Tetra Pak was able to improve productivity and expand the dairy market. The company estimates that 64 percent of farmers can now rely on milk production as their primary income and that PRAN has increased production from 70,000 to 200,000 liters per day.

In parallel, Tetra Pak launched a series of consumer-education initiatives. The company’s milk secret campaign, targeting Bangladesh mothers, included key messages around sterilized milk being a safe, natural option. Newspaper advertisements further supported this messaging by portraying women

Sources: Margo Geogiadis, “How Clorox, Booking.com and CVS Health are Winning Micro-Moments,” Think with Google, June, 2016, https://www.thinkwithgoogle.com/articles/clorox-booking-com-cvs-health- winning-micro-moments.html

Mark Brohan, “Exclusive: Q&A with Brian Tilzer, Chief Digital Officer of CVS Health,” Mobile Strategies 360, May 9, 2016, https://www.mobilestrategies360.com/2016/05/09/exclusive-q-brian- tilzer-cvs-health

“Message from Larry Merlo, President and CEO,” http://www.cvshealth.com/thought-leadership/ message-from-larry-merlo-president-and-ceo

“CVS Caremark Announces Corporate Name Change to CVS Health to Reflect Broader Health Care Commitment,” September 3, 2014, https://www.cvshealth.com/newsroom/press-releases/cvs- caremark-announces-corporate-name-change-cvs-health-reflect-broader

“CVS Health to Partner with Direct-to-Consumer Telehealth Providers to Increase Access to Physician Care,” August 26, 2015, http://cvshealth.com/newsroom/press-releases/cvs-health-partner- direct-consumer-telehealth-providers-increase-access

Bruce Japsen, “CVS and IBM’s Watson Cloud Pursue Ways to Predict Patient Health,” Forbes, July 30, 2015, http://www.forbes.com/sites/brucejapsen/2015/07/30/cvs-and-ibms-watson-partner-to-predict- patient-health-needs/#3d5338668ac9

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as the key decision-maker within the family. Tetra Pak also held seminars for nutritionists, who they saw as potential ambassadors for the product. Finally, the company piloted a program that involved a single serving of Tetra Pak milk being included in the daily food packs of 10,000 garment factory workers across the country.

Tetra Pak’s value proposition of underscoring safety in its products and its willingness to build a business model that effectively facilitates this has been core to its growth. Today, the company serves people in more than 175 countries, and it has continued to expand its product line to support other unmet nutrition needs.

Questions:

1. Discuss how Tetra Pak aligned its value proposition and business model for competitive advantage.

2. If Tetra Pak were to become a relational value leader (like Redpath Sugar in this chapter), how would its strategy change?

Sources: “Educating Consumers in Bangladesh,” http://www.tetrapak.com/sustainability/food-protection/ consumer-education/educating-consumers-in-bangladesh

“From Cow to Consumer in Bangladesh,” http://www.tetrapak.com/sustainability/food-availability/ dairy-hubs/dairy-hubs-from-cow-to-consumer

Chapter 6 Creating Advantage: Customer Value Leadership 121

C H A P T E R S E V E N

Building and Managing Customer Relationships

“You’ve got to start with customer experience and work back toward the technology, not the other way around.” —Steve Jobs

“A journey is like marriage. The certain way to be wrong is to think you control it.” —John Steinbeck

“Use authentic experiences to inspire.” —Howard Schultz, Founder of Starbucks

Creating superior value is the first critical step in creating a sustainable competitive advantage. The customer’s journey to making the purchase decision, having a positive experience, and remaining loyal must also be managed by companies to convert that offering of value into company profits. This chapter examines the customer’s decision journey and its changing nature given the evolving digital landscape. Managing the customer’s experience throughout that journey is examined in detail, including measuring and improving the experience. Finally, customer loyalty is considered in depth with a focus on the nature of customer loyalty, building relationships, and defending those relationships.

THE CUSTOMER DECISION JOURNEY Core Elements of the Customer Decision Journey

The Customer Decision Journey is the set of stages customers move through as they evolve through a search process to being triggered to purchase and post-purchase states. The journey used to be a simple, linear, and unidirectional flow of activities in which brands were eliminated by the customer as she built knowledge from retailers or salespeople and was persuaded to make a purchase. Customers operating in today’s marketplace participate in a more complex, iterative, and

122

bi-directional journey. Understanding the journey opens up important opportunities for the company to influence it.

Figure 7.1 depicts the traditional decision journey that begins with awareness, followed by consideration, preference, purchase, loyalty, and culminating in advocacy. This is typically modeled as a funnel that starts wide with a large set of purchase options and then narrows as customers move through the journey, resulting in one brand that customers buy and are loyal to. The first step is awareness, which refers to the set of brands that a customer is aware of in a particular category. Following search and knowledge building, the customer forms a consi- deration set, which is the subset of brands the customer is open to buying. Then the customer forms preferences, or evaluative judgments that reflect the degree of liking and positive attitude, for one or more of these brands; disliked brands are removed from further consideration. Next is purchase, which reflects what the customer ultimately buys. If the customer has a positive experience with the purchase and post-purchase, she could become loyal to the brand. Another common framework employed in marketing is AIDA, which stands for Attention, Interest, Desire, and Action. AIDA and the traditional funnel are similar and have corresponding levels (Attention = Awareness, Interest = Consideration, Desire = Prefer- ence, and Action = Purchase).

This journey is depicted as a linear one-way push method of communication from companies to customers as they move through this process of eliminating brands at each stage.1

It also assumes that customers go in one direction—from awareness to advocacy. Several factors challenge this traditional funnel. New channels and technologies are changing

the ways in which companies and customers interact. Empowered and web-connected customers can search for almost unlimited information and offerings from small and large companies around the world as well as gain access to information from other customers, curators, and critics. The traditional funnel of one-way method of communication with brands talking at customers has shifted from a push of information to a pull of information as customers actively seek information at every step of the journey. Communication is now a two-way dialogue between companies and customers.

Attention AWARENESS

CONSIDERATION

PREFERENCE

PURCHASE

LOYALTY

ADVOCACY

Interest

Desire

Action

Figure 7.1 The Traditional Customer Decision Journey

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The Complex Nature of Today’s Customer Decision Journey

These changes produce a modified Customer Decision Journey where brands can enter and exit more easily. If a brand is not in the initial consideration set, it can enter later, expanding the pool of brands. McKinsey reports that customers in the skincare sector add 1.8 brands on average during what they call the “active consideration” process.2 The degree of expansion of the consideration set can vary greatly across different categories, customers, and occasions. Customers are more likely to consider additional brands along the way if the purchase is high involvement (important and/or expensive), if it’s an unfamiliar purchase in which initial knowledge is limited, or when companies have strong capabilities to trigger new searches even as the customer is moving through the process.

Figure 7.2 captures several of these unique features in the modified Customer Decision Journey. Each activity is described from the customer’s point of view starting with a trigger to purchase an item. Following the trigger, the pathway around the interior of the figure resembles a traditional journey path—information is gathered, a consideration set is formed, preference emerges, and a purchase is made. Customers can begin the process without gathering information, in which case they would simply create a consideration set from memory. In addition to these steps, however, there are modifications that occur in the journey, which are explained in detail in the following sections.

Trigger

Prior to an initial purchase, an event will trigger the Customer Decision Journey to begin. Triggers can be internal, such as a change in roles like moving from being a student to a working professional. Triggers can also be external, such as a neighbor buying a new car, a story on

Preference

Purchase

Consideration set

WOM/ Advocacy

Post- purchase

Information gathering

Complaining/ Neutral

Trigger

Learning loop

Loyalty loop

Traditional journey path

Journey modifications

Loyalty loop

Learning loop

Figure 7.2 A Modified Customer Decision Journey

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the radio about a new film, or chatter about a new company in a customer’s social media circle. A trigger is anything that a customer experiences that influences the desire to purchase something. Importantly, triggers do not end after the first information-gathering step. Triggers can occur throughout the Customer Decision Journey, as illustrated in Section 7.2. Those triggers can then influence which brands are being considered at each phase of the journey.

Information Gathering

In this stage, the customer obtains information either actively or passively. An active approach involves the customer pulling information from various sources while a passive approach occurs when companies or their advocates reach customers with information those customers have not necessarily sought out. This stage has been called the zero moment of truth. Exposure at this stage increases the chances a company will make it into the customer’s consideration set. As Jim Lecinski of Google describes, the zero moment of truth “is that moment when you grab your laptop, mobile phone or some other wired device and start learning about a product or service (or potential boyfriend) you’re thinking about trying or buying.”3 For example, Google Consumer Services reports that 66 percent of smartphone users turn to their phones to learn more about something they saw in a TV commercial.4

Consideration Set

After the customer receives information, she considers an initial set of brands. If she feels confident and informed in her choices, or if the purchase is time sensitive, she will move onto the next step. If the customer feels she still needs more information, she will stay in the information- gathering stage.

This continual information gathering can be thought of as a learning loop. In this mode, the customer is adding and subtracting brands to his or her consideration set based on the information processed. The loop can occur several times if the customer continues to gather information and revise her consideration set. It can also happen during the preference formation and purchase stages as the customer browses options she had not considered. Companies in a customer’s consideration set want to discourage more information gathering lest the customer find a better alternative! As a result, they take steps to preempt search, such as offering same day discounts for purchasing.

Preference

After creating a consideration set from information gathering, the preference stage occurs. Here the customer undertakes a final review of her short list and whittles it down to a smaller number and ultimately, a final decision. Preference is internal to the customer and not yet acted upon. If enough time passes or circumstances change before the customer acts on her preference, she could move backward and make a different choice and/or resume active search for new information.

Purchase

In this phase, one brand is ultimately selected as the best option based on the information gathered. This phase is also known as the first moment of truth, the key moment when shoppers are converted to users. It is important that all aspects of the offering—whether it is on the web, in a showroom, in a sales pitch, or in a supermarket—fit the brand promise. If not, purchase is unlikely and more information gathering will commence.

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Post-purchase

In the post-purchase phase, customers experience and engage with the brand they purchased. This is also known as the second moment of truth because it reflects the customer’s assessment of whether the promised value proposition has been delivered. If a customer has a positive experience, a relationship with the brand can begin. A positive preference for the brand is maintained and the customer is likely to repurchase it the next time the need for the purchase is triggered. This creates a loyalty loop between positive experiences and the customer’s purchase. While in this loop, the customer is less likely to search and will likely shun competitive companies’ attempts to gain his or her attention in the marketplace. This virtuous cycle is the brass ring for business. A satisfied customer can also become an advocate for the brand. This can occur through reviews, word-of-mouth, and other social media. Not all satisfied customers advocate and companies can take steps to encourage this important behavior in order to trigger new customer searches and to feed the information-gathering activities of customers actively searching for solutions.

A customer who is dissatisfied or neutral will not enter the loyalty loop. Instead, she will reconsider her choice the next time a similar product or service is needed, this time including post- purchase knowledge. A particularly dissatisfied customer will not consider the brand next time, and may even actively complain about the brand.

A SKINCARE CUSTOMER DECISION JOURNEY

You just ran out of face moisturizer and this triggered the Customer Decision Journey to begin. You have used Neutrogena in the past but worry you might be outgrowing the brand and the upcoming winter season triggers the idea that a thicker lotion might be helpful. Based on ads you have seen in magazines you read, you add Aveeno and Clearasil to your initial consideration set of Neutrogena. You gather information from Amazon, referring to friends’ recommendations, and thinking about your own perceptions of the brands based on television advertisements and other touchpoints in the information- gathering phase. Based on this, you remove Aveeno from your consideration set. You were just on Instagram and saw your favorite movie star post a photo with vibrant looking skin that she attributed to her favorite Clinique skincare product. You initially didn’t consider Clinique because it was slightly above your price point but this movie star has offered a promotional code on her page. You add Clinique to your consideration set during this learning loop. Later you go shopping in the drugstore and see a sample display of Jergens. You love the way it feels on your skin and add this brand into the consideration set as well. In this learning loop, you have gone from three brands to four brands even after removing Aveeno from your consideration set. Your behavior is consistent with McKinsey’s research which shows that the average number of brands in the initial consideration set for skincare is 1.5 but on average, 1.8 are added in active consideration.5

After comparing the products, you narrow it down to Clinique and Neutrogena in the preference phase. You ultimately decide to purchase Clinique based on the aspirational nature of the brand and the great discount you received. In the post-purchase, you use the product and notice that although the lotion makes your skin glow like the celebrity’s skin you noticed earlier, you read an online post by a celebrity about lotions having parabens, which you have been trying to avoid in all body care products. Despite searching you can’t find out if Clinique has eliminated parabens from its products. You also

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Managing the Customer Decision Journey

All stages of the Customer Decision Journey involve a dialogue between customers pulling information and companies pushing information, so companies must ensure they are available at key moments of communication. Two-thirds of the touchpoints during evaluation are customer- driven pull activities, like online reviews, word-of-mouth recommendations, and in-store activa- tions.7 If a customer posts a question or complaint on Facebook, for example, the company is expected to answer quickly and publicly through the same channel. According to research done by HubSpot, 11 percent of customers expect a response in minutes, 40 percent expect one in hours, and 23 percent in days. The bottom line is that conversations are happening on social media and for a brand to be well positioned, it must be attentive to that conversation. Brands should think of interactions with customers as an ongoing relationship.8

Companies can also use the Customer Decision Journey to identify where they are most likely to lose potential customers. The area of focus will vary by company.

Mercedes-Benz is a well-known brand and hence a customer may easily recall the name or be interested in an ad she sees for one of their vehicles. However, once a customer starts to gather information during the information loop, she might realize that buying a Mercedes is out of her means. Mercedes should therefore focus on converting those who are aware and consider their brand but who do not prefer it because of price. This might involve offering a lower-priced entry-level line of vehicles that is more accessible to the masses.

Hyundai, on the other hand, is an economy brand and it trails Honda, Nissan, and Toyota in brand value.9 During the economic crisis in 2009, it offered the Hyundai Assurance Program. It allowed customers to return vehicles if they lost their income. This likely brought Hyundai into the initial consideration set of car buyers since the risk associated with buying a car was lowered. Despite the tough economic times, Hyundai’s market share grew. Hyundai diagnosed its Customer Decision Journey and tailored its message to be impactful in moments where it knew it was weaker than its competitors, and it paid off.10

wonder whether it is really worth the extra amount you paid despite your promotional code. As you embark on the next skincare journey, your Clinique experience, together with the fact that you no longer have the promotional code, sways you to return to Neutrogena. The cycle continues, again and again. This illustrates that the moment after purchase is just as important as the moment prior. Could Clinique do something to sway you to purchase this product at full price and initiate a loyalty loop? Brands must strive for loyalty so that they can create brand advocates. Court et al. describe two types of brand loyalists: active and passive. An active loyalist is someone who is vocal about their preferences, often recommending the brands to friends and family. They write product reviews and post on social media about positive (and negative) experiences. A passive loyalist is someone who might not even recognize their loyalty to a brand. They stick with a brand sometimes because of laziness or confusion due to the onslaught of choices that make it simply more convenient to continue with one brand.6 These customers are more at risk of being lost to other brands due to their receptiveness to other brands’ messages.

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How does a company know where its customer journey is weak? This process usually starts with the market research or consumer insights team assessing the journey, answering questions such as which customers are progressing and which are getting stuck in the journey, what are the barriers to proceeding along the journey, and what factors facilitate progression. Once areas of weakness are identified, more tailored research can be done at whatever stage of the journey needs analysis and improvement.

Exactly how this research is performed depends on the nature of the journey, which is likely to vary considerably depending on the industry and the offering including methods covered in Chapter 2. However, several common metrics for assessing the different stages of the Customer Decision Journey are useful in a wide range of firms. For example, companies measure the types and levels of information searched, including where customers search and click—through rates. Aided and unaided awareness can also be measured in the pre-purchase phase, whereas advocacy scores and likelihood of repurchase are measured post-purchase. Once a set of valid measures are selected, it is important to collect these measures regularly to establish a baseline. Then firms can identify recurring areas of weakness, when unexpected changes occur, and establish the effect of new campaigns or initiatives. For example, if research uncovers that a brand is weak at the consideration set stage, such as a private college that low income students are aware of, but do not seriously consider because it seems too expensive, the college might consider advertising its prominent financial aid packages and research whether it is better to advertise to students, parents, or high school counselors.

MANAGING CUSTOMER EXPERIENCE The Different Meanings of Customer Experience

Customer experience is a multidimensional concept that captures a customer’s cognitive, emo- tional, behavioral, sensorial, and social responses to a firm’s offerings and activities across the decision journey.11 Every touchpoint a company has with a customer contributes to the customer’s experience, including the website used to gain initial product or service information, the cleanliness of restrooms, product packaging, and the experience of using products (whether it is in your customer’s kitchen or used as a component in your customer’s factory). How these experiences are combined to form an overall impression of customer experience will vary by customer, but companies should have a strong understanding of what matters most to their target customers.

Zappos, an online shoe retailer, has grown to over $1 billion in revenue since its inception over 10 years ago. The idea for the company arose for founder Nick Swinmurn when he experienced the frustration of searching for a pair of shoes. The problem was that local retailers, from whom most consumers bought their shoes, had limited inventories due to space and mostly carried products for the mass market. As an online retailer without the same inventory limitations, Zappos is able to offer a variety of widths and sizes. Zappos focused its resources on establishing a web presence and optimizing its site to help move customers efficiently through the journey. On top of an already excellent site, Zappos also has the competency to build a new landing page for something specific it notices customers are searching for. For example, if customers search for “size 18 shoes” and no page exists, they will build one that only features size 18 shoes—a fact that is greatly appreciated by its customers. Monitoring and analyzing search activities that are occurring during the Customer Decision Journey has enabled Zappos to successfully usher customers through to purchase.12

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Customer experience used to be relegated to the concerns of service businesses. For example, Singapore Airlines provides the basic service of a flight but also a superior and unique customer experience, offering business travelers great food, innovative technology, new planes, and the ability to anticipate other travel needs.13 However, successful product companies are now differentiating on experiences as well.14 At flagship Niketown stores, the customer has the opportunity to interact with Nike in a unique, fun, and more intimate way, creating value and building the brand well beyond immediate sales. Sephora similarly curates an experience to complement its core product offerings, by allowing women to try products under glamorous lighting, request samples, and get free advice from experts. Other brands straddle the line between product and service, such as Eataly with its traditional grocery offerings alongside restaurant service and cooking classes—all with an overarching experience of Italian culture and the celebration of food.

The Strategic Importance of Customer Experience

A great customer experience can help companies differentiate from the competition, resist imitation attempts, add value to core products and services, and build a memorable brand. As a differentiation point, a great customer experience can take an otherwise commoditized product and give customers a reason to choose it over others. For example, the customer service experience at Zappos differentiates it from not only other shoe competitors but also generic e-commerce sites like Amazon. Imitation becomes difficult when firms take a holistic approach to creating a customer experience that cannot be boiled down to one or two activities that are fairly easy for competitors to observe and copy. Brands like Shoebuy have tried to imitate Zappos, but Zappos’s entire activity system and commitment to putting the customer first has kept it ahead.

Additionally, the added value of a great customer experience to a core product should not be underestimated. Customers are often willing to pay more if they receive superior touchpoint experiences such as customer service, social media interaction, post-purchase check-ins, or easy returns. Zappos’s unique customer experience are shared on social media and in word-of-mouth discussions where reviews and ratings spread like wildfire. Finally, a great customer experience can make a brand more memorable and thus inspire loyalty. Anyone who has shopped with Zappos will tell you it is certainly a memorable brand!

Factors Affecting Customer Experience

To understand, measure, and manage customer experience, it is useful to break the Customer Decision Journey into pre-purchase, purchase, and post-purchase experiences.15 Pre-purchase experience involves touchpoints during information gathering, consideration, and preference formation stages. The purchase experience encompasses all aspects of the actual exchange of money for the offering between the customer and the company. Think about how the purchase process differs for an Amazon customer purchasing online versus a Walmart customer purchasing from a brick-and-mortar store. Post-purchase experiences include the customer’s experience after purchase that relate to the company. This might include how well the product performs, post- purchase engagement with the brand online, interactions for service requests, returns, and even treatment of customer purchase information.

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During any of these stages, many different factors will influence the customer’s experience. To understand and appropriately manage the customer experience, a brand must recognize, monitor, and influence all of these factors. For example, to understand the iPhone experience, Apple focuses on its product design and packaging, the performance and service of wireless carriers, and customers’ expectations and needs, among many other factors. Some of these are factors controlled by the brand or its partners, and some are controlled by the customer or outside forces.

HOW GE POWER SYSTEMS MANAGES CUSTOMER EXPERIENCES16

In large-scale business-to-business settings, the touchpoints that shape the customer’s experience along the journey can be very complex. GE Power Systems, which provides products and services to clients in the energy industry, is a prime example of this complexity and of how its effective management can contribute to a unified customer experience and brand image. A single purchase for GE Power Systems can involve years of relationship building, sales efforts, stakeholder engagement, and contract negotiations in order to make the sale; months of installation and client training to deliver the product or service; and many years of ongoing service and engagement during a power plant’s decades-long life cycle.

Managing this lengthy and complex process to achieve a strong customer experience is no small feat for GE. It is a tall order with high stakes—a single client’s satisfaction can translate to hundreds of millions of dollars in revenue. The concentration of buying power in this B2B market creates unique challenges. To meet these challenges, GE Power Systems grounds its sales and marketing efforts in two key principles: trusted long-term relationships and cutting-edge technical sophistication.

Building a long-term trusting relationship by managing experiences across the journey takes time and effort. GE Power Systems uses the following strategies. It builds and reinforces relation- ships outside of the sales process by hosting “State of the Art” conferences to teach potential customers about the energy industry’s latest systems, services, and products. This enables GE to take an active role in the customer journey from the very earliest stages, ensuring its place in these customers’ consideration sets when the time comes. Building on these initial touchpoints, GE structures its sales organization and practices around the goal of strong relationships. This includes hiring responsive salespeople who work to foster a trusting relationship with the customer over time and facilitating a partnership between GE and the customer. This relationship-based strategy also includes structural aspects, like having an Account Executive that is local to each client who can act as a consistent face for the brand, build long-term personal relationships, and have regular formal and informal contact with the customer over time. This relationship enables the Account Executive to continuously advise the customer and respond to feedback during the sales and delivery processes. GE Power Systems also reinforces its customer relationships through a portfolio of offerings that enable smaller ongoing sales and interactions. Aside from large-scale offerings for power plants, GE provides customers with smaller offerings like minor upgrades and emergency replacement parts. This helps GE maintain a steady stream of both communication and revenue with its customers during the post-purchase phase.

In addition to building trusted long-term relationships, GE Power Systems also works to reinforce its reputation for technical sophistication in all aspects of journey. Doing so benefits the brand in three critical ways. First and most directly, technical superiority enables the brand to maintain a strong offering portfolio and compete on functional performance. When customers are committing to massive

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Touchpoints Controlled by the Brand or Its Partners

Customer experience is inherently personal and subjective, existing only in the mind of the buyer.17 Although no two customers will have exactly the same experience, their personal experiences are shaped by a variety of “clues” that firms and partners may be able to shape or control. The most obvious of these are functional clues related to the core features of a product or service. For example, the taste of a hamburger at a restaurant is a functional clue that McDonald’s controls, and the reliability of a jet engine is a functional attribute that Boeing controls.

Humanic clues come from the behavior and appearance of other individuals involved in the customer journey, such as the friendly attitude of a Costco greeter or the perceived confidence and expertise of a USAA salesperson.18 A hurried or distracted associate has the potential to affect overall customer perception of the quality of the product or service, while someone who is appropriately dressed, knowledgeable, approaches in a timely manner, and makes eye contact sends a different signal. Even the often-overlooked sense of touch can play a powerful role in retail environments, where a salesperson’s appropriate touch could signal friendliness and build trust.19

Mechanic clues come from the physical, sensory experiences involved in the customer journey, such as the ambient light, sounds, and smells in a retail store or showroom. Manipulating the mechanic clues in the customer’s environment can be a powerful tool for companies. By carefully designing the music, lighting, colors, textures, and ambient scent of a store, a retailer can make it more likely that customers will make a purchase, will be happy with their products, and will buy again in the future.20 Brands have found great success by taking a holistic approach to customers’ sensory experience, such as Westin’s Heavenly Bed and the thoughtful design of the hotel brand’s sheets, soaps, showerheads, and even the ambient scents of the lobby.

investments that will impact them for decades, they need to be very confident that the product or service is at the cutting edge. Second, technical superiority lets GE Power Systems become their customers’ go-to source for smaller day-to-day purchases or incremental upgrades throughout the larger life cycle of a power plant. This not only wins the brand a variety of ongoing sales, but it also creates an opportunity to maintain and strengthen the customer relationship. Third, technical superiority makes the brand a trusted source for knowledge and advice, through formal channels like “State of the Art” conference presentations as well as informal interactions with individual clients. Although these educational interactions do not always create revenue directly, they can be immensely helpful for staying top-of-mind for current customers and also for building new connections with potential future customers.

OFFICE DEPOT’S CUSTOMER EXPERIENCE TURNAROUND

The CEO of Office Depot was puzzled about the fact that sales were declining, while the customer service scores from a third-party mystery shopper were extremely high. To find out why, he made unannounced visits to some 70 stores in 15 states. He observed and talked to customers in the aisles. Customers leaving the store, especially if their shopping carts were empty or nearly so, were asked why

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Touchpoints Controlled by the Customer

There are many other factors involved in the customer experience that neither the brand nor its partners can control. Some of these are controlled by customers, who are fundamentally co-creators of the experience. Perhaps the most critical thing customers bring to the table is their expectations. These expectations can be captured in two general questions.

First, what is the standard for the brand’s performance? A luxury boutique will be judged much more harshly than a big-box retailer for the same objective level of service. On the other hand, even a poor service performance may not bother customers of a discount airline where expectations are low.22 Firms should strive to create expectations that are high enough to attract customers’ interest but low enough to be met or, preferably, exceeded.

Second, what dimensions do customers expect the firm to do well on, and what dimensions are they likely to ignore? If expectations are stylish clothing and fast service, improving price or store cleanliness may not matter. Brands should focus their resources on improvements that match customers’ priorities. For example, among Internet retailers, consumer preference surveys show that free shipping and an easy return process are important across demographics.23

At the same time, brands can also work to sway these priorities by tailoring communications to draw attention to different features or benefits, or by segmenting customers to target those whose priorities match the firm’s.

Aside from their expectations and preferences, customers can also act as co-creators in more concrete ways. For example, Lego customers use the brand’s products to come up with their own unique creations, and Lego in turn often makes new boxed sets based on user-designed creations. Similarly, Starbucks used its MyStarbucksIdea.com website to engage customers around improv- ing the customer experience. This type of deliberate co-creation can be especially useful when there is a lot of uncertainty about customer preferences, when the focus is on business customers who are experts in an area, or when a small firm with a limited budget is trying to innovate.24

Touchpoints Controlled by Social/External Sources

Other factors that shape customer experience outside of the brand’s control may be outside of the customer’s control as well. For example, an airline passenger’s experience might be affected by a friendly conversation with another passenger or by a restless child kicking the back of

they did not buy more. The mystery shopping scores were correct because they were based on cleanliness of the store, including the bathrooms, and whether the shelves were full. The stores got high marks on these dimensions. But how was the customer experience buying products in the store? The answers were not good. The Associates did not focus on the customers; in one case, they actually argued about whether an item was carried by the store. The stores were large and complex, so items were hard to find. The experience was not as efficient as desired; customers just wanted to get in and out. Customers wanted some items not offered, such as shipping and computer repair.

As a result of these insights, stores were redesigned so they were easier to shop in and some were downsized. Operations were made more efficient so that Associates had more time to sell. The interaction pattern was changed. For example, questions such as, “What brings you in today?” and “How are you planning to use the product?” were added to help stimulate a dialogue between the customer and the Associate. Finally, Associates were encouraged to offer recommendations and to systematically cross-sell complementary items.21

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her seat. Similarly, a customer’s experience with a new mobile device might be affected by reviews or advice posted by other users in an online forum. Finally, experience can be determined by environmental factors, such as those occurring in the political and economic environment. A newly built and financed home may be experienced as less valuable if variable interest rates climb during an inflationary period.

Measuring Customer Experience

Given that customer experience is internal and subjective, it can be very difficult to measure. Methods and tools can vary depending on factors such as industry or end customer, but it is worth highlighting several approaches.

Service Blueprinting

Service blueprinting provides an overview of the customer experience. Service blueprinting is a type of experience audit that establishes when a service starts and stops for a customer and tries to visually show the types of customer actions, visible employee actions, backstage employee actions, support processes, and physical evidence that play a role in that service experience.25 For example, a bank could examine the customer experience of opening up a checking account and all of the firm, partner, social, and customer activities that play or should play a role in the quality of that experience. What part of the performance works well or not so well and what actions can the firm take to improve the quality of the experience?

SERVQUAL

Customer satisfaction surveys are a common way to measure various aspects of the customer experience. For service industries, one popular tool called SERVQUAL, short for Service Quality, measures key factors in service satisfaction, including reliability (ability to perform the promised service dependably and accurately), assurance (employees’ knowledge and courtesy and their ability to inspire trust and confidence), tangibles (appearance of physical facilities, equipment, personnel, and communication materials), empathy (caring, individualized attention given to customers), and responsiveness (willingness to help customers and provide prompt service).26

Customers rate what they would expect from excellent firms in the sector as a point of reference and then rank perceptions of the specific company in question. This allows companies to measure customer satisfaction, which is commonly viewed as the difference between expectations and perceptions.27

For example, SERVQUAL could be used by a new restaurant to gauge whether common customer service expectations are being met. In that scenario, the managers would most likely be interested in the appearance of wait staff or reliability of taste. While there are significant cultural differences in what factors are most important to overall satisfaction, in the U.S., reliability is generally the most important factor to customers.28

Mobile Technology

Historically, there has been a delay between a customer experiencing a touchpoint and evaluating it, but mobile technology makes it possible for firms to get real-time assessments of how customers feel. Firms can assess customer reaction to all exposures to a brand using real-time experience

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tracking (RET). In RET, participating customers are asked to text a 4-character text message to the firm each time they come across the brand in the course of their daily lives. In the text message, they indicate their level of positivity toward the touchpoint—the ad, word of mouth, the experience of working with an employee, etc. Since the survey is very short and available on the customer’s phone, the firm can get real-time customer responses to its actions.29 Firms can also use location analytics—programs that track and analyze where a product or a person using a mobile device is geographically—to answer questions about traffic flow in a business, wait time in lines, and when and where their customers use their products. Location analytics can tell rental car firms where their cars are at any time, technology firms whether a user is using a computer at home or work, and retailers that customers are avoiding the back wall of their shoe department. These new technologies are exciting for firms, but also raise concerns about customer privacy that must be considered when using them.30

Attribution Models

Ultimately firms want to know which touchpoints are influencing sales. Current models examine this question online, but new models need to be developed for offline customer behavior or for the common crossover behaviors of showrooming (search offline, buy online) and webrooming (search online, buy offline). For example, companies could examine how distinct touchpoints (brand, customer, partner, and social/external) contribute to the customer experience in different phases of the journey. Importantly, companies should also consider the extent to which the touchpoints are integrated around the brand image that the company wishes to emphasize. Such integration becomes very challenging when the company relies on partners or customers to drive some of the touchpoints, such as when Singapore Airlines’ customers reach its trans-Pacific flights through more mundane experiences offered by U.S. partners. When this occurs, a clear delineation between the experiences is useful to separate the Singapore Airlines’ brand from its partners.

Customer Journey Analysis

Across all of these methods of measuring the customer experience, it is critical to keep in mind the holistic journey instead of just particular touchpoints. Mapping the journey from beginning to end is essential to understanding what is happening to the customer is most important to the decision to purchase or repurchase. However, adding together measures for a series of touchpoints can often lead marketers to miss the big picture.31 For example, if the company resolves the customer’s specific complaints or sends a replacement part each time the customer calls or emails, the customer may rate those individual interactions highly. This might lead the company to overlook the fact that, after several months and a series of product failures, the customer is unhappy and unsatisfied to be having those interactions at all!

Other issues can arise from failing to understand the weight that each touchpoint has in the customer’s total satisfaction—a fact that can be determined in market research. The weighting of different parts of the journey will vary across categories and across different types of customers. For example, consider how differently vacationers versus business travelers value on-time departure and in-flight Wi-Fi. However, there are two rules of thumb that companies can keep in mind. First, customers enjoy experiences that improve over time more than ones that plateau or get worse over time, even if the sum of their satisfaction at each touchpoint is the same.

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Think of a concert or a boxing match, where the less-popular openers come before the headliner or the main event—the same events in reverse order could lead to a very dissatisfied crowd. Second, customers’ evaluations and memories of an experience are subject to a peak-end bias. Overall satisfaction is affected most by the peak of that experience—the most intensely enjoyable or the most painful moment along the way—and the end of the experience, which could be within a stage or across the entire journey.32 For example, overall impressions of a positive experience might be damaged if something positive but lackluster is added at the end, compared to if it had ended earlier on a high note.

Improving Customer Experience

Maintain a Customer Focus

Experience management without an orientation toward meeting customer needs is unlikely to produce satisfied customers. Disney uses an orientation, referred to internally as “Traditions,” that emphasizes customer service. Four key values underlie this employee training. For each, Disney sets a standard of behavior, including—safety (e.g., I practice safe behaviors in every- thing I do), courtesy (e.g., I go above and beyond to exceed Guest expectations), show (e.g., I stay in character and perform my role in the show; I ensure my area is show-ready), and efficiency (I perform my role efficiently so Guests get the most out of their visit). For Disney, it’s clear that the focus of experience management is the customer, not the experience.33

Adopt a Touchpoint Evaluation and Improvement Process

Five steps are recommended in this process.34

Create an inventory of touchpoints by mapping the customer journey. This should include how the journey is experienced by different target markets.

Provide an internal evaluation of all of the touchpoints to determine which are managed well and which are deficient. A key question is how well the touchpoint experience is being delivered with respect to internal expectations, external expectation, or the competition. This should be done for each segment targeted by the company. At Jiffy Lube, for example, the shops were set up by men for men yet it turns out that 70 percent of the cars that came in for service were driven by women.35 Women did not want to see dirty restrooms and men’s magazines on the tables. Nor did they want to be asked to take a sleeping baby out of the car.

Determine which touchpoints have the greatest impact on customers’ decision and experiences.

Prioritize touchpoints in the customer experience—the key is to focus on touchpoints that are most important to developing delivering customer value.

Develop a touchpoint action plan. For the priority touchpoints, the goals of the touchpoint and who is responsible should be clearly identified. Furthermore, a development and execution plan to improve the touchpoint experience that includes performance metrics will be needed. This plan should include consideration of touchpoints that are missing from the current journey but that may improve it in important ways.

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Bridge the Gap between Customer Expectations and Perceptions36

There are many reasons why customers’ expectations and perceptions do not align. First, a company may not have enough information about what customers expect. This may be due to a weak customer research orientation or lack of upward communication between contact employees and managers. Second, even if expectations are understood, the company may do a poor job translating them into a well-designed set of experiences. Unfortunately, great execution on a bad design will not offer customers what they want. A third problem arises when the company does not deliver on a strong experience design. This can occur because of poor HR policies, customers not fulfilling roles or following directions, or problems with service intermediaries performing key roles. Finally, companies run into problems when they do not effectively communicate to customers what they should expect from the experience. There are many reasons for this failure, including poorly coordinated marketing communications, overpromising to attract customers, or inappropriate pricing that inflates expectations.

McKinsey has created a framework for addressing misalignment between customer expect- ations and outcomes that involves the following six steps:37

1. Identify the nature of the journeys customers take—from the customer’s point of view. 2. Understand how customers navigate across the touchpoints as they move through

the journey.

3. Anticipate the customer’s needs, expectations, and desires during each part of the journey.

4. Build an understanding of what is working and what is not. 5. Set priorities for the most important gaps and opportunities to improve the journey. 6. Fix root-cause issues and redesign journeys for a better end-to-end experience.

Leverage Technology to Manage Customer Experiences

Technology enables management and customization of each person’s experience, even at a large scale. Mobile technology lets firms interact with customers in real-time as they search at targeted points in their journeys. This can be used for targeting coupons and advertisements at key decision points, or for getting feedback from customers in real-time, to name just a couple of applications. Online environments create new challenges along with these opportunities. The firm has less control compared to a sales visit or in a retail store—an online user, especially a mobile one, could be anywhere! Online marketing is also limited in its sensory breadth, offering only visual and audio information—although this could change in the future. Marketers should be aware of how this might affect their brand in particular, whether they are trying to sell clothing that shoppers can’t feel or food that shoppers can’t smell.

The financial services industry, though not traditionally known for positive customer expe- riences, provides a good example of using technology to address service gaps. Long waits at the ATM, elevator music while on hold with the credit card company, and the paperwork associated with a mortgage are not things people enjoy. However, advances in financial technology (“fintech”) have enabled the industry to begin to improve its reputation. Mobile apps, 24-hour online chat support, and transferring money through a digital assistant are all ways the banking world is improving to create a more holistically satisfactory experience and build brand loyalty and customer retention in a competitive industry.38

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Manage the Extended Delivery Network

An expansive approach to managing the customer experience recognizes that many important factors are outside of the firm’s direct control. There are three basic forms that this broader experience ecosystem, known as the delivery network, can take. First, the customer-coordinated network, where firms provide individual products or services that the customer selects and pulls together into a unified experience. For example, a couple’s night out at dinner could involve booking reservations in an online service, getting childcare from a neighbor, hiring a taxi for transportation, and finally enjoying a meal at their favorite restaurant. This type of network involves a lot of uncertainty about the quality of the experience because each service provider controls just part of the experience. Second, the service-coordinator-based network, allows the customer to outsource coordination efforts to a professional such as a travel agent. This reduces the burden placed on the customer and also allows the coordinating firm to gain valuable insights into the holistic experience—insights that may be used to improve the experience or may be shared with other firms in the network to do so. Third, the firm-coordinated network places the burden of coordination on one of the firms already involved in the network, such as when a hotel concierge coordinates taxis or local restaurant reservations for hotel guests. In this type of network, the responsible firm incurs extra costs and takes the blame for any failures in the network, but it secures greater control, more credit from the customer, and valuable customer insights (due to the fact that is it present) in return.

Channel Challenges

Different channels (catalogs, direct mail, online, etc.) provide different benefits and costs for both marketers and customers. People may research in one channel and purchase in another. Showrooming (searching offline and purchasing online), and its converse webrooming (searching online and purchasing offline), complicate the online/offline relationship and create a complex interplay of customer experience.39 Although marketers are sometimes frustrated by this channel crossover behavior, it offers useful insights for improving multichannel strategy. For example, webrooming might be a sign that information presentation isn’t as clear or efficient in-store as online, or it could be a sign that the online channel needs to better lock-in to convert browsing customers. On the other hand, showrooming might be a sign that the online channel lacks key information that shoppers rely on, particularly for highly multisensory products like clothing or home decor products. Marketers can embrace the potential synergies of letting customers leverage the different strengths of each channel, or they can respond by shoring up weaknesses to improve the single-channel experience (e.g., providing clear, multi-attribute comparisons of several laptop models at a retail store). However, it is important to recognize that channels’ relative strengths and weaknesses are sometimes unavoidable. Mobile shopping, for example, allows for supplemental search in-store, which desktop browsing can never match, but the mobile interface is also limited in how much information can be examined compared to a computer monitor. Mobile also creates an opportunity for firm-initiated, location-based touchpoints through tailored advertisements or promotional offers delivered in real time.

TOWARD LONG-TERM CUSTOMER RELATIONSHIPS In the late 1990s, Schwab had passed Merrill Lynch to become the stock-brokerage industry leader (by market capitalization).40 A darling of Wall Street, Schwab seemed unstoppable. Within a few years, however, the firm was faltering. New products were not regarded well and market

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capitalization plummeted. What went wrong? Analysts argue that Schwab failed to hold onto its position as a price value leader—a low-cost, no-frills brokerage firm. Account fees rose and client service declined. Schwab had dropped below parity on the basic relational behaviors that even price-conscious investors require. Customers felt abandoned and Schwab ranked 27th among 38 financial services firms on the degree to which the firm was perceived to be a “customer advocate.”

To turn the firm around, new leadership decided to focus the whole firm on customer loyalty. Beginning in 2006, using a campaign called “Through Clients’ Eyes,” Schwab took several steps to regain customer trust. It reallocated resources so that by 2008, 84 percent of retail staff was client-serving, up from 60 percent in 2004. This resulted in a reduction in wait times for callers from 2 minutes to 19 seconds. Schwab also adopted the policy of giving the customer a “direct call- back number” if a problem was not resolved with one call. It began measuring client satisfaction, and clients with a low satisfaction score received a personal call from a manager to investigate problems. Schwab made pricing for CDs, money market funds, margins, and home loans transparent to the customer. The company changed its internal reward system to focus on client satisfaction—not on whether the client bought products with certain types of fees. Finally, the firm identified a set of principles for how managers should act on behalf of the customer.

The change in customers’ ratings of agreement related to Schwab’s performance was nothing short of astonishing: “Honoring promises and guarantees” (40–91 percent increase), “Willing and able to assist me” (68–88 percent increase), “Always on my side” (57–86 percent increase), and facilitating the “Ease of comparing prices” (42–67 percent increase). The number of customers rating the firm high on the net promoter score—willingness to recommend to friends and family—rose from 35 percent to 50 percent. The number of customers willing to consider Schwab for two or more additional products increased from 49 percent to 71 percent. Sales and profits followed.41 These changes have continued to work to Schwab’s advantage as it was ranked highest in overall investor satisfaction by J.D. Power in 2016.42

Charles Schwab understood the importance of moving the customer from a focus on the single transaction or purchase to a sense of loyalty to the company. As a contrast, consider the situation with British banks during the 1990s.43 Only 50 percent of retail banking customers were “very satisfied” with their bank; a level of satisfaction lower than any other retail sector. Yet only one in thirty British customers switched banks in a given year. Among the reasons for the apparent stability were inertia, high switching costs, and lack of perceived differences among the banks. This circumstance demonstrates that duration and customer loyalty are not the same thing.

So what distinguishes a long sequence of purchases from true loyalty? Here it is helpful to distinguish behavioral loyalty from attitudinal loyalty. Behavioral loyalty is how frequently the customer purchases from the company when the need arises. Alone, behavioral loyalty produces revenues for the company. But the revenue stream is at risk! Household customers may be buying out of habit, because of family histories, or because of a lack of a convenient alternative—not out of attachment. Business customers may be buying because of automatic reordering systems.

Attitudinal loyalty, on the other hand, reflects a deeper trust or commitment to the company and what it offers. This type of loyalty is revealed in positive thoughts, feelings of affinity, or attachment to the firm and/or its specific products or services. This trust makes customers more likely to rely on the firm for important activities, such as food for their children or key components for their most important products. Trust is even more vital in service settings when the customer must trust the firm to provide clean sheets, get the package there on time, or fix an ailment on the operating table, for example.

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For many price value leaders, trust is based on a promise of low prices. Walmart customers trust that the company will offer low prices—always! Walmart’s tag-line, “Save Money, Live Better” also promises customers that the savings will give them an opportunity to lead better lives. For performance value leaders, customers trust that the company will improve technologies, designs, quality, or contribute to a social mission, and they are loyal to the company’s stream of new products. Customers count on performance leaders to make their lives more interesting or healthier or to make their businesses more profitable.

The Loyalty Funnel44

A simplified Customer Decision Journey is often captured in a company’s purchase funnel used to organize, measure, and manage customers throughout the purchase process. The management of this funnel and associated metrics is examined in detail in Chapter 8. However, it is important to appreciate that purchase is not synonymous with customer loyalty. Loyalty is essential to the long-term value of a customer. To build loyalty, companies must take extra steps to ensure the customer progresses to this state.

Satisfy the Customer with an Offering

For a company to have any chance at loyalty with a customer, its product or service must meet customer expectations after purchase. This is often called the “second moment of truth” in the company’s interaction with customers. If the offering fails here, the prospects for loyalty are bleak. Offerings that perform as promised or exceed expectations breed satisfied customers. Of course, to meet this requirement, companies must identify the proof points used by the customer to make their judgment. For example, if the number of minutes to de-plane is the indicator customers use to judge service quality, airlines should focus on this aspect of operations rather than check-in or baggage handling.

Connect the Product or Service Performance to Deeper Customer Outcomes

To build loyalty, companies should work to link the product or service to important outcomes valued by the customer. These “jobs to be done” are why the customer “hires” the product in the first place and they are often the differentiating factor that helps the product stand out. Whether the goal is personal, such as being a good grandparent, or commercial, such as becoming a market leader in a category, these outcomes should be communicated and associated with the brand.

Give the Company Credit

Customers must attribute the outcomes they experience to the offering—they must give credit to Special K for the weight they have lost, or to Rogaine for the hair they have gained. This attribution should not be left up to chance. For example, Chevron Energy Solutions, a division of Chevron that designs and implements energy efficiency and renewable energy projects charges clients nothing upfront. It gets paid when customers save on energy bills, which ensures that customers link their savings to Chevron’s green designs.

Remember the Need and Offering

The objective at this point is to ensure that customers stay aware of their needs and keep the company or its brands at the forefront of their consideration set. Advertising and

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sales efforts can keep information fresh and relevant so their brand is top-of-mind to the consumer.

Build Habit

Loyalty can be converted into a habit and further cement bonds between the customer and the product. Several strategies can help convert a product or service into a habit. Loyalty programs, for one, remind customers and give them the nudge they need to make repeated purchases. A second strategy is to promote high-volume purchases. When customers buy a full case of wine at Costco they not only consume more, but spend less time shopping at other wine stores between once-a-month Costco visits. A third option is to get the customer to make investments. For B2C customers, this might involve asking them to make a financial commitment to diet such as Weight Watchers does; for B2B customers, customers could be asked to make small investments such as downloading software or building a specialized ramp to facilitate delivery of the company’s products, these investments are sunk costs and a reminder of the customer’s commitment to the company. As such, they can prompt the customer to repeat behavior.

Raise Customer Switching Costs

Related, firms can make it very difficult for customers to walk away from a relationship by raising switching costs. The classic example is frequent flyer miles. These lock-in customers to a carrier because of the escalating benefits tied to different levels of miles flown and because miles expire after a certain period of time.

Lock-in can also occur because customers do not want to incur the costs of learning to interact with a new firm. Once customers accumulate enough experience with a retail store where they can easily locate items or talk to a favorite salesperson that knows their preferences, or a website where they have loaded their preferences, they are resistant to change. Challengers need to reduce the costs of trial or offer large incentives to induce trial in order to offset these learning barriers.

Deepen Commitment

As the customer builds positive experiences with the company, deep affection, trust, and a sense of commitment to the relationship will follow. A committed customer relationship shares some qualities of a good marriage. Success in the long-run depends on trust, which is built with transparency and frequent, open communications. Trusted partners are transparent and honest. In business-to-business relationships, a dashboard of mutually agreed-upon metrics between the firm and its customer facilitates building and maintaining trust so that surprises can be avoided.

Sales or service personnel often develop very strong relationships with individual custom- ers. These individual relationships are an important part of building and maintaining trust, but can be risky because employee turnover makes customer defection more likely. This problem is common among professional services and financial services firms; American Express reports that 30 percent of its customers follow their representatives to a new firm.45

Furthermore, when employees leave the firm, they often do not transfer what they have learned to firm databases. New salespeople must then re-learn all that the departing employee has gathered over the years. This takes time and leads to errors and costs for the customer.

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Defend the Customer Relationship

Given their financial importance to the company, customer relationships need to be protected over time. What actions should companies take to safeguard loyalty from competitor challenges?

Differentiate Value

When the offering provides exceptional value that is not replicated elsewhere, customers will return. The jeans that fit, the familiar computer setup, the components that are compatible with the aircraft engine design, the consultant who knows the business strategy, and the vacation spot that thrills are not easy for customers to replicate. Differentiation of offerings is the most defensible form of customer lock-in. It is a key to providing value and it is a key to maintaining loyalty.

Consider how American Express handles its most elite customers. In its “By Invitation Only” program, American Express might observe that a customer likes to frequent upscale restaurants, and then offer a free dining experience at a new restaurant. The customer wins through a valuable offer from a merchant. The merchant wins because important customers are introduced to the restaurant. And American Express wins by connecting the two and deepening its relationship with its Card members and merchants.

Rebuff Competitor Challenges

When Walmart bought the U.K.’s grocery chain Asda, its competitor, Tesco expected a price challenge. In a brilliant strategic maneuver reported in the Wall Street Journal, “Tesco searched its database and singled out price-shoppers who buy the cheapest available item. Tesco figured they were most likely to be tempted by Asda. Tesco identified 300 items these price-sensitive shoppers bought regularly. One was Tesco Value Brand Margarine. Tesco lowered its price along with other products with similar profiles. Shoppers didn’t defect.” Outmaneuvering competitors in this and other ways is essential to building long-term customer relationships

Increase Investments in Customers

There are inherent risks associated with making dedicated investments, such as human resources, capital equipment, and information technologies, in customers. As a result, customers are likely to view these investments as a signal that the firm is interested in a long-term relationship. Better yet, when firm investments stimulate reciprocal customer investments, partners are in a “mutual hostage” situation. With incentives aligned, the relationship is even stronger. Reciprocation is a powerful norm that guides nearly all strong relationships. Most companies forget about this norm when managing customer relationships. When the company exceeds expectations with exceptional service, such as a flight attendant rushing to deliver a purse left on an airplane to an unwitting customer waiting at the baggage carousel, customers experience a sense of reciprocity that compels them to return the relationship.

Resolve Need for Variety

Some customers want a great deal of variety. Regardless of the value the firm provides, these customers may switch simply to have different experiences. Food and entertainment are areas where customers experience a strong desire for variety. Many firms defend loyalty against this threat by extending their product and service lines so they can offer customers that variety.

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Refresh the Relationship

Customers may also want multiple relationships or a reasonable level of switching in order to ensure they continue to learn new things. In areas where innovation is important, such as product design, consulting, advertising, and market research, customers may reach out to find new relationships in order to overcome the problems of stale knowledge. Companies should manage this problem by systematically infusing new insights into the relationship. Adding new and varied talent to a key account team is one way to bring new ideas to the customer. Regular knowledge- sharing, brainstorming, or co-creation efforts with a client can also rejuvenate relationships.

Foster Customer Co-creation

If customers co-create products and services with a company, it increases involvement and commitment to the offering and company.46 For example, in B2B co-creation relationships, value- leading suppliers rely on leading-edge customers for help in developing new products. This process can increase customer interest in the success of the new offering, which should translate into higher investments.

The Internet has created an ever-increasing array of ways that customers can deepen their involvement with companies. Whether offering new code for open source software, rating books, or designing their own sneakers and t-shirts, all of these approaches help facilitate a stronger relationship with the company. Customers want to know they matter, and invitations to participate are key ways that companies can signal a desire to co-create with customers.

Create Multiple Relationships

It is increasingly common for B2B firms to form multiple relationships with their customers. In 2002, Brocade Communications set up a marketing alliance and a joint venture with HP for manufacturing switches in addition to selling HP servers, an R&D alliance, and a licensing agreement.47 As the depth of interaction increases, the risk of relationship termination decreases. Customers gain a greater sense of shared interest and solidarity with the firm because of the number of shared relationships. Partners also learn to use the relationships in a compensatory manner, trading benefits and costs so that both parties’ interests are served.

Grant Exclusivity

When the company makes pledges or signs contracts that give the business customer exclusive rights to territories or products, those commitments wed the customer to the company.

KEY LEARNINGS

The modified Customer Decision Journey accounts for the complex, nonlinear process that customers go through as they are triggered to make a purchase, gather information, form a consideration set, develop preferences, make a purchase, and evaluate their choice post-purchase.

Customer experience is a multidimensional concept that captures a customer’s experience with all aspects of the firm. It includes what she thinks, feels, and does each time she encounters touchpoints across the journey. Firms can measure and improve aspects of the customer experience.

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Long-term customer relationships are built on customer loyalty. Behavioral loyalty is defined by repeat purchase, whereas attitudinal loyalty is defined by a customer’s active commitment to the firm and/or its offerings. Relationships characterized by behavioral loyalty alone may be sustained by inertia and are at risk if customers find attractive alternatives in the market. Ways to build long-term relationships and defend a customer relationship include differentiating value, rebuffing competitor challenges, raising customer switching costs, increasing investments in customers, fostering customer co-creation, resolving the need for variety, refreshing the relationship, making multiple relationships, and granting exclusivity.

FOR DISCUSSION 1. Trace the Customer Decision Journey for a customer buying a new mobile phone. 2. Analyze how social media could influence each stage of the Customer Decision

Journey for a customer deciding where to go on vacation.

3. Walgreens is trying to better understand its customer experience from the perspective of its elderly customers. What can it do in order to achieve this goal?

4. You have been tasked with assessing the current customer experience at a big-box store. Which tool(s) would you use to do this and why?

5. Identify two ways a grocery store’s relationship with behaviorally loyal customers could be at risk. How could the store reduce this risk by strengthening attitudinal loyalty?

6. Discuss three ways Netflix might defend its current customer relationships against new entrants.

BEST DIGITAL PRACTICE

Panera 2.0

In 2014, Panera Bread, a national fast-casual cafe, embarked on a digital transformation. Already a market leader due to its ability to offer good food, a warm, welcoming ambiance, and customer perks like free Wi-Fi, the bakery-restaurant chain hoped the initiative—called Panera 2.0—would further cement customer loyalty.

Panera 2.0 consisted of making customer-facing improvements through new digital technologies and operations upgrades. Rather than a series of individual, siloed enhancements, management envisioned each change as part of an “integrated, comprehensive, end-to-end solution” to improve the customer experience.

Two of Panera’s key mobile-based initiatives were its Consumer Mobile App and in-store iPad Kiosks. The app provides a fast, convenient way for customers to place an order, whether that be a selection from the menu or a custom-made creation. Additionally, a feature of the app called Rapid

(continued)

Chapter 7 Building and Managing Customer Relationships 143

Pick-Up enables individuals to pick up their food at a predetermined time. Fast-Lane Kiosks, inserted at the front of the store, also facilitate a quicker ordering process by reducing the number of people in the order line and the food pick-up area. This is because “eat in” guests now have the option of having their meals delivered directly to their table.

Non-customer facing investments have focused on updated processes and protocols so that accuracy is not lost with the increased speed of order turnaround. For example, a dedicated Panera team member now confirms and verifies every order before it is delivered to the customer.

Panera 2.0 has had a positive impact on the company’s customer relationships. Panera’s loyalty program data indicates that customers who use rapid pick-up or in-store kiosks visit Panera more often than they did before adopting the new tools. Additionally, sales in Panera 2.0 cafes have increased at a faster rate than non-cafe stores. Finally, the initiative has opened up a new revenue channel that is forecasted to continue to grow. Digital sales made up 12 percent of all sales at the end of Q32015 and 22 percent of sales in stores implementing the 2.0 system.

Questions:

1. How does Panera 2.0 influence the customer experience?

2. What part of the customer journey does Panera 2.0 influence and with what effect?

3. Is Panera 2.0 defensible source of competitive advantage? Why and why not?

Sources: Will Scott, “Review: What Operators can Learn from Panera 2.0,” Fast Casual, October 2, 2015, http:// www.fastcasual.com/articles/review-what-operators-can-learn-from-panera-20/

“Panera Unveils Panera 2.0,” April 10, 2014, https://www.panerabread.com/content/dam/panerabread/ documents/press/2014/panera-unveils-panera-2.0.pdf

Ben Unglesbee, “Panera’s New Secret Sauce: Fees on Digital Sales,” St. Louis Biztalk, November 19, 2015, http://www.bizjournals.com/stlouis/blog/2015/11/panera-s-new-secret-sauce-fees-on-digital- sales.html

BEST GLOBAL PRACTICE

How Electricity Wizard Manages its Funnel

Organizations can utilize a number of marketing strategies to increase their ability to attract and retain customers, including better managing their marketing funnels. Electricity Wizard, an Australian energy broker, employed some of these tactics. The company acts as an intermediary between local suppliers and end consumers. At no cost, they compare a range of plans from energy companies in a consumer’s area, and negotiate directly with those companies to find the best deals. Electricity Wizard then presents the consumer with different options and advises him or her on what they think would best match the consumer’s needs.

The company primarily relies on customers visiting its website and then calling the customer service center for more information. Since the website is such a critical channel for attracting new customers, Electricity Wizard seeks to attract the best prospects. So, the company decided to work with

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Google to understand which digital ads led to the greatest level of customer interest. Specifically, the partnership was able to identify which ads and ad features led to the greatest number and length of phone calls—both key indicators of customer interest. As a result of this data on ad efficacy, Electricity Wizard shifted their marketing spend toward the most effective ads, which ensures that they are feeding the funnel with higher quality prospects.

Electricity Wizard was also able to identify which times of day customers were most interested in learning more about their services. It turns out that a high-traffic period is lunch time—which the company had historically understaffed. As a result, some customer inquiry calls were often lost due to long wait times. As an adjustment, Electricity Wizard shifted staff lunch breaks, which improved the abandonment rate by 85 percent. Having made the initial contact, Electricity Wizard was able to move a larger number of interested prospects down the funnel.

Questions:

1. How will Electricity Wizard’s strategies affect its bottom-line?

2. Assume the next stage in the sales process is to perform a follow-up call to those customers that have made an initial inquiry. Describe one step that Electricity Wizard could take to use information from the customer inquiry call to manage this follow-up call.

Sources: “Electricity Wizard Performs Customer Magic in Australia,” Think with Google, July, 2014, https:// www.thinkwithgoogle.com/case-studies/au-electricity-wizard-performs-customer-magic.html

“The Energy Broker Totally Dedicated to Saving you Money,” https://electricitywizard.com.au/about-us/

Chapter 7 Building and Managing Customer Relationships 145

C H A P T E R E I G H T

Creating Valuable Customers

“The purpose of business is to create and keep a customer.” —Peter F. Drucker

“Make a customer, not a sale.” —Katherine Barchetti

“In God we trust; all others bring data.” —Dr. W. Edwards Deming

The focus thus far has been on ensuring that companies target customers, facilitate their decision journey, create value through strong experiences, and develop strong customer relation- ships. This now shifts to a focus on ensuring that the company can capture enough value from these activities to make the business profitable over time. When the company succeeds, it has moved from creating customer value to the creation of valuable customers. To illustrate this contrast, Figure 8.1 depicts four different business conditions—customers do or do not find value in what the company offers and customers are or are not valuable to the company. The star customers are those that value the company’s products and services and that offer sufficient value to the company over time to sustain and allow for reinvestment in the business. Free-riding customers value what the company offers but are not loyal or willing to pay for what the company offers. The company finds vulnerable customers valuable but the customers do not find value in what they are getting from the company. The company’s objective is to move customers into the star position. Such a status is part of the process of building and managing customer equity.

Customer equity is the sum of the value of a firm’s customers over time. This view emphasizes the long-term or what is often called the lifetime value of customers—what they will purchase from the company over the course of their involvement in a market. For parents with young children, this might mean two to three years in the diaper market, but for recent college graduates, this could be decades of engagement with a media company, which is why companies such as HBO provide free cable services to undergraduate students at many universities. Whatever costs are incurred during the college years are presumably made up for in loyalty over time.

In the early 1990s, the Royal Bank of Canada (RBC) had a strong customer base, but it sought ways to become more profitable. RBC used a series of small steps designed to make its most

146

valuable customers more likely to stay with the firm and more likely to give the firm positive word of mouth. For example, instead of applying across-the-board overdraft fees, the company adopted more lenient policies for its high-value customers. Although this meant giving up profits in the short term, RBC managers predicted such policies would produce more loyal and longer-term customers. They were right—the lifetime value of these customers increased by 20 percent!1

While fostering longer-term relationships to build customer equity is a critical management approach (as discussed in Chapter 7), it must be preceded by identifying valuable potential customers and moving them through their first purchase. This involves bringing the right quantity of high-quality customers into the process and then keeping them engaged through to purchase. One common management tool—the purchase funnel—is often used to understand, measure, and improve those activities. This purchase funnel is examined first, followed by a broader considera- tion of customer equity.

THE PURCHASE FUNNEL Understanding the customer decision journey offers marketers the opportunity to manage and measure customers as they move through different stages of the process. The purchase funnel is a management tool that allows a company to sort its customers into different stages in the journey and monitor their progress. The term funnel is used because companies usually begin with a large number of customers that are targets for their offering but ultimately focus on driving the most qualified through to purchase.

Creating the Purchase Funnel

The exact nature of a company’s purchase funnel will depend on the journey customers are taking and how the company chooses to manage the journey. Although purchase funnels can vary by industry and target customer, most have several defining characteristics. First, each stage of the funnel corresponds to an observable action the customer takes along the decision journey. This ensures that the funnel is both customer-centric and that the company can measure and manage customer progress. Second, exactly which and how many stages are used in the funnel is determined by a company’s strategy.

Value of customer to

company

Value of company offering to customer

Low

Low

High

High

Vulnerable customers

Star customers

Free-riding customers

Figure 8.1 Moving Toward Valuable Customers

Chapter 8 Creating Valuable Customers 147

B2B companies tend to use very specific terms to describe the customer as she progresses through the different stages of the funnel. Figure 8.2 shows stages of a typical funnel and defines each in terms of B2B activities taken for a B2B air-conditioning company selling units to other companies. B2C companies use a similar approach but may adopt different labels to capture funnel progress, for example, a funnel that captures the journey steps of brand awareness, brand

Journey Stage B2B Terms and Progression

B2B Air-Conditioning System Company Example

Awareness Prospect becomes aware of company services.

Company sends message to members of building owner email list or participates in a trade show.

Interest Prospect indicates interest in the service by engaging with the company through digital, phone, or human contact.

Company becomes aware of prospect when the prospect requests information from company. The company addresses inquiry while also collecting information to qualify the prospect (i.e., to determine if the lead is worthy of additional company attention). If so, the prospect becomes a lead.

Consideration Lead offers a deeper assessment of needs, time frame, and price preferences and allows company deeper access to help create value.

Company communicates total value of the offering to lead and how this lead compares to the competition, often with a proposal written to meet the opportunity needs and specifications.

Preference Lead seeks approvals and internal funding.

Negotiations occur between company and lead. Lead obtains internal approval for purchasing.

Purchase Lead comes back to company with commitment to purchase.

Company receives a signed purchase order from lead who now becomes a customer in exchange for air- conditioning services for the year.

Reevaluation Customer decides whether to renew contract.

First year of services is close to ending so company sends customer updated proposal to continue services.

Loyalty Customer repurchases product or service and continues relationship with company.

Company receives a signed purchase order from customer to continue providing air-conditioning services.

Advocacy Customer provides positive word of mouth and referrals to new prospects.

Company requests customer to leave online review, serve as a reference, or participate in a white paper.

Figure 8.2 B2B Company Funnel Stages and Definitions

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consideration, and brand purchase. Figure 8.2 links up the journey stage with the terms used by B2B marketers.

A prospect is a member of the firm’s target market who is likely to value what the firm offers. This group should be the focus of the company’s marketing efforts. A lead is a prospect that becomes aware of the company and their offerings. This can be through company channels, customer referrals, or publicity. A qualified lead is a lead that the company has identified to have an immediate or near-future need for the product or service that the company offers. A customer is a qualified lead that has decided to purchase the company’s offerings. A loyal customer is a customer who repurchases company offerings over time. This type of customer may also advocate for the company by providing information about their experience with the company that could be used to further engage future prospects.

Purchase Funnel Metrics

Four recommendations can help companies effectively assess and manage the funnel using metrics. First, select funnel metrics that are aligned with the company’s goals. For example, for a new business, the goal may be to increase awareness of the company; therefore, measuring the quantity of prospects generated would be a good metric to help determine the efficiency and progress of the marketing campaigns. Both aided (recall) and unaided customer awareness (recognition) of whether or not the company competes in the category and the nature of its offerings are recommended. Quantity of prospects is a direct feeder to quantity of leads that have been qualified by the company. As time progresses and the company succeeds in reaching the market, the focus could shift to improving the lead quality.2 Lead quantity without lead quality can lead to wasted resources trying to convert a large number of leads that are not sales ready.3

Second, develop a scoring system to measure the quality of potential customers. This type of system uses information the company has about the characteristics of potential customers and their observable actions that the company finds correlate with ultimate purchase. Data might show that certain behaviors, such as number of page views, registration for a webinar, or a request for a product demo, for example, are strong predictors of whether a prospect will become a customer. Once known, the company can prioritize the prospects exhibiting these behaviors as higher quality leads because they are more likely to become customers.4 This same evaluation can be used for any stage of the funnel. For example, in creating awareness, people reached with one campaign may be more likely to progress in the funnel. Such insights should guide campaign selection over time so the company is always improving its ability to reach and convert customers.

Third, identify and resolve bottlenecks, which represent customers getting stuck at one stage of the funnel. Bottlenecks can lead to reduced revenues and customer frustrations. Once a bottleneck is identified, a deeper dive into the customer decision journey is needed to develop a solution. Key metrics, specifically stage-to-stage conversion rates can identify bottlenecks within the funnel. A stage-to-stage conversion rate can be calculated by dividing the quantity in one stage by the quantity in the preceding stage. For example, imagine that a company found that 10 percent of potential customers were converting from awareness to consideration, 20 percent of those converted to preference, and then 60 percent of those converted to purchase. This information would suggest that the funnel has a bottleneck moving customers from awareness to consideration. In this case, the company might dig deeper to uncover that the reason for this bottleneck is the premium price of the product. With this information they might consider a temporary promotion or bundling with other products.

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Fourth, determine how to report and communicate the status and progress of the customer through the purchase funnel. One approach is to determine the quantity and quality of leads in each stage of the funnel over a period of time, for example, a quarter or a year. Goals should be compared to actual levels, so the company can determine if it is on track. One common way to accomplish this is with a dashboard that contains key data that are updated in real time.

Key metrics to consider including in the dashboard:

Stage-to-Stage Conversion Rate: As noted, this analysis can be performed on adjacent stages or any two stages that are meaningful to a company. This calculation is based on the quantity of leads in a stage divided by the quantity of leads in prior stage (e.g., preference/ consideration). For example, if a company has 50 leads in the preference stage and 100 leads in the consideration stage, the conversation rate from consideration to preference is 50 percent. Sales Cycle Length: This is the average time duration it takes for a prospect to progress through the funnel to make a purchase. This metric offers insight into at-risk opportunities or those that are becoming a resource drain. For example, if an average sales cycle duration is 30 days, and there is a lead that has been in the funnel much longer than 30 days, this should be an indicator that this lead has a lower probability of progressing to the purchase stage. To create, track the average time (typically days) spent in each funnel stage. For newer companies, compare this information to industry benchmarks.

Channel Cost-Effectiveness: Monitor which channel each lead was acquired through. For example, out of 10 leads, two were from a TV ad and eight were from a tradeshow booth. Given that TV ads cost $10,000 and the tradeshow cost was $20,000, the cost per lead is $5,000 for TV and $2,500 for the tradeshow.5

Customer Acquisition Costs (CACs): CAC is the sum of all sales and marketing costs for a given period of time, divided by the newly acquired customers during that same period of time. This metric tracks company spending for each new customer. If this number increases over time, that means that the company is either spending more to acquire new customers, or that the sales and marketing efforts are less efficient. Often times, spending more to acquire customers who have a higher lifetime value, which is described in detail later in this chapter, is well justified.6

Ratio of Customer Lifetime Value to CAC: This metric compares the lifetime value of a customer, a tool discussed in the next section of this chapter, to the amount spent to acquire that new customer. The higher the ratio, the more ROI customers are delivering to the company’s bottom line.7

Common Pitfalls in Funnel Management

Attracting Poor Quality Leads

If a strategy is working, the company’s marketing spending leads to the target customer entering the funnel. If non-target customers are attracted, the company needs to vet and manage these customers which distracts from interactions with target customers. Of course, companies may find that customers other than those they target also find value in their offerings and if so, efforts should be taken to attract these customers as well if they are sufficiently profitable for the company.

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Failure to Attract Enough Leads

Many mid-size and large companies struggle to attract enough leads because they spend 80 percent of their time focusing on conversion rates and only 20 percent of their time on lead generation.8

Other companies overemphasize selling more to current customers versus attracting new customers.9 Over time, these approaches limit growth opportunities. While the exact rates vary by company strategy, sustained growth requires a good mix of attracting new customers and expanding relationships with current customers.

Failure of Sales and Marketing to Work Together

Often, the marketing department focuses on acquiring as many leads as possible, regardless of quality, to hand off to sales. Sales pushes back and refuses to waste its time on low-quality leads. This can lead to further prospecting by sales, which takes away from their time spent closing. This can also lead to a delay in following up with new leads. Sales and marketing must work together. In particular, the two groups must decide on a common definition of the quality and quantity of leads.10

Failure to Link Funnel Problems to their Causes

Conversion rates can be weak because insufficient company resources are leveraged to create conversion from one stage to another, the company lacks strong insight into the barriers that are keeping customers from progressing to the next stage, and/or low-quality inputs are available to convert from the prior stage. Each of these underlying problems has a remedy. In the first case, more financial resources should be devoted to conversion, but in the second, greater investments should be devoted to understanding the customer’s challenges in moving forward, while in the third, quality can be improved by limiting which customers make it into the prior stage. Identifying the wrong problem can lead to a misallocation of company resources.

Failure to Optimize through Experimentation

In order for a company to maximize stage-to-stage conversion rates, it is important to experiment with various calls-to-action during a customer interaction. For example, the firm could test the effectiveness of the subject line in an email by sending 1,000 prospects the exact same email, but half of them receive one subject line and the other half receive a different subject line, and measuring the open rates associated with each subject line. This is an application of an A/B split test, where one variable, such as the email subject line, is varied. In this test, all other variables, such as colors, fonts, and displays remain the same. Experts recommend a focus on calls-to-action that vary in the extent to which they have valuable, easy to use, prominent, and action-oriented emphases. These small changes can lead to surprising differences in conversion rate.11

Purchase Funnel Management

If a company is attracting, converting, and retaining its target customers over time, the funnel should look more like a rectangle with fewer losses at each stage. Several activities can improve how well a funnel performs. First, funnel stages should reflect observable customer actions. The journey underlying this process may be more intricate, and this is important to understand. However, given that the funnel is a management tool, it should be based on actions managers can observe and therefore measure and manage.

Chapter 8 Creating Valuable Customers 151

Second, the funnel and its metrics should be carefully negotiated within the company. Marketing and sales are often jointly responsible for managing the funnel, and, as noted earlier, if both parties do not agree on funnel stages and funnel metrics, conflict is likely to emerge.

Third, the funnel should be jointly managed by marketing and sales. A common problem in organizations is that marketing controls the early stages of the funnel and sales controls the later stages. The truth is that most businesses are better off with both functions playing a role throughout the entire process. Their roles are likely unequal, but both functions can offer important skills and feedback that can improve the funnel over time. For example, what sales learns in the final stages of the process should be fed back to improve early exposure strategies and lead-scoring approaches. Likewise, marketing can play a key role late in the process in many B2B companies by providing competitive intelligence and arranging customer events.

Finally, funnel metrics should be used to guide strategy adjustments. Therefore, when a business is starting up or going through major strategic transitions that require reaching new markets, funnel metrics may indicate that the strategy needs to be fine-tuned. Lead-scoring metrics, for example, might indicate that a secondary market is actually easier to reach, more likely to convert, and spends at higher levels than the firm’s primary market. If so, the strategy may shift to spend more on the secondary market.

CUSTOMER LIFETIME MODELS AND STRATEGY EFFECTIVENESS Customer Lifetime Value: General Approaches

Most companies don’t know the value of their customers. As a result, they don’t know how much they should spend to attract or retain a customer. These companies often overspend or under- spend. Knowledge of how different customers or customer segments vary in value should guide strategy and investments. If, for example, the firm has two segments of customers and one segment has higher margins and is likely to be retained for a longer period, the firm should be more willing to spend on this segment and might even reduce spending on the other segment.

Customer lifetime value (CLV) models help managers calculate the long-term value of an individual customer or segment of customers. These approaches explore what value a customer brings to a company over the entire period a company and customer interact. This long-term horizon offers a stronger basis for driving strategy versus only examining the company’s current sales from a customer. The value of the customer is summed across the expected life and then the values of those cash flows are discounted into present day dollars.12

The core idea underlying a CLV model is based on discounted cash flow models used in finance. These models take into account the following factors—the customer’s margin in a specific time period, the customer’s retention rate in that time period (the probability of being retained through to the next period), expected life of the customer (how many years the customer is expected to stay active in the market), and the firm’s discount rate. Lifetime value can be calculated at the individual customer level or for an average customer within a target segment. The lifetime value of a customer for the average customer in a segment is:

CLV N

t 1

Mst rts

1 i t ACs

In this equation, Ms is the gross margin for a customer in segment s in a given time period t (e.g., a year) net of retention costs such as extra service costs for that segment, i is the firm’s discount rate,

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rs is the segment’s retention rate or likelihood of returning to the company at time t, ACs is the acquisition cost, such as the price of a sales call or an email, and N is the period over which the customer segment is assumed to remain active in the market.

Here’s an example of how CLV models are used. Consider the average customer in a segment stays active in a market for N=3 years, has a gross margin of $17,000 in year 1, $10,000 in years 2–3, a retention rate of 80 percent, and firm discount rate of 10 percent. CLV is $21,499.62 = (year 1: ($15,000 0.80))/(1.10) + (year 2: $10,000 (0.80)2)/(1.102) + (year 3: (10,000 (0.80)3) (1.103). Contrast that with the CLV of a customer who yields a margin of $8,000 in all three years (CLV = $13,126.97) or if the firm could increase its retention rate from 80 percent to 90 percent for the segment under the original scenario (CLV = $26,080.39).

These simple CLV analyses reveal several important guidelines. First, firms should be willing to spend more to acquire and retain customers with a higher lifetime value. If the future profits from a customer are high, then the company can afford to make a bigger investment in today’s marketing and acquisition costs.

Second, the firm can have a larger impact on the value of the customer by increasing retention rather than by increasing margin.13 Research has shown that a 1 percent increase in retention rate has a 4.9 percent increase in customer lifetime value, while a 1 percent increase in margin has only a 1.1 percent increase in customer lifetime value. An example from USAA drives home the importance of customer retention very well. The average retention rate in the auto insurance industry is 80 percent. USAA, an insurance and financial services company for military personnel and their families, has an astonishing retention rate of 96 percent. This means that over a three- year period, USAA need only replace 12 percent of its customers (0.96 percent3 = 88 percent retained, 1 0.88 = 0.12 or 12 percent) compared to the average auto insurance industry company (0.80 percent3 = 51 percent retained, 1 0.51 = 0.49 or 49 percent), which has to replace almost half of its customer base after three years!

Third, if a firm spends according to CLV, it will receive a higher return on investment because every dollar of investment means a greater return. Specifically, focusing on the acquisition of higher-value customers or continuing to invest in higher-value customers to increase their likelihood of retention provides the company with a better return on its customer investments compared to investing in less valuable customers.

Strategic Uses of CLV

Guide Customer Management and Acquisition

A large Fortune 1000 high-tech manufacturer of computer hardware and software offers an example of how CLV models can guide both marketing investments and targeting strategies. Using monthly transaction data from January 2000 to April 2007, researchers found that the top 20 percent of customers accounted for 91 percent of total profits, while the bottom 20 percent had a negative lifetime value. Further profiling showed that high-value (low-value) customers were in the high-tech, aerospace, and financial services industries (chemicals and plastics); had been incorporated for between 15 and 25 years (5–10 years); were multinational (domestic); had more than 500 employees (100–300 employees); and had yearly revenues exceeding $50 million (between $5 and $10 million). In response to these customer insights, the company moved marketing resources to high-CLV customers and directed negative-CLV customers to online channels. It also increased acquisition expenses on prospective customers who matched the profile of high-CLV customers—under the assumption that these customers, if converted, would provide

Chapter 8 Creating Valuable Customers 153

long-term value at levels commensurate with their current high-CLV customers. Profits soared, and the company’s average monthly stock price increased 32.8 percent in the nine months that followed.14

Predict and Mitigate Churn

Given the impact of customer retention on company performance, managing churn should be a strategic priority. A company’s churn rate is 1 minus its retention rate. Companies need to understand what factors influence the likelihood that a customer will not be retained. Customers exhibiting characteristics such as low engagement, smaller dollar purchases, or less frequent purchases may be showing evidence that they are not going to return to the relationship. Companies should use the data they have available about all customer behaviors, including frequency of purchases, recency of purchases, value of purchases, as well as service calls, engagement in the company’s social sites, or nature of referrals—whatever information the company can acquire about customers—to determine if any of these behaviors are strong predictors of churn. If so, the company can take actions to intervene when the customer begins to engage in a problematic behavior. For example, HubSpot finds that if its small business owners invest in the company’s content management system upon adopting the suite of products, its churn rate per month decreases by about half.15 Hence, offering incentives to improve these sign-up rates up to the level of these retention payoffs makes good business sense.

Account for and Facilitate Customer Transitions

Firms should work to stay with customers as they transition out of one segment and into another. This may mean expanding into categories to capture the customer’s loyalty to the firm as the customer moves from needing one set of products and services to another. For example, college students may need only checking accounts from a bank while young professional adults are looking for investment products or loans as they move into saving and investing new income and buying more permanent housing. Using these transitions is important in the valuation of a customer segment. If the bank fails to account for the student to a young working professional transition in its valuation of the student, the valuation will be low compared to the true valuation. To do so, the bank needs to account for when that transition is likely to occur, how likely is it to occur, and changes in margin and retention rate for the new segment.16

The XO Group has had great success with its website The Knot, which enables couples to manage weddings. They extended the brand to shift consumers to The Nest (a home decorating lifestyle website) and then to The Bump (a pregnancy and parenting website) using the same underlying business model, including a digital platform that offers advice and support on key tasks (e.g., picking flowers for your wedding or dealing with diaper rash). As the company states, “We inspire, inform and cheer on our community as they move through life’s most amazing (and stressful!) milestones. From the proposal to creating a home and starting a family together, we’re there for every step of the journey.”17

Channel members can do this as well. For example, Tesco uses its data-collecting loyalty card (the Clubcard) to track which stores customers visit, what they buy, and how they pay. This information has helped Tesco tailor merchandise to local tastes. It also helps the retailer customize offers to individual customers. For example, shoppers who buy diapers at a Tesco store for the first time receive coupons by mail not only for baby wipes and toys but also for beer, according to The Wall Street Journal. Tesco’s analysis revealed that new fathers tend to buy more beer at retail because they can’t spend as much time at the pub!

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Firms should facilitate other transitions as well, such as the transition of a customer from a lower-value segment to a higher-value segment. American Express uses customer information to understand the customer’s readiness to move along a predefined upgrade path among the different branded cards offered by the company. For example, the first purchase of an upper-class airline ticket on a Gold Card triggers an invitation to upgrade to a Platinum Card. Companies can use marketing analytics to understand what behaviors predict the customer’s readiness to transition. This is similar to the use of data to determine churn discussed earlier.

Improve CLV by Lowering Acquisition Costs

A fundamental way to lower acquisition costs is to use referrals instead of using traditional reach marketing methods.18 Uber does this successfully through its friend referral program, which shares the $10 off the next two rides with the referral and $10 off the referrer’s next two rides. Referrals can be included in customer valuations by also accounting for the customer’s referral value (CRV), which captures the net present value of future profits of new customers who purchased firm offering as a result of referral behavior of a current customer. Together, CLV and CRV offer a more complete view of customer valuation.

Challenges in Using CLV Models

Though CLV models are straightforward calculations that can bring huge value to the business, there are a few challenges to be wary of in these calculations:

Need to Account for When Money Arrives

The approach we offer assumes that companies have to wait to receive their money from customers until the end of the t period. This may not be an accurate situation for companies that receive their money from customers at the beginning of the relationship, such as payments before shipments or health club memberships. If this is the case, the margins, costs, and retention rates from the prior t should be used in valuing customers to get the most accurate assessment.

Missing Individual Data

Firms may find that they do not have data on the profits or costs needed to value each individual customer. For example, many packaged goods companies do not interface directly with their customers. In these cases, firms can use lifetime value models at the segment level and calculate average profit margins and marketing costs for a “typical customer” in a segment. This is the total profit and total marketing costs divided by the number of customers in a segment.19

Unsure How Long a Typical Customer is Active

Based on historical data, universities know that a typical undergraduate takes approximately four or five years to graduate. Most companies don’t have such predictable time frames for how long their customers will remain in a market—and many hope this will be over for as long as possible. A detailed, well-maintained customer database would help address this fundamental question, but without this resource, many experts recommend using a 3-year period.20 Another approach is to assume that the life of the customer is infinite. That might sound like an outrageous assumption.

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However, this approach is quite reasonable mathematically given that the future value of a customer is very small after 5 years due to retention rates and discount rates. Therefore, unless retention rates are very high or discount rates are very low, the infinite CLV approach is a good approximation.21 To do so, use the following approach to calculate CLV—notice there are no t subscripts in this approach, which reflect the fact that it is summing across years.

CLV Ms rs

1 i rs ACS

Difficult to Assign Marketing Costs

Firms may also find it difficult to assign marketing costs to customers or segments of customers. One way to manage this is to do simple counts of marketing contact levels with the customer. Frequency of store visits, warranty claims, customer service calls, and salesperson visits can all be estimated by managers or front-line employees.

Using CLV to Invest in Prospects

In addition to providing information on which current customers to invest in, lifetime value approaches can also guide companies on investments in new customers or prospects. To do so, companies can compute the lifetime value of a prospective customer (prospect lifetime value (PLV)) for that segment. PLV shows the expected value per prospect of any acquisition effort.

PLV accounts for the fact that a company has not yet acquired this customer by including acquisition rate in the CLV equation. The acquisition rate is the probability that a company will acquire a customer. This helps companies decide the future value of a customer and directs resource allocation decisions.

PLVs ARs CLVs ACs

In this equation, PLVs is expected lifetime value of a prospective customer, ARs is the segment’s acquisition rate or likelihood that a prospect will become a customer, ACs is the segment’s acquisition cost per prospect. Here, CLVs is the segment’s CLV (and does not include ACs to avoid double counting).

As an example, AudioReader Inc. has introduced a new range of audiobook devices that are targeted at children between two to seven years old. There are about 500,000 such customers in their current region of operation. As a start-up, AudioReader has limited money for marketing initiatives at its disposal, and it needs to decide whether or not to invest in a new salesforce that will acquire these new customers with a probability of 5 percent (AR = 5 percent). The company has estimated the cost of training this salesforce as $1M, which equates to an acquisition cost of $2 per prospect ($1M/500,000 prospects). Assume the same discount rate of 10 percent.

The first step is to calculate CLV (AudioReader uses the infinite customer life approach and keeps acquisition cost out of the model as instructed). CLV = 100 (60%/(1 + 10% 60%)) = $120. The second step is to calculate PLV = (AR CLV) AC = (5% 120) $2 = $4 per prospect.

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Therefore, the total expected value of new salesforce = PLV # of prospects or $4 500,000 = $2,000,000. All else being equal, AudioReader should make the salesforce investment, as the total PLV is higher than the investment required for the salesforce.

Use PLV to Guide Acquisition Cost Expenditures

The PLV calculation can also be used to determine the maximum a company should spend acquiring a new customer segment. Returning to AudioReader, the VP of Sales goes to the COO with this analysis to get the salesforce training budget approved, and the COO poses a good question—what is the maximum we should spend on customer acquisition? To make this determination, AudioReader should set PLV = 0 in the equation. Because CLV does not include AC, if we set PLV = 0 and solve for AC = AR CLV, the company should spend no more than $6 per prospect in its go-to-market strategy (AC = 5 percent 120 = $6), and its maximum overall customer acquisition budget should be $3M ($6 500,000 prospects).22

CUSTOMERS AS VALUABLE ASSETS Customers have always been central to marketing, but the shift into a perspective where customers are an asset has become more prevalent, especially as digital tools enable data collection about and management of customers at scale. The hard decision of choosing investment in different marketing activities now extends to questions such as which customers to invest in acquiring and which to invest in keeping loyal to the business. The customer lifetime value model provides a strategic framework to understand how to value customers, as well as which levers to shift to gain the biggest value from customers.

KEY LEARNINGS

Star customers both bring high value to and derive high value from the firm.

The purchase funnel is a management tool that allows a company to sort its customers into different stages in the purchase process and monitor progress in moving customers through the process. It also enables firms to see when in the process they are losing customers, which can be used to improve customer progress.

Funnel management problems like poor quality leads or slow movement of fine- grained data can often be solved by more coordination between marketing and sales, making sure funnel steps reflect observable customer actions, etc. Customer lifetime value (CLV) models can be used to calculate the long-term value of individual customers or segments of customers. Skillful use of CLV can guide customer management, predict and mitigate churn, account for and facilitate customer transitions, and lower acquisition costs.

The CLV model can be adapted to calculating prospect lifetime value (PLV), which identifies the potential value of a future customer. Firms can use PLV to determine how much to invest in acquiring new customers by segment, as well as which new customers to prioritize when allocating firm resources.

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FOR DISCUSSION 1. Create a purchase funnel for an organic farm that wants to sell its produce to local

restaurants. What metrics do you recommend it use?

2. Perform a loyalty analysis of the automobile industry and the snack food industry. Rate key firms on attitudinal and behavioral loyalty. Take one firm in each industry and offer one suggestion for improving customer loyalty.

3. Using the AudioReader data, estimate its CLV when customer retention increases from 60 percent to 70 percent and 80 percent. In each of these scenarios, assess the value of increasing margin by 10 percent to $110 or 20 percent to $121.

4. Considering AudioReader’s offering and target market, have a discussion about the company’s most effective use of customer lifetime value tools? What would you measure and how would you use it to improve the company’s performance over the long-run.

5. Imagine AudioReader’s retention rate increases from 60 percent to 80 percent. What is its new PLV? How much should AudioReader now be willing to spend to acquire a customer?

BEST DIGITAL PRACTICE

Netflix Customer Loyalty Machine

Netflix has emerged as one of the most disruptive and successful on-demand video and media service providers over the last decade. Started as a mail-order DVD company in 1997, Netflix has succeeded by changing its strategies to keep pace with changing technologies. By 2015, Netflix had acquired a 52 percent share of all U.S. broadband homes and, in the process, put the behemoth brick-and-mortar retailer Blockbuster out of business.

Netflix uses a dual strategy of outstanding content and a powerful subscription model to succeed. At first, content came solely from movie and television production companies, including syndicated re-runs. However, in 2013, Netflix debuted its first original series, House of Cards, to great fanfare. It has continued to produce winners, including Orange is the New Black, Narcos, Making a Murderer, and most recently new episodes of Gilmore Girls. The company has also brought back award-winning shows, such as Full House. This content strategy keeps current customers engaged, as reflected in the fact that the average subscriber streams content for 2 hours a day—up 18 minutes over the prior year. It also continuously attracts new users to the platform.

Netflix acquires customers by offering a free one-month trial that can be canceled at any time. This strategy has zero cost to the company given the trial only utilizes Netflix’s existing portfolio of offerings. For current customers, Netflix uses four strategies to improve the value it offers and the value the company is able to extract from them.

First, the low monthly subscription rate of $9.99 makes membership an affordable luxury for many customers. Of course, most people don’t just sign up for one month. The average person is an estimated Netflix subscriber for 25 months, creating a recurring source of revenue.

Second, its “Watch Anywhere” option allows customers to watch shows on any device and even download them to use on computers or tablets, making it easier to watch Netflix on the go—thereby extending viewing opportunities to out-of-home, non-Wi-Fi settings.

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BEST GLOBAL PRACTICE

How Starbucks Rewards Reward Starbucks

In 2008, Starbucks launched its first loyalty program, aptly called Starbucks Rewards. The program is designed to operate on a prepaid system, in which customers load funds onto a Starbucks card and then use that card to purchase products. Since its inception, the program has been tremendously successful. A recent financial analyst noted that Starbucks had $1.2 billion in customer funds loaded onto plastic and mobile cards as of the first quarter 2016. This figure, which is larger than many banks have in

(continued)

Third, Netflix tracks customer engagement and uses this information to recommend new content to users based on their past viewing behaviors. This impacts customer retention of which Netflix has the lowest churn rate in the on-demand video sector. In 2015, just 5 percent of U.S. broadband homes canceled their Netflix accounts. This also includes customers who left after the end of a trial period so it is not a pure CLV calculation, which would not count customers until they had made a more formal commitment. Such a high retention rate offers a strong indicator of long-term cash flows for the company.

Finally, Netflix uses a tiered pricing plan that allow users to pay for the number of screens on which they want to view content—basic streaming for one screen is $7.99, standard streaming for two screens is $9.99, and premium streaming for four screens is $11.00. The multiple screen options allow people to join together who might not otherwise join individually. Subscribers can also add people to their plans easily by sharing access codes. This allows Netflix to gain access to new customers who might later join on their own.

Questions:

1. What actions to you recommend Netflix take to increase its customer lifetime value?

2. How can Netflix improve its prospect lifetime value?

3. What is Netflix’s biggest competitive vulnerability?

Sources: “The Customer Lifetime Value Equation: Will it Pay Off for Tech Companies,” Knowledge@Wharton, December 7, 2011, http://knowledge.wharton.upenn.edu/article/the-customer-lifetime-value-equation- will-it-pay-off-for-tech-companies/

Jeff Baumgartner, “Netflix Has Lowest Churn Rate among OTT Services: Study,” Multichannel News, April 14, 2016, http://www.multichannel.com/news/content/netflix-has-lowest-churn-rate-among-ott- services-study/404142

Jay Somaney “Netflix Sellsiders Say ‘Churn Baby Churn,’” Forbes, April 12, 2016, http://www.forbes. com/sites/jaysomaney/2016/04/12/netflix-sellsiders-say-churn-baby-churn/#10d21eba261b

Lara O’Reilly, “Netflix is Eating TV’s Dinner,” Business Insider, April 16, 2015, http://www. businessinsider.com/average-daily-netflix-usage-according-to-btig-research-2015-4

Kissmetrics, “How Netflix Measures Your to Maximize their Revenue & How it Can Help Your Business,” https://blog.kissmetrics.com/how-netflix-measures-you/

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deposits, reflects 12 million loyalty club members—a number that has almost doubled since 2014! According to the company’s CFO, members spend three times more than nonmembers and visit more frequently. Forty-one percent of Starbucks transactions in the United States and Canada came from a Starbucks card.

Why does the program work so well? First, the company created a loyalty program that rewards customers for all their purchases within the family of Starbucks products. Customers earn “stars” on coffee drinks and accessories at its stores, coffee purchases at grocery stores, and purchases at Teavana. These stars and the progression of cards ranging from green to gold give loyal customers increasing levels of rewards, such as free refills and free drinks once certain frequency requirements are met. The program has an astonishing 94 percent retention rate.

Second, 24 percent of U.S. transactions occurred through Starbucks’ mobile app, which contains a Mobile Order and Pay feature. This is so popular because customers can order coffee before they even arrive at the shop, making buying coffee easier and faster than ever before. One blogger recently describes this loyalty innovation “shattering customer expectations of convenience.” Another customer loyalty and retention expert noted, “It goes without saying that the companies who best utilize technology to meet the ever-changing needs of the customer will be the winners in the long-haul.”

Third, Starbucks has created the capability to generate hyper-personalized e-mail reward offerings with more than 400,000 variations. The result is that customer response rates have doubled over previous campaigns. Experts say this will not only increase the level of customer engagement but also the speed. By early 2017, the company expects to complete the rollout of a system that will make recommendations to customers for items that can be paired with or added to purchases during Mobile Order and Pay checkout, which the company believes will further fuel engagement and growth.

Fourth, Starbucks provides both a high-quality product and coffee-drinking experience. It consistently improves its offerings, which increases visit frequency and dollar amount spent. For example, the introduction of seasonal favorites keeps customers coming back to try new coffees. The introduction of more food offerings has made it easier for customers to return for food and beverages throughout the day. This allows rewards to multiply quickly as customers have different day-part needs (breakfast, lunch, breaks, and dinner) met by a company they love. Finally, Starbucks is now working to further differentiate itself by opening new store formats such as Roasteries, which offer super-premium coffees and coffee experience for customers seeking an ultra-premium experience.

Questions:

1. How might Starbucks use its rewards program to attract new customers to its stores?

2. The Roasteries format carries some risks for Starbucks. Discuss these possible risks as well as the strategic benefits Starbucks might expect from this move.

Sources: Trefis Team, “Let’s Look at Starbucks’ Growth Strategy,” Forbes, September 19, 2016, http://www. forbes.com/sites/greatspeculations/2016/09/19/lets-look-at-starbucks-growth-strategy/#1c27ca277175

Sabri Suby, “How Big Brands like Amazon and Starbucks Retain Customers,” King Kong, July 13, 2016, http://kingkong.com.au/big-brands-like-amazon-starbucks-retain-customers/

“Starbucks Presents its Five-Year Plan for Strong Global Growth,” December 7, 2016, https://news. starbucks.com/news/investor-day-2016-press-release

Hadley Malcolm, “Starbucks Loyalty Program Will Now be Based on Dollars Spent,” USA Today, February 22, 2016, http://www.usatoday.com/story/money/2016/02/22/starbucks-loyalty-program- changing-to-be-based-on-dollars-spent/80725784/

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Andrew Meola, “Starbucks’ Loyalty Program Now Holds More Money than Some Banks,” Business Insider, June 13, 2016, http://www.businessinsider.com/starbucks-loyalty-program-now-holds-more- money-than-some-banks-2016-6

Jessica Didion, “Starbucks: Loyalty Innovation Shatters Customer Expectations of Convenience,” Lenati, July 29, 2015 http://www.lenati.com/blog/2015/07/starbucks-customer-loyalty-innovation- shatters-customer-expectations-of-convenience/

Nate Matherson, “Starbucks Beats Competition in Building Customer Loyalty,” The Street, November 12,2013,https://www.thestreet.com/story/12104711/1/starbucks-beats-competition-in-building-customer- loyalty.html

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C H A P T E R N I N E

Building and Managing Brand Equity

You do not merely want to be considered just the best of the best. You want to be considered the only ones who do what you do. —Jerry Garcia, The Grateful Dead

You cannot make a business case that you should be who you’re not. —Jeff Bezos, Amazon

The secret of success is constancy of purpose. —Benjamin Disraeli

A business strategy is enabled by brand assets. A brand gives a firm permission to compete in product markets and services and it represents the value proposition of the business strategy. Thus, it is strategically crucial to develop, refine, and leverage brand assets.

Research shows that the value of brand assets, compared with other intangible assets (such as people and IT technology) and tangible assets, represents from 15 percent (Toyota and GE) to more than 75 percent (BMW and Nike) of the value of the firm. Even the lower number is significant strategically.

Brand equity is the set of assets and liabilities linked to the brand. The conceptualization of brand equity, which occurred in the late 1980s, was pivotal because it changed the way that marketing was perceived. Where brand image could be delegated to an advertising manager, brand equity—as a key asset of the firm—needed to be elevated to become part of the business strategy, the purview of the CEO. Top management had to be strategic and visionary instead of tactical and reactive, long term in orientation, and use a different set of metrics. It truly changed the role of marketing and paved the way for the creation of the chief marketing officer (CMO) role.

There are three types of brand assets—brand awareness, brand loyalty, and brand associations (see Figure 9.1). Each creates formidable competitive advantages and each needs to be actively managed.

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BRAND AWARENESS Brand awareness is often taken for granted, but it can be a key strategic asset. In some industries that have product parity, awareness provides a sustainable competitive difference. It serves to differentiate the brands along a recall/familiarity dimension.

Brand awareness can provide a host of competitive advantages. First, people like the familiar and awareness provides the brand with a sense of familiarity. For low-involvement products, such as soap or chewing gum, familiarity can drive the buying decision. Taste tests of such products as colas and peanut butter show that a recognized name can affect evaluations even if the brand has never been purchased or used.

Second, brand awareness can be a signal of presence, commitment, and substance, attributes that can be very important even to industrial buyers of big-ticket items and consumer buyers of durables. The logic is that if a name is recognized, there must be a reason. The “Intel Inside” program was remarkably successful at creating a perception of advanced technology and earned a significant price premium for Intel for well over a decade even though it did not communicate anything about the company or the product. Pure awareness power was at work.

Third, the salience of a brand will determine if it is recalled at a key time in the purchasing process. The initial step in selecting an advertising agency, a car to test drive, or a computer system is to decide on which brands to consider. The extreme case is name dominance, where the brand is the only one recalled when a product class is cued. Consider Kleenex tissue, Clorox bleach, Band-Aid adhesive bandages, Jell-O gelatin, Crayola crayons, Facebook, and A-1 steak sauce. In each case, how many other brands can you name? How would you like to compete against these dominant brands?

Brand awareness is an asset that can be extremely durable and thus sustainable. It can be very difficult to dislodge a brand that has achieved a dominant awareness level. Customers’ awareness of the Datsun brand, for example, was as strong as that of its successor, Nissan, four years after the firm changed its name.1 An awareness study on blenders more than two decades after GE stopped making the product found that the GE brand was still the second-most preferred brand.2 Another

Brand Awareness

Brand Equity

Brand Loyalty

Brand Associations

Figure 9.1 Brand Equity

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study of familiarity asked homemakers to name as many brands of any type as they could; they averaged 28 names each. The ages of the brands named were surprising: more than 85 percent were over 25 years old, and 36 percent were more than 75 years old.3

There is a great deal of difference between recognition (have you ever heard of Brand X) and unaided recall (what brands of SUVs can you name). Sometimes recognition for a mature brand is not even desirable when unaided recall is low. In fact, brands with high recognition and low recall are termed graveyard brands. Without recall, they are not in the game; their high recognition means they are considered yesterday’s news, making it difficult for them to gain visibility and energy.

Because consumers are bombarded every day by more and more marketing messages, the challenge of building awareness and presence—and doing so economically and efficiently—is formidable, especially considering the fragmentation and clutter that exist in mass media. One route to visibility is to extend the brand over product categories. For that reason, firms such as 3M, Sony, Toshiba, and GE have an advantage because wide product scope provides brand exposure. Another route is to go beyond the normal media channels by using event promotions, publicity, sampling, Internet community, and other attention-grabbing approaches. For example, consider the impact of Samsung’s Olympic sponsorship, the Niketown showcase stores, Swatch hanging a 165-yard-long watch from skyscrapers in Frankfurt and Tokyo, and the Pampers Village, the go-to site for resources and conversation about infant care. All of these firms were able to increase their awareness levels much more effectively than if they had relied only on mass media advertising.

BRAND LOYALTY An enduring asset for some businesses is the loyalty of the installed customer base. Competitors may duplicate or surpass a product or service, but they still face the task of persuading customers to switch brands. Brand loyalty, or resistance to switching, can be based on simple habit (there is no motivation to change from the familiar gas station or supermarket), preference (people genuinely like the brand of cake mix or its symbol, perhaps based on use experience over a long time period), or switching costs. Switching costs would be a consideration for a software user, for example, when a substantial investment has already been made in training employees to learn a particular software system.

An existing base of loyal customers provides enormous sustainable competitive advantages. First, it reduces the marketing costs of doing business because less marketing is required to retain these loyal customers. Keeping existing customers happy and reducing their motivation to change are usually considerably less expensive than trying to reach new customers and persuading them to try another brand. Of course, the higher the loyalty, the easier it is to keep customers happy.

Second, the loyalty of existing customers represents a substantial entry barrier to competitors. Significant resources are required when entering a market in which loyal customers must be enticed away from an established brand. The profit potential for the entrant is thus reduced. For the barrier to be effective, however, potential competitors must know about it; they cannot be allowed to entertain the delusion that customers are vulnerable. Therefore, signals of strong customer loyalty, such as customer interest groups, can be useful.

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Third, a relatively large, satisfied customer base provides an image of a brand as an accepted and successful product. A set of loyal customers also provides reassurance to others. Customers find comfort in the fact that others have selected the brand.

Finally, brand loyalty provides the time to respond to competitive moves—it gives a firm some breathing room. If a competitor develops a superior product, a loyal following will allow the firm the time needed to respond by matching or neutralizing the offering. With a high level of brand loyalty, a firm can allow itself the luxury of pursuing a less-risky follower strategy.

The management of brand loyalty is a key to achieving strategic success. Firms that manage brand loyalty well are likely to:

Have a customer culture, whereby people throughout the organization are empowered and motivated to keep the customer happy.

Manage customer touchpoints to ensure that the brand does not falter in key contexts.

Have a relationship that goes beyond functional benefits to emotional, self-expressive, and social benefits.

Make customers feel that they are part of the organization, perhaps through customer clubs.

Have continuing communication with customers, using direct mail, the Internet, toll-free numbers, and a solid customer backup organization.

Measure the loyalty of existing customers. Measurement should include not only sensitive indicators of satisfaction, but also measures of the relationship between the customer and the brand. Is the brand respected? Liked? Trusted? The ultimate measure is, will the customer recommend the brand to others? Conduct exit interviews with those who leave the brand to locate points of vulnerability.

Measure the lifetime value of a customer so expected future purchases are valued.

BRAND ASSOCIATIONS A brand association is anything that is directly or indirectly linked in the consumer’s memory to a brand (see Figure 9.2). The associations attached to a firm and its brands can be key enduring business assets, because they reflect the strategic position of the brand. Thus, McDonald’s could be linked to Ronald McDonald, kids, the Golden Arches, Ronald McDonald House, having fun, fast service, family outings, or Big Macs. All these associations potentially serve to make McDonald’s interesting, memorable, and appealing to its customers.

Product attributes and customer benefits are the associations that have obvious relevance because they provide a reason to buy and thus a basis for brand loyalty. Companies love to make claims for good reason. Heinz is the slowest-pouring (thickest) ketchup, Amazon has the fastest deliveries, Intel has a faster chip, LinkedIn has the largest professional network, Volvo is durable and safe, and Walmart delivers value. Companies love to make product claims, for good reason. They often engage in shouting matches to convince customers that their offering is superior in some key dimension—Brand One is a high-fiber cereal, or a Boeing plane has more range.

There are several problems with a reliance on attribute and benefit associations. First, a position based on some attribute is vulnerable to an innovation that gives your competitor more

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speed, more fiber, or a greater range. In the words of Regis McKenna, the Silicon Valley marketing guru, “You can always get outspeced.”

Second, when firms start a specification shouting match, they all eventually lose credibility. After a while, customers start to doubt whether any aspirin is more effective or faster acting than another. With many conflicting claims, all of them are discounted.

Third, people do not always make decisions based upon a particular specification. They may feel that small differences in some attributes are not important, or they simply lack the motivation or ability to process information at such a detailed level.

Strong brands go beyond product attributes to develop associations on other dimensions that can be more credible and harder to copy. It is useful to understand some of these other dimensions and learn how they have been used by firms to create customer relationships and points of differentiation. The value propositions described in Chapter 6 are all prominent candidates for associations. Several associations, all with a proven ability to drive successful firms, will now be described to provide a feel for the scope of potential associations.

Product Category

The choice of a product category or subcategory with which a business will associate itself can have enormous strategic and tactical implications. Schweppes positioned its tonic water in Europe as an adult soft drink, and the popularity of new-age adult drinks carried it to a dominant position. In the United States, however, Schweppes (perhaps wanting to avoid the Coke/Pepsi juggernaut) positioned its tonic water as a mixer for alcoholic drinks, which relegated it to being a minor player. Energy bars became a big business by creating a category distinct from candy bars. Wasa Crispbread, in contrast, expanded its market by positioning itself as an alternative to bread rather than positioning itself in a category with rice cakes and Ry-Krisp.

Brands Key Associations

Volvo, Crest Attributes/Benefits Apple, Calvin Klein Design HubSpot, IBM Systems Solution Warby Parker, Tom’s Shoes Social Programs Nordstrom’s, Ritz Carlton Customer Relationships Ferrari, Gold Violin Niche Specialists Lexus, Mayo Clinic Quality Walmart, IKEA Price Value Singapore Airlines, Zappos Service Intel, Toyota’s Prius Product Category Amazon, Google, Marriott Breadth of Product Line 3M, Accenture Organizational Intangibles Visa, Coca-Cola Being Global Google, Telsa Being Contemporary Virgin Atlantic Airlines Brand Personality

Figure 9.2 Brand Associations

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Breadth of Product Line

A broad product offering signals substance, acceptance, leadership, and often the convenience of one-stop shopping. For example, the strategic position that drove Amazon’s operations and marketing was never about selling books, even at the beginning when it was simply a bookstore. (Amazon had the vision to avoid calling itself books.com.) Rather, the firm positioned itself as delivering a superior shopping/buying experience based on the “Earth’s Biggest Selection”—an array of choices so wide that customers would have no reason to look anywhere else. This position allows Amazon to enter a variety of product markets, although it also puts pressure on the company to deliver in each venue.

Breadth also works well as a dimension for other firms, such as Chevrolet, Walmart, and Black & Decker. Even under a strong brand, however, expanding the product offering involves risks. The firm may venture into business areas in which it lacks skills and competencies, the brand might be eroded, and resources needed elsewhere may be absorbed.

Organizational Intangibles

As already noted, attribute and benefit associations can often be easily copied. In contrast, it is difficult to copy an organization, which will be uniquely defined by its values, culture, people, strategy, and programs. For example, at Southwest Airlines, the friendly, fun brand is not created by advertising, but rather by the company culture and people that work there. Likewise, the customer-focused brand image of Nordstrom is created by its dedicated, hard-working sales associates. As Tony Hsieh, CEO of Zappos says, “Your culture is your brand.”

Being Global

CitiGroup is a global financial institution. Visa is a global credit card. Toyota is a global car company. Being global provides functional benefits in that customers can access the services of CitiGroup or Visa anywhere. It also provides the prestige and assurance that comes from knowing that the firm has the capability of competing successfully throughout the world. Knowing that Toyota is strong in the United States helped it succeed in Europe, where customers might otherwise look at it as a modest player. More information on global associations and strategy is provided in Chapter 14.

Being Contemporary

Most established businesses face the problem of remaining or becoming contemporary. A business with a long heritage is given credit for being reliable, safe, a friend, and even innovative if that is part of its tradition. However, it also can be perceived as “your father’s (or even grandfather’s) brand.” The challenge is to have energy, vitality, and relevance in today’s marketplace—to be part of the contemporary scene. The answer usually entails breaking out of the functional-benefit trap. Approaches to add energy will be explored in Chapter 11.

Lane Bryant, a retailer to plus-sized women, developed a dowdy, apologetic image that was holding it back. To break out, it developed a new, contemporary strategic position. It spread the message with new, even sexy, fashions; a Lane Bryant fashion show in New York; revitalized stores; and a new spokesperson, rapper/actress Queen Latifah, in ads, on its website, and in a voter- registration program. Ironically, Lane Bryant’s sister company, Victoria’s Secret, had to reposition

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itself previously from an edgy (Frederick’s of Hollywood) brand to a more mainstream one, albeit at the edge of the mainstream market.

Brand Personality

As with human beings, a business with a strong personality tends to be more memorable and better liked than one that is bland, nothing more than the sum of its attributes. And like people, brands can have a variety of personalities that can become key associations. For example, a brand can be professional and competent (CNN and McKinsey), upscale and sophisticated (Jaguar and Tiffany’s), trustworthy and genuine (Hallmark and John Deere), fun and interesting (Snapchat and Lego), exciting and daring (Red Bull and HBO), or active and tough (REI and Under Armour). Certainly, Virgin is a brand whose strategic position includes a unique personality.

Harley-Davidson has a strong personality reflecting a macho, America-loving, freedom- seeking person who is willing to break out of confining social norms. The experience of riding a Harley (or even the association that comes from wearing Harley-Davidson clothing) helps some people express a part of their personality, which results in intense loyalty. More than 250,000 of these people belong to one of the 800 chapters of the Harley Owners Group (HOG). Twice a year, believers from all over the country gather for a bonding experience. Harley is much more than a motorcycle; it is an experience, an attitude, a lifestyle, and a vehicle to express “who I am.”

Joie de Vivre is a San Francisco firm whose boutique hotels are each inspired by a theme that reflects a personality. The “Rolling Stone” Phoenix hotel attracts rock-and-roll and other enter- tainment personalities with its irreverent sense of cool and funky, adventurous decor. The “New Yorker” Rex hotel is clever and sophisticated, with a literary sensibility. The “1920s luxury liner” Commodore Hotel, with its Titanic Cafe, looks and feels like a party straight out of The Great Gatsby. The “movie palace” Hotel Bijou has a miniature movie theater in the lobby, accompanied by dramatic Hollywood portraits.

Maintaining Relevance

Strong brands stay relevant to their customers by shifting associations slowly over time. In the Brand Asset Valuator, the product of Young & Rubicam’s mammoth study of global brands, relevance is one of four key dimensions identified (along with differentiation, esteem, and knowledge). Analysis of this database reveals that relevance is necessary for brand success. If a business loses relevance, differentiation may not matter.

The abilityof a firmto maintainrelevance varies along a spectrum,as shown inFigure 9.3. At one extreme are trend neglectors—firms that miss or misinterpret trends, perhaps because they are too

Trend

Neglectors

Trend

Responders

Trend

Drivers

CreateIgnore

Figure 9.3 How Companies Engage With Trends to Stay Relevant

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focused on a predetermined business model. Such firms are often characterized as having organizational inflexibility, inadequate strategic analysis capability, and/or a weak brand portfolio strategy; they eventually wake up in surprise to find their products are no longer relevant. At the other end of the spectrum are trend drivers, those firms that actually propel the trends that define the category (or subcategory). In the middle are trend followers, firms that track closely the trends and the evolution of categories and subcategories, making sure that their products stay current.

Virgin Atlantic Airlines, Toyota, and Schwab all have been trend drivers. Virgin created a new subcategory by introducing and owning new services such as massage services in first class. Toyota defined the hybrid category with its Prius. Schwab’s OneSource defined a new subcategory of brokerage firm services.

Trend responders—those firms that can recognize and evaluate trends and then create and implement a response—can sustain success in dynamic markets. Some fashion brands such as Tommy Hilfiger have been nimble in staying abreast of fashion trends. Barbie has changed with the times, being an astronaut, a surgeon, a presidential candidate, and a high-fashion woman; incorporating ethnicity; and becoming relevant to the Internet with an involving Barbie site. L.L. Bean has evolved its position from a hunting, fishing, and camping focus to a broader outdoors theme that is relevant to hikers, mountain bikers, cross-country skiers, and water-sports enthusiasts.

Being a successful trend responder, however, is not easy. As suggested in Chapter 4, it can be difficult to identify and evaluate trends and separate them from fads. It is also difficult to respond to emerging subcategories, especially if the subcategory starts small and if strong brands are well established. Consider the difficulty that McDonald’s, Burger King, KFC, and the other fast food giants have had in responding to the healthy eating trend. They are simply not good at product development and delivery in that arena because it is not in their DNA—they lack the people and culture to be successful. Even worse, their brand becomes a liability as they attempt to change perceptions ingrained by decades of doing what they do. Nevertheless, McDonald’s, after several unsuccessful efforts to create salads, broke through with not only a line of salads that worked well in the chain (e.g., Southwest Buttermilk Crispy Chicken Salad), but also healthy desserts for concerned parents and even gourmet coffee to provide an alternative to Starbucks.

Box VIRGIN ATLANTIC AIRLINES

In 1970, Richard Branson and a few friends founded Virgin as a small mail-order record company in London, England. By the mid-1980s, this modest beginning had led to a chain of record shops and the largest independent music label in the United Kingdom, with artists as diverse and important as Phil Collins, the Sex Pistols, Boy George, and the Rolling Stones. By the 1990s, there were more than a hundred Virgin “megastores,” many making a significant brand statement with their signage, size, and interior design.

In February 1984, Branson decided to start Virgin Atlantic Airlines to make flying fun and enjoyable for all classes, not just first-class passengers. Defying the odds, Virgin became the number two airline in most of its markets by the end of the 1990s. Not only that, it enjoyed the same consumer awareness and reputation as much larger international carriers, including service-oriented airlines such as Singapore Airlines. Virgin Atlantic’s success is due in part to its image of service quality, value, being the underdog, and having an edgy personality.

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Extraordinary Service Quality

Virginhasdelivereda high quality ofserviceand,moreimportanttoperceptions,hasoftendazzledcustomers with original, “wow” experiences. Virgin pioneered sleeper seats in 1986 (British Airways followed nine years later with the cradle seat), limo services at each end of the flight (or motorcycle service for those flying light), in-flightmassages,childsafetyseats,individualTVsforbusinessclasspassengers,drive-throughcheck-inatthe airport,andnewclassesofservice.First-classpassengersareofferedanewtailor-madesuittobereadyattheir destination, masseurs or beauty therapists, and a facility to shower or nap.

Value

Virgin Atlantic’s Upper Class is priced at the business-class level with a service level comparable to many other airlines’ first-class service. Mid Class is offered at full-fare economy prices, and most Virgin Economy tickets are available at a discount. While this lower price point offers a clear consumer advantage, Virgin does not emphasize the price position in its promotion. Cheapness per se is not the message at Virgin.

The Underdog

Virgin’s business model is straightforward. The company typically enters markets and industries with large, established players (such as British Airways) that can be portrayed as being somewhat complacent, bureaucratic, and unresponsive to customer needs. In contrast, Virgin presents itself as the underdog who cares, innovates, and delivers an attractive, viable alternative. When British Airways attempted to prevent Virgin from gaining routes, Virgin painted British Airways as a bully standing in the way of an earnest youngster who offered better value and service.

The Virgin Personality

The Virgin brand has a bold, edgy personality, largely reflecting its flamboyant service innovations and the actions of Richard Branson. Virgin as a person would be perceived as someone who:

Flaunts the rules Has a sense of humor that can be outrageous at times Is an underdog, willing to attack the establishment Is competent, always does a good job, and has high standards

Interestingly, this personality spans some extremes, from competent to a feisty, fun-loving, rule- breaker—an accomplishment envied by other businesses. The key is the fact that Virgin has delivered on each facet of this personality.

Virgin is a remarkable example of how the right set of brand associations can allow a business to stretch far beyond what would be considered its acceptable scope of operations. Rather than restrict itself to records and entertainment, Virgin has used its associations to extend from record stores to airlines, colas (Virgin Cola), vodka (Virgin Vodka), rail service (Virgin Rail), jeans (Virgin Jeans), and dozens of other categories. In each business, the Virgin associations work to provide differentiation and advantage.

In fact, the decision to extend Virgin, a business then associated with rock music and youth, to an airline could have become a legendary blunder if it had failed. However, because the airline was successful and was able to deliver value with quality, flair, and innovation, the master Virgin brand developed associations that were not restricted to a single type of product. The elements of the Virgin strategic position—extraordinary service quality, value for money, the underdog position, and a quirky

170 Part Two Creating, Adapting, and Implementing Strategy

BRAND IDENTITY Creating and managing a brand requires a brand strategy, the heart of which is the brand identity, which provides direction, purpose, and meaning for the brand. A brand identity is a set of brand associations that the firm aspires to create or maintain, an aspirational external brand image. These associations represent what the brand aspires to stand for and imply a promise to customers from the organization. It differs from brand image in that it could include elements that are not present in the current image (you now make trucks as well as cars) or even conflict with it (you aspire to have a quality reputation that is superior to the current perceptions).

The brand identity can best be explained in terms of three steps. These steps assume that a comprehensive strategic analysis has been done. Customer, competitor, and internal analyses are particularly critical to the development of a brand identity.

1. What the Brand Stands For

The first step is to create a set of from 6 to 12 distinct associations that are desired for the brand. The process starts by putting down all the associations that are desired given what is known about the customers, competitors, and the business strategy going forward. A list of more than two dozen is shown in Figure 9.4 for a business-to-business service company here termed Align. In actuality, the list is more often from 50 to 100. During this process there is no effort to zero in on categories of associations, although there is an effort to make sure that organizational intangibles and personality dimensions are at least considered.

These items are then grouped, and each group is given a label. Align was created with a set of a half-dozen acquisitions, each of which continued to operate somewhat autonomously. It was becoming clear, though, that customers preferred a single-solution firm with broad capabilities. The new Align strategy was to orient its service to broad customer solutions and to get its

personality—work over a large set of products and services. It has become a lifestyle brand with an attitude whose powerful relationship with customers is not solely based on functional benefits within a particular product category.

Virgin’s success has been driven in part by pure visibility, largely based on publicity personally generated by Richard Branson. For the launching of Virgin Bride, a company that arranges weddings, he showed up in a wedding dress. At the 1996 opening of Virgin’s first U.S. megastore in New York’s Times Square, Branson (a balloonist holding several world records) was lowered on a huge silver ball from 100 feet above the store. These and other stunts have turned into windfalls of free publicity for Virgin, helping the brand in all contexts.

Branson has fully mastered his role. By employing British humor and the popular love of flouting the system, he has endeared himself to consumers. By never deviating from the core brand values, he has gained their loyalty and confidence. When BBC Radio asked 1,200 people who they thought would be most qualified to rewrite the Ten Commandments, Branson came in fourth, after Mother Teresa, the pope, and the archbishop of Canterbury. When a British daily newspaper took a poll on who would be most qualified to become the next mayor of London, Branson won in a landslide.

Chapter 9 Building and Managing Brand Equity 171

operating units to work together seamlessly. The strategy represented a significant change in culture and operations. With respect to the brand identity, the elements “partner with customers,” “customized solutions,” “collaborative,” and “close to customers” were clustered and given the name Team Solutions, which became one of eight identity elements. The brand goal was to provide a face to customers that matched this new strategy.

2. The Core Identity

The second step is to prioritize the brand identity elements. The most important and potentially the most impactful are classified as core identity elements. The core identity will be the primary drivers of the brand-building programs. They will be the focus of the brand investments, as they are the most critical to the success for the businesses that they are supporting. The balance of the elements are termed the extended identity. They serve to help define the brand, make decisions as to what actions and programs are compatible with the brand, and drive minor programs that will have lesser impact and take modest resources.

In developing the core and extended identity, four criteria should guide the process. Identity elements are sought that:

Resonate with the target market. Ultimately, the market dictates success, and thus the identity should resonate with customers. It is useful to think in terms of how customers relate to the brand over time rather than simply what drives purchase decisions. Also, consider emotional and self-expressive benefits in addition to functional ones.

Differentiate from competitors. Differentiation is often the key to winning. There should be some points of differentiation from competitors throughout the brand identity so there is always an answer to the question as to how the brand is different. Provide parity where competitors have an advantage that is compelling to customers. It is not always necessary to be different or better on all dimensions. There may be some dimensions where the goal is simply to be close enough so that this

Value creation In-depth understanding of customers Flexible Close to customers Resourceful Team oriented Dynamic Partner with customers Broad capability Collaborator Committed to excellence Open communication Best-of-breed Multicultural World class Risk-sharing partner Gets job done Diversified workforce Experienced Technology that works Confident Global Competent Bold (without arrogance) Straightforward World health

Figure 9.4 Partial List of Aspirational Associations for Align

172 Part Two Creating, Adapting, and Implementing Strategy

dimension is no longer a reason to not buy the brand. Hyundai need not, for example, be equal to Toyota in quality; it just needs to be close enough so that its quality image does not prevent purchase.

Reflect the strategy and culture of the business. Ultimately, the brand needs to enable and support the strategy of the business. Particularly, when the strategy represents a change from the status quo and requires a change in brand image, the brand identity needs to reflect the new strategy. The brand identity should also support and reflect the culture and values of the firm because it is the organization that has to deliver on the aspirational brand promise.

The Haas Business School at UC Berkeley has created a brand identity the core of which is:

Question the status quo (lead by championing bold ideas)

Confidence without attitude (lead through trust and collaboration and not arrogance)

Students always (lifelong pursuit of personal and intellectual growth)

Beyond yourself (lead ethically and responsibly)

The “confidence without attitude” dimension, in particular, resonates with students and recruiters and differentiates Haas from other business schools.

3. The Brand Essence

The core identity compactly summarizes the brand vision. However, it is often useful to provide even more focus by creating a brand essence, a single thought that captures the heart of the brand. The purpose of an essence is to communicate the brand internally. Thus, while there are times when an external tagline, designed to communicate the message of the day externally, can and does represent the essence, that is often not the case. Figure 9.5 shows the final brand identity for Align, including the brand essence.

A good brand essence will capture much of the brand identity from a different perspective, will provide a tool to communicate the identity, and will inform and inspire those inside the organization. The Haas School of Business has as its essence “We develop leaders who redefine how we do business.” The Haas essence is a stretch goal encouraging faculty and students to think broadly about innovation.

A key essence choice is whether to focus on what the brand is or on what it does for customers. The former, such as Banana Republic’s “casual luxury” or the Lexus essence reflected in the “passionate pursuit of perfection,” tend to involve functional benefits; the latter, such as American Express’ “do more” or BMW’s “ultimate driving machine,” tend to look to emotional and self- expressive benefits.

Proof Points and Strategic Initiatives

A brand identity should not simply reflect something that appeals to customers. Rather, the firm needs to be willing to invest behind it and create products and programs that deliver on the promise. Toward that end, each identity element should have proof points and/or strategic initiatives associated with it.

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Proof points are programs, initiatives, and assets already in place that provide substance to the strategy position and help communicate what it means. REI has a position around outdoor enthusiasts. Proof points include the brand’s heritage of outdoor activities, a flagship store geared to the outdoors, and the expertise and professionalism of the customer contact staff. Nordstrom has a customer service position supported by the following proof points:

A reputation for customer service

A policy that attaches a service person to a customer rather than a product area

A return policy that is well known and has credibility

An employee compensation program that makes the customer experience a priority

The quality of the staff and the hiring program

An empowerment policy permitting innovative responses to customer concerns

A gap between what the brand now delivers (even given the proof points) and the promise implied by the strategic position should lead to strategic imperatives. A strategic imperative is an investment in an asset or program that is essential if the promise to customers is to be delivered. What organizational assets and competencies are implied by the strategic position? What investments are needed in order to deliver the promise to customers?

If a regional bank aspires to deliver a relationship with customers, two strategic imperatives might be needed. First, a customer database might need to be created so that each customer contact person would have access to all of the customer’s accounts. Second, a program might be needed to improve the interpersonal skills of customer contact people, including both training and measurement.

Worldly but Informal

Core Identity

Commitment to Excellence—anytime, anywhere, whatever it

takes

Spirit of Excellence

Global Network of Local Experts

Open Communicator

Technology That Fits

Support World Health

Team Solutions

Confident, Competent

Ex te

n d

e d

Id e n

ti ty

Exte n

d e d

Id e n

tity

Figure 9.5 The Align Brand Identity

174 Part Two Creating, Adapting, and Implementing Strategy

The Role of the Brand Identity

The need to articulate a brand identity and position introduces discipline and clarity into the strategy formulation process. The ultimate strategy is usually more precise and elaborated as a result. However, the brand identity and position have other, more explicit, roles to play.

One role is to drive and guide strategic initiatives throughout the organization, from operations to product offering to R&D project selection. The overall strategic thrust captured by the identity and position should imply certain initiatives and programs. For example, given that we want to be an e-business firm, what tools and programs will customers expect from us? Initiatives and programs that do not advance the identity and position should be dialed down or killed.

A second role is to drive the communication program. A strategic identity and position that truly differentiates the product and resonates with customers will provide not only punch and effectiveness to external communication, but consistency over time because of its long-term perspective over organizational units that tend to march to their own drummers.

A third role is to support the expression of the organization’s values and culture to employees and business partners. Such internal communication is as vital to success as reaching out to customers. Lynn Upshaw, a San Francisco communication consultant, suggests asking employees and business partners two questions:

Do you know what the business stands for?

Do you care?

Unless the answers to these questions are yes—that is, employees and business partners understand and believe in the business strategy—the strategy is unlikely to fulfill its potential. Too many businesses drift aimlessly without direction, appearing to stand for nothing in particular. Lacking an organizational sense of soul and a sound strategic position, they always seem to be shouting “on sale,” attached to some deal or engaging in unrestrained channel expansion.

Multiple Brand Identities

Arbitrarily insisting that a brand identity should apply to all products or market segments can be self-defeating. Rather, consideration should be given to adapting it to each context. One approach is to augment the brand identity to make it appropriate to a specific context. For example, Honda is associated with youth and racing in Japan while being more family oriented in the United States, but both positions share a focus on quality and motor expertise. Another is to define one of the brand identity elements differently in disparate contexts. Quality for GE Capital might be different than quality at GE Appliances, but high standards apply to both.

The Brand Position

The brand position represents the company’s communication objectives for the brand—what parts of the identity will be actively communicated to the target audience. The conceptualization of a brand position independent of a brand identity frees the latter to become a rich, textured picture of

Chapter 9 Building and Managing Brand Equity 175

the aspirational brand. The brand identity does not have to be a compact view appropriate to guide communication.

The brand position will be inherently more dynamic than the brand identity. As the strategy and market context evolve and communication objectives are met, new ones become appropriate. A series of four or five positions over many years may be required to achieve the brand identity.

One fundamental choice often in front of strategists is whether to create a position that is credible or aspirational. In the case of Align, the firm’s energy and over-the-top quality was legendary and created a value proposition with both functional and emotional components. An associated brand position would be credible, compelling, and relatively easy to implement. However, it would not move the needle as far as supporting the new strategy. A position around collaboration and team solutions, on the other hand, would be on-strategy but would also not be credible for a firm noted as being arrogant and silo-driven and would be expensive and maybe even infeasible. The choice depends on the answers to two questions. Does the firm have programs in place to deliver on the new promise? Is the market ready to accept the changed firm? If the answer to either question is no, it might be prudent to delay the aspirational position.

Another positioning choice is whether to emphasize points of differentiation or points of parity. The answer will depend on which direction will affect the target market. If the brand has a well-established image on a point of differentiation (such as value for IKEA, safety for Volvo), it may be more effective to attempt to create a point of parity on another dimension that is holding it back (quality for Kmart or styling for Volvo).

KEY LEARNINGS

Brand equity, a key asset for any business, consists of brand awareness, brand loyalty, and brand associations.

Awareness provides a sense of familiarity and credibility and makes it more likely that a customer will consider a brand.

A core loyal customer base reduces the cost of marketing, provides a barrier to competitors, supports a positive image, and provides time to respond to competitor moves.

Brand associations can and should go beyond attributes and benefits to include such associations as brand personality, organizational intangibles, and product category associations. The brand identity represents aspirational associations. The most important of these, the core identity, should be supported by proof points and/or strategic imperatives and should be the driver of strategic programs, including product development. While the brand identity represents long-term aspirational associations and is multi-dimensional, the brand position represents the short-term communication objectives and is more focused.

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FOR DISCUSSION 1. Explain how each of the three brand equity dimensions provide value to the firm.

Explain how they provide value to customers.

2. What is the difference between identity and position? Develop alternative positioning statements for Align. Include a tagline and the rationale for that tagline.

3. Create a brand identity for Virgin Atlantic Airlines. Are there potential dimensions, such as high quality and superior service, that are inconsistent with the brand’s personality? If so, how is that handled? How has the identity been brought to life? What are the proof points? Why don’t more brands emulate Virgin’s brand-building programs?

4. Pick out three brands from a particular industry. How are they positioned? Which is the best in your view? Does that brand’s positioning provide any emotional or self- expressive benefits? How would you evaluate each brand’s positioning strategy? Hypothesize proof points and strategic imperatives for each brand.

5. Consider the Joie de Vivre hotel concept described on page 169. Think of themes stimulated by magazines or movies and discuss how you would design a hotel around each concept. For each theme, choose five words that reflect that theme.

Box BEST DIGITAL PRACTICE

REI’s #OptOutside Brand Identity

REI, a national retail co-op selling high-quality outdoor adventure gear and apparel, has built its brand identity on making outdoor adventures more accessible. The company’s “#OptOutside” 2015 Black Friday campaign is an excellent example of how a strategic initiative can reinforce and extend a brand.

A month before Black Friday in 2015, REI announced that it would be giving all of its employees a paid vacation day, closing its stores and suspending online sales on this famous shopping day. By doing so, REI hoped to enable its employees, and of course customers, to #OptOutside instead of spending the day shopping. The campaign was supported by a microsite, a social media campaign, and entertaining online films. Individuals were encouraged to use the designated hashtag to share their activities and experiences. Additionally, REI partnered with a geo-mapping service to help those who wanted to explore the outdoors but were not as familiar with their surrounding areas.

The ambiguity of the #OptOutside tagline was intentional—it made the concept broad enough to apply to many different types of people—from highly active hikers and bikers to individuals who were simply nature enthusiasts. It allowed the REI community to define what opting outside meant to them personally.

The campaign’s impact was significant. More than 150 other retailers and the National Parks department also decided to participate—that number has risen to 275 for the 2016 season. Last year 1.4 million people joined in on the trend, and REI expects that number to continue to grow.

Ultimately, REI’s intention with the campaign was not a short-term stunt but a calculated reinforcement of its brand identity and encouragement for more people to shop at stores.

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The company’s efforts certainly paid off, with customer membership to the REI co-op rising significantly in the wake of the campaign.

Questions:

1. Why does #OptOutside improve REI’s performance over the long run?

2. What are the risks associated with developing the brand in this way?

Sources: Ann-Christine Diaz, “REI’s ’#OptOutside’ Campaign Takes Best of Show at the One,” Advertising Age, May 13, 2014, http://adage.com/article/advertising/rei-s-optoutside-campaign-takes-show-show/304012/

Niraj Chokshi, “Looking to #OptOutside? These States Waived Park Fees in Joining REI’s Anti-Black Friday Campaign,” The Washington Post, November 27, 2016, https://www.washingtonpost.com/news/ morning-mix/wp/2015/11/25/rei-is-boycotting-black-friday-and-some-states-are-following-its-lead/

“REI Overview,” https://www.rei.com/about-rei/business.html

Patrick Coffee, “How One Brave Idea Drove REI’s Award-Winning #OptOutside Campaign,” Adweek, June 28, 2016, http://www.adweek.com/news/advertising-branding/how-one-brave-idea-drove-reis- award-winning-optoutside-campaign-172273

BoxBEST GLOBAL PRACTICE

This Girl Can: Building Awareness

While building brand awareness with a campaign is fairly intuitive, driving tangible change among consumers is more challenging. Sport England, a government organization with the mission of giving all individuals access to athletics no matter their age, background, or ability, successfully accomplished this with its “This Girl Can” campaign. Initially aimed at educating the public on the significant gender gap in sports, the messaging also began to inspire real action.

In England, two million fewer women play sports than men, despite 75 percent of women sampled stating that they want to be more active. Understanding why this was the case was a crucial first step. Sport England’s research uncovered that fear of judgment from others was the primary reason holding women back from sports. However, the type of judgment varied widely—including that they weren’t fit enough, they were being too selfish with their time (particularly among mothers), or they weren’t skilled enough.

After gathering these insights, the marketing team understood that the heart of the campaign would need to focus on breaking down the perception regarding what being active means and looks like. The campaign, anchored by TV commercials, featured women of all sizes, ages, and fitness abilities engaging in sports. The ads used humble and entertaining language to relate to women who were new to sports. For example, a popular ad said “I’m slow, but I’m lapping everyone on the couch.”

Sport England’s ability to create a campaign that stood out from traditional sports advertising ensured that the ads would capture attention. The campaign went on to yield extremely successful results. Upon its launch, it garnered 37 million people views on Facebook and YouTube, and 500,000 members joined the “This Girl Can” online community. Most importantly, Sport England estimated that 50,000 more women engaged in sports.

178 Part Two Creating, Adapting, and Implementing Strategy

Questions:

1. Develop an ad campaign for “This Girl Can” that would motivate women who felt that engaging in sports was a sign that they were too selfish with their time.

2. What types of partnerships and sponsorships would reinforce this brand and further increase the number of women engaged in sports?

Source: Nicola Kemp, “Case Study: How ‘This Girl Can’ got 1.6 Million Women Exercising,” Campaign, May 18, 2016, http://www.campaignlive.co.uk/article/case-study-this-girl-can-16-million-women-exercising/ 1394836

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C H A P T E R T E N

Toward a Strong Brand Relationship

They laughed when I sat down at the piano—but when I started to play. . . . —John Caples, copywriter, 1926

A strong relationship develops not by driving brand involvement, but by supporting people in living their lives. —Susan Fournier, guru of the brand relationship metaphor

Any CEO who cannot clearly articulate the intangible assets of his brand and understand its connection to customers is in trouble. —Charlotte Beers, J. Walter Thompson

Integral to a business strategy is creating a cadre of loyal customers connected to the brand based on a strong brand relationship. The larger the cadre and the stronger the relationship the better. It will provide a base business and, often as important, a potential source of brand advocacy, the most effective brand building that exists.

A loyal customer base is the ultimate competitive advantage because it is shielded from competitors. Loyal customers will have little motivation or interest in competitive offerings. As a result, competitors will find it expensive to try to gain converts among this group. In addition, because maintaining customers is much less expensive than attracting customers, the marketing effort to support the customer base will be relatively modest.

There are many routes to a brand relationship. Three are explored in this chapter. First, make the brand experience as positive as possible by employing a touchpoint analyses program (see also Chapter 7). Second, instead of focusing on selling the brand or the firm, look to the customer sweet spot, something the customer is involved and even passionate about, and connect to it, possibly as a supportive partner. Third, look beyond functional benefits to provide a more intense and differentiating basis of a relationship.

UNDERSTANDING AND PRIORITIZING BRAND TOUCHPOINTS The brand experience is at the essence of a brand relationship. It should be pleasant, exceed expectations, and even inspire people to talk about positive interactions. It should not be

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frustrating or disappointing and certainly should not motivate people to discuss negative incidents. The brand relationship can be compared to a personal relationship. If you have a friend or colleague or mentor relationship with another, you expect the interaction experiences to be consistent at a minimum and hopefully be exceptional, thereby furthering and strengthening the relationship.

The brand experience is created by brand touchpoints. A brand touchpoint occurs any time a person in the marketplace interacts with the brand. Over time, all of those touchpoints combine to define the brand experience. It is therefore important to recognize that touchpoints need to be managed on an ongoing basis so that they deliver and support a strong brand relationship. This is especially true for a service business or one that has a service component to it.

A touchpoint perspective quickly makes it clear that the drivers of each touchpoint experience are the employees and firm partners who participate in the design and execute the experience. Thus, they need to understand and believe in the brand and in the value proposition. This is one reason why the brand vision must be communicated to employees and partners.

All touchpoints do not have the same impact, the same execution requirements, or the same cost structure. So one task is to prioritize the touchpoints to determine which should receive resources to improve the experience. There should be a clear understanding as to which touchpoints should be improved, why they were selected, and how the improvement can be achieved.1 Prioritizing the touchpoints and developing a plan to improve those that are considered most in need of change involves the five steps summarized in Chapter 7 (page 135).

The effort to improve the customer experience should strive to achieve simplicity and trustworthiness. Customers want a touchpoint experience to be simple and easy to use, navigate, and understand. They do not want complexity, information overload, and frustration. The power of simplicity is shown by its effect on customer decisions. One study found that brands that scored in the top quarter in delivering simply, relevant information were 86 percent more likely to be purchased and 115 percent more likely to be recommended to others.2

Touchpoints around brand search are particularly prone to complexity and inconvenience. A buyer usually wants to compare brands, and communicating specifications and benefits of one brand is not that helpful. Several automobile brands, recognizing that reality, do offer the ability to compare their brand with a set of comparison brands of choice. Anything that can reduce the complexity of a decision will be welcome. DeBeers uses the four Cs (cut, color, clarity, and carat) to frame a complex decision. Herbal Essence provides a guide based on identifying hair type and color treatment needs that simplifies the decision. Also, information that is screened for relevance will be valued. ShoeDazzle.com, for example, provides shoe suggestions based on personality information such as customers’ favorite fashion icons and heel preferences.

Customers also want trustworthy, relevant information about brands and guidance as to how to compare them. Often customer input is seen as the most trustworthy because it is based on actual experience and there is no commercial bias. Walt Disney World Moms Panel, for example, answers questions about Disney vacations. Airbnb offers reviews of hosts and properties to provide helpful information to potential renters. TurboTax provides more than 100,000 unfiltered reviews of its products and helps customers find the most relevant ones for their needs. Another source is experts. Saks Fifth Avenue, for example, has the fashion writer Dana Riggs give fashion advice to its customers. Betty Crocker has an “Ask Betty” section on its website. Companies are also linking

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to internet celebrities that have their own followings to help customers learn more about products and services and the lifestyle surrounding their use.

Improving the brand experience at every touchpoint is one way to build and solidify brand relationships. Any failure of a touchpoint to deliver an on-brand experience can put customer loyalty at risk and can provide an opening for competitors. Conversely, excelling at the touchpoint level will make customer loyalty an ongoing source of brand and business strength.

FOCUSING ON THE CUSTOMER’S SWEET SPOT The instinct of executives developing a marketing program is to advance the offering, brand, and firm. This is especially true when the goal is to create a digital community around a brand. How can visibility be enhanced, associations reinforced, and user loyalty increased? This orientation is driven by financial performance goals and the assumption that customers are rational and want to know and act on information regarding a product or service.

When customers are highly involved in the brand and offering, an offering-driven program can work. For example, Dell has a series of programs for which customers are motivated to be engaged. These programs include Direct2Dell blog, where users can communicate directly to Dell; IdeaStorm whereby a user can post ideas for Dell to consider and evaluate the ideas of others; and the Dell Support Forums, where users ask questions and get answers. The problem is that most brands and offerings are inconsequential within, tangential to, or detached from customers’ lifestyles. As a result, offering-driven brand building and marketing rarely create a strong brand– customer relationship.

There is an alternative. Instead, look for a customer “sweet spot” and find a program that will allow the brand to connect with that sweet spot. A sweet spot, whether it is New York City adventures, healthy living, rock climbing, sustainability, a college football team, or whatever else, should be important to customers and what they are motivated to talk about. It should reflect how customers spend their “thinking and doing” time, their beliefs and values, their activities and passions, those possessions that express their personality, and their higher purpose. Ideally, it would be a part of, if not central to, their self-identity and lifestyle or reflect a higher-order purpose in their lives.

The goal should be to create or find an event, activity, interest area, or cause that connects to a true customer sweet spot. It needs to resonate, break out of the clutter, provide a hub around which a set of coordinated brand-building programs can be developed, and link to and enhance the brand. Consider Pampers and Coke, for example.

Pampers went beyond diapers by “owning” the website Pampers Village, which provides a “go to” place for all issues relating to babies and child care and gets more than 600,000 unique visitors each month. Its seven sections—pregnancy, new baby, baby development, baby toddler, preschool, me, and family—each has a menu of topics. For example, under baby development, there are 57 articles, 230 forums, and 23 play-and-learn activities. Its online community allows moms and soon-to-be moms to connect with each other to share their common experiences, issues, and thoughts about how to raise a healthy, happy child. The program demonstrates that Pampers understands mothers and works to establish a relationship between the brand and the mother that will potentially continue throughout a mother’s Pampers-buying life.

Coca-Cola partnered with the World Wildlife Foundation, which is engaged in major initiatives to conserve water, reduce carbon emissions, and save polar bears. A visible Coke

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component is an effort to spotlight polar bears with research (customers can contribute and receive a virtual piece of arctic land from which they can monitor bears) and promotions such as the Polar Pick-me-up where a person can send a Coke to a friend. The Coke Facebook page with 104 million likes coordinates the effort. The community provides Coke with likability, energy, and customer engagement. It resonates with a segment important to Coke that is likely to be different than the segment that responds to the humorous videos around Coke “happiness.”

What Does the Sweet Spot–Driven Program Buy?

To connect with a customer sweet spot provides avenues to a relationship much richer than that of an offering-based relationship that, for most brands, is driven by a functional benefit and is relatively shallow and vulnerable. In particular, it can potentially do the following:

Stimulate a Social Network

A social community associated with a sweet-spot program often has the potential to have a high level of social activity, which is increasingly difficult in an era of social media fatigue. Focusing on what a person is passionate about, such as baby care with the Pampers Village or motorcycle trips with Harley-Davidson, will motivate customers to reach out for information or to share experi- ences and ideas. Such efforts can stimulate the major reasons to be socially active, including to be involved in the contest (gain or spread information), self-involved (gain attention, show knowl- edge), and other involved (belonging to a community and helping others).

Create Brand Energy and Interest

One of the key challenges for most brands globally is to create energy and visibility. For Avon, for example, the product line is not an energy source, but the Avon Walk for Breast Cancer creates involvement, connects to an area the target audience has passion about, and attaches a higher purpose the to the Avon brand, which can lead to respect and liking. Millions of women have participated directly or indirectly over two decades and the program has raised more than $600 million for cancer research. That is energy. If you make hot dogs, it is hard to manufacture energy. But if you focus on a shared interest with kids, namely their events and parties, and create the Oscar Mayer Wienermobile (or more accurately, eight of them) that joins the party and supports a jingle contest, you have real energy.

Enhance Brand Likability and Credibility

Finding a sweet spot and developing a connecting program with substance raises the brand way above the noise emanating from firms shouting, “My brand is better than your brand.” The positive feelings associated with the shared-interest area can lead to positive feelings about the brand; people attribute all sorts of good characteristics to liked brands with whom they share interests. Hobart, a maker of high-end institutional kitchen equipment, became a thought leader and information source in regard to such issues as finding, training, and retaining good workers, keeping food safe, providing enticing dining experiences, eliminating costs, and reducing shrinkage. This program impacted perceptions of the brand and propelled Hobart into a leadership role that lasted well over a decade until the company was bought and integrated into a larger firm.

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Form a Friend–, Colleague–, or Mentor–Brand Relationship

The existence of a sweet-spot program makes a friend, colleague, or mentor relationship metaphor likely to be applicable. California Casualty, an auto and home insurance firm that specializes in teachers, has a “School Lounge Makeover” program to provide $7,500 to upgrade teacher lounges for schools that make the most compelling case. Only a friend would take an interest in such a mundane but important issue area. California Casualty also acts as a colleague, sharing goals and programs by being a sponsor and partner in IMPACT, an organization that is designed to attack teenage distracted driving through in-school educational and involvement programs. Finally, a brand can be like a mentor. Udi, which promotes gluten-free living with its website GlutenFree.com, for example, is in a position to offer advice and encouragement with its gluten-free bakery products as well as support a community concerned with gluten issues.

HOW TO CREATE OR FIND A CUSTOMER SWEET SPOT Creating a successful sweet spot–driven program involves identifying a customer sweet spot, creating or finding a connecting program, and linking the brand to the program. Each step has substantial uncertainties and challenges.

Identify a Customer Sweet Spot That Will Engage the Audience

The first challenge is to find a set of potential sweet spots by understanding the customers in depth. How do they spend their quality time? What activities do they enjoy? What possessions are important to them and reflect their personality and lifestyle? What do they talk about? What issues absorb their attention? In what areas do they hold strong opinions? What are their values and beliefs? Their higher purpose?

Create a Sweet Spot–Driven Program

With an understanding of the customer in hand, there are three on ramps to the identification of the right shared-interest program.

Making the Offering an Integral Part of the Program

The first on ramp is to determine if the brand can be integrated into a “sweet-spot” program and be a full partner that contributes assets and substance. Kaiser Permanente, for example, repositioned its brand away from a focus on health care (linked to bureaucracy and sickness) to a shared interest in healthy lifestyles (associated with control and wellness). The shared-interest program involves members controlling their own health by accessing a wide array of preventive health programs online and through classes that include areas such as weight control, stress management, insomnia, smoking issues, and healthy eating, all supported by “My Health Manager,” which can be used to record and monitor program participation. These programs have objectives very different from selling compassionate staff and clean, effective hospitals.

Linking the Offering to the Program

A second on ramp is to build on a sweet spot that has a natural connection to the brand. There are a host of bases for a brand connection such as lifestyle (Zipcars and urban living), an application (Harley-Davidson and touring on motorcycles), an activity (adidas Streetball Challenge, a local

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three-person basketball tournament surrounded by a weekend party with music, dance, etc.), a target customer (Pampers and mom’s involved in baby care), a country (Hyundai makes and sponsors the Kimchi Bus, a 400-day effort to spread Korean cuisine), values (Dove on redefining beauty), or an interest (the Sephora BeautyTalk site for those interested in beauty tips and issues). The fit should work; it should not appear incongruous.

Linking the Target Market to the Program

A third on ramp is to find or create a sweet-spot program that has no connection with the product or service. The Avon Walk for Breast Cancer and the Red Bull Soapbox Racer video game have little relationship with the respective offerings. Instead the connection is to the target market’s interests. Relaxing the commonly held dictum that there must be some kind of offering fit or connection means that the search for a sweet-spot area that customers will be truly involved with will be unconstrained. Anything is eligible as long as it is relevant to the target market.

It can be a challenge to connect the brand to these types of programs. If the brand is included in the program as it is for the Red Bull Soapbox Racer, the connection challenge can be overcome. However, in other circumstances, the task requires persistent reminders, which can expensive and difficult to do well.

Find an Existing External Program to Which the Brand Could Connect

The classic “make or buy” decision should be debated. An internal, owned sweet-spot program means that the substance, evolution, and investment can be controlled by the firm. However, establishing a new program can be costly, difficult, and even not feasible, especially if the sweet- spot program candidates have been preempted in the marketplace or if the firm lacks the resources to create a competing program.

An option is to find an established branded sweet-spot program with proven visibility and effectiveness and link to it. Home Depot wanted a program to leverage its assets and expertise to help disadvantaged people build or rebuild homes. The solution was to connect to Habitat for Humanity, a branded program with an established record of success in building homes to those who need help. Home Depot connected by providing visible and tangible support with building supplies, volunteers from its knowledgeable staff, and signage in stores and on its website. For many customers of Home Depot, the link was well known. As an aside, it does not matter if Habitat for Humanity is linked to Home Depot, only the reverse, because the goal is to influence the Home Depot brand.

The Sweet Spot—A Big Idea

The sweet-spot program should have an immediate impact by stimulating customer involvement and purchases, thus affecting the short-term financials. Its more important impact, however, is likely to be enhancing the brand, building long-term customer relationships, and increasing loyalty, all firm assets that will pay off even though they are sometimes not so easy to quantify or justify.

GET BEYOND FUNCTIONAL BENEFITS When identifying the top print advertisements and best headline in the past century of advertising, the one written in 1926 by a young copywriter named John Caples is always in the conversation. The ad is known by its heading: “They laughed when I sat down at the piano—but when I started to

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play . . .” His assignment was to entice people to buy piano lessons by correspondence from the U.S. School of Music.

Under a picture of a young man at a party sitting down to play the piano, the headline set the stage and indeed summarized the story, which was recounted in detail in the body of the ad. The hero was ridiculed by the guests when he sat down, but the ridicule turned to accolades and applause when he began to play, only a few months after starting the correspondence course. The ad was not only critically acclaimed but, more to the point, brought in a lot of customers.

There is a lot to learn today from this ad. There was almost nothing about the offering or the learning process that surrounded it. Rather, the ad told a story in graphic detail about what happened to someone who took the correspondence course. Most remarkable, the ad shows that functional benefits are not the sweet spot of persuasion and communication. Rather, what grabs people are emotional, self-expressive, and social benefits. There is the emotion felt not only by the piano player who excelled in a pressure context, but also by those hearing the story who are bursting with pride that he did it. There is the self-expressive benefit, the ability of the person to express his talent, his perseverance, and his ability to face down doubters. And there is the social benefit when the man became not only accepted into a desirable reference group, but also an admired member.

All too common is the “product-attribute fixation trap” in which the strategic and tactical management of the brand is excessively focused on product attributes and functional benefits. Product characteristics such as scope (Crest makes dental hygiene products), attributes (Volvo is safe), quality and value (Kraft delivers a quality product), and uses (Subaru is made for the snow) are assumed to dominate in the brand relationship. There is thus a failure to recognize that a brand includes these product characteristics but potentially much more. The results are less than optimal strategies and ineffective marketing programs.

The product-attribute fixation trap is based in part on the erroneous assumption that these attributes are the only relevant bases for customer decisions and competitive dynamics. This “rationale person” view of customers is comfortable but usually wrong. It gets reinforced when market research aimed at finding important drivers of brand preference has a significant bias toward attributes in part because they are easier to use by researchers and respondents alike. Attributes, however, often scale much higher in importance than they merit. Research on trucks, for example, suggests that rational attributes such as durability, safety features, options, and power are the most important. Yet more intangible attributes such as “cool styling,” being “fun to drive,” and “feeling powerful” are more likely to influence decisions of consumers who often cannot or will not admit that such frills are really important to them.

Even worse, strategies based on functional benefits are often strategically ineffective or limiting. First, customers may not believe that a brand has a functional advantage because of the conflicting claims of competitors and puffery or may not believe the benefit represents a compelling reason to buy the brand. In the hotel business, cleanliness is important, but most hotels are perceived to be clean. Second, if the functional benefit represents a point of differentiation, competitors may quickly copy it. A gas-millage advantage for a car brand may be a short-term differentiator because competitors will find ways to beat or bypass any performance specification. Third, the benefit may not represent a basis of a strong, long-term relationship because there is no emotional attachment. Finally, a strong functional association confines the brand, especially when it comes to responding to changing markets or in exploring brand extensions.

Thus, it makes sense to move beyond functional benefits and consider emotional, self- expressive, and social benefits as a basis for the value proposition.

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BROADENING THE CONCEPT OF A BRAND A brand, in addition to product attributes, can be defined by its user imagery (the Ralph Lauren man), symbols (the Apple logo), country of origin (Audi is German made), organizational associations (such as innovation, a drive for quality, and concern for the environment), and brand personality (such as being perceived to be upscale, competent, trustworthy, formal, or intellectual).

A brand is also defined by some combination of emotional, self-expressive, and social benefits, three intertwined concepts that, along with functional benefits, are components of the value proposition. They provide a richer view of a brand and its relationship with customers.

Emotional Benefits

An emotional benefit relates to the ability of the brand to make the buyer or user of a brand feel something during the purchase process or use experience. “When I buy or use this brand, I feel . . .” Thus, a customer can feel safe in a Volvo, excited in a BMW, happy with Coke around, warm when receiving a Hallmark card, strong and rugged when wearing Levi’s, relaxed when having Numi tea, or in control when using TurboTax. Evian is simply water, but through the slogan “Another day, another chance to feel healthy” and supporting advertising, Evian associates itself not only with working out (a common use occasion for the brand), but also with the satisfied feeling that comes from a workout.

Emotional benefits add richness and depth to the brand and the experience of owning and using the brand. Without the memories that Sun-Maid raisins evoke, the brand would border on commodity status. The familiar red package links many users to the happy days of helping mom in the kitchen (or the idealized childhood for some who wished that they had such experiences). The result can be a different usage experience reinforced with feelings, and a stronger brand.

Box P&G’s “THANK MOMS”: A MODEL CAMPAIGN IN A GLOBAL WORLD

P&G’s “Thank You Mom” Olympic marketing program was a brilliant effort to draw on a universal human value to create a program with energy, relevance, and emotional benefits that spanned brands and countries. Plus, it is ongoing with a life beyond one Olympics. Applied to the Vancouver Games of 2010 and the Special Olympics of 2011, it made it major push in the 2012 London and 2016 Rio Games. It is all about celebrating what moms do and to thank them for their efforts, their care, and their achievements.

In London, the campaign came to life with the “Best Job,” a short film that touches the heart and celebrates the role that moms play in raising Olympians and great kids. There were also videos of the moms of some of the 150 athletes sponsored by P&G brands. A mom would be shown watching her child excel by an exceptional performance or by winning an event. The campaign was promoted through a host of media channels. A companion in-store worldwide retailer program for five months before the London games involved four million retailers. It was tied to an effort to raise more than $25 million to support youth sports programs that would aid both the Olympics and moms everywhere. The promotions involved some 34 P&G brands, including Tide/Ariel, Pantene, Pampers, and Gillette. There was a “Thank You Mom” app that allowed people to thank their own moms with personalized content in the form of a video.

(continued)

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In a study of brand love, researchers from the University of Michigan—Rajeev Batra, Aaron Ahuvia, and Richard Bagozzi—used some 90 in-depth interviews about object and brand love and followed them up with a quantitative study.3 One finding was that respondents had no trouble identifying brands with which they had a love relationship. Another was that some of the key characteristics of that love relationship were emotional benefits such as feelings of happiness, excitement, calm, “like an old friend,” having the right “fit,” and having a strong desire to avoid being separated.

Self-Expressive Benefits

Russell Belk, a prominent consumer behavior researcher, wrote, “That we are what we have is perhaps the most basic and powerful fact of consumer behavior.”4 Belk meant that brands and products can become symbols of a person’s self-concept.

Brands and products, as symbols of a person’s self-concept, can provide a self-expressive benefit by providing a vehicle by which a person can express his or her self. “When I buy or use this brand, I am ___.” A brand does not have to be Harley-Davidson to deliver self-expressive benefits. A person can be cool by buying clothes at Zara, successful by driving a Lexus, creative by using Apple, a nurturing parent by preparing Quaker Oats hot cereal, frugal and unpretentious by shopping at Aldi, adventurous and active by owning REI camping equipment, or competent by using Microsoft Office.

Why is some contemporary art sold at astronomical prices? Why would a stuffed dead shark be worth $40 million and hang in the New York Metropolitan Museum of Art? Why would a rectangular set of color spots created by an artist’s staff sell for $600,000? It is not objective quality for sure. Experts could not agree as to whether a painting resembling a Jackson Pollock drip painting found at a flea market was authentic. Depending on their verdict, the painting would be worth a few thousand or $40 million. The same painting! How does an artist create a brand that can capture such a price premium? The answer is not simple, but without question, self-expressive benefits play a predominant role.

In the brand love study, another dimension identified was self-expressive benefits. Three benefits were identified—current self-identity where the brand says something about who you are, a desired self-identity where the brand helps you reach for your aspirational self, and a sense that a loved brand makes life meaningful.5

When a brand provides a self-expressive benefit, the connection between the brand and the customer is likely to be heightened. For example, consider the difference between using Oil of Olay, which has been shown to heighten one’s self-concept of being gentle, sophisticated, mature,

The marketing program was a winner for several reasons beside the fact that it scaled over dozens of brand silos and many countries and was estimated to have generated $500 million in sales. It provided the prestige and energy of being involved in the Olympics plus the “feel-good” aspect of supporting youth sports. Further, the connection with real moms provided a hearty dollop of authenticity and emotion. It is easy to empathize with moms who have fed babies, provided lunches, supported at swim meets, dealt with skinned knees, been there for recitals, and shared in the joy of winning gold at the Olympics. Everyone can relate to the best of a mom’s role.

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down to earth, and Jergens or Vaseline Intensive Care Lotion, neither of which provides a comparable self-expression benefit.

Of course, each person has multiple roles; for example, a woman may be a wife, mother, writer, tennis player, music buff, and hiker. For each role, the person will have an associated self- concept and a need to express that self-concept. The purchase and use of brands is one way to fulfill these multiple needs for self-expression (Figure 10.1).

Social Benefits

The drive to have friends, colleagues, family, and groups with common interests is intense and satisfies the needs of belonging and self-identity. Many brands have the capability of participating or even driving social benefits. Social relationships not only are linked to fundamental human needs, but provide a setting to influence as well. Word-of-mouth communication from friends or associates is often the most influential communication because it is perceived to be unbiased and based on knowledge or experience.

There are several types of social benefits. Some can involve actual or potential interactions with friends or others who share an interest, a lifestyle, and values. Bikers can post pictures of their last ride on the Harley website. BeautyTalk by Sephora, for example, provides a community for those interested in or even obsessed with skin care and cosmetics. They can directly talk about issues of concern with experts and peers who are every bit as involved as they are. Kraft Kitchens has a community around cooking dishes and meals that are tasty, healthy, and easy to prepare. The community shares information but, more important, feelings about a common interest.6

Some brands can provide social benefits by defining or linking to a reference group, a group in which an individual identifies and whose values he or she has adopted. “When I buy or use this brand, the type of people I relate to are _________.” Prius may reflect a reference group for some. Or a Starbucks loyalist may feel that he or she is part of a closed club of aficionados. This reference group social benefit, which can occur without any actual interaction, is often very powerful. The brand experience becomes the device to link the person with the group, thereby providing a belonging experience. Although there is often no actual word-of-mouth communication with the reference group, it is still influential because of its implied brand endorsement.

Another type of social benefit can come from an aspirational group. A person who plays golf with Titlist Pro V1 golf balls is among a group that contains some really good golfers. The brand makes the link. These golfers are not assessable, but the brand provides a link that makes them a potential part of a person’s identity and lifestyle. The group can also influence by being a type of person to emulate.

A social benefit is powerful because it provides a sense of identity and belonging as well as an influence platform. Most people need to have a social niche whether it is a family, a work team, a recreation group, or whatever. If a brand can provide that, it can be a basis for a strong relationship.

Benefits Offered From Customer’s Perspective

Emotional Benefits When I buy or use this brand, I feel ______________. Self-expressive Benefits When I buy or use this brand, I am ______________. Social Benefits When I buy or use this brand, I relate to people like _________________.

Figure 10.1 Emotional, Self-Expressive, and Social Benefits

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Combining Benefits

These three benefits are often related, and a brand or its associated programs can activate two or all three benefits. BeautyTalk, for example, could provide a satisfying feeling from finding the right cosmetic and looking good, a self-expressive benefit of being knowledgeable, if not an expert, in an area of importance to you in addition to social benefits. That was the case in the ad “They laughed . . .” discussed earlier.

When multiple benefits are present, it can be useful to prioritize them because it can matter which benefit dominates. It can impact the way that the benefits are enhanced and brought to light. For example, whereas emotional benefits tend to involve the act of using the product (wearing a cooking apron confirms oneself as a gourmet cook), self-expressive benefits would tend to focus on the consequence of using the product (feeling proud and satisfied because of the appearance of a well-appointed meal) and social benefits involving others affected by the use experience (the feelings of others participating in cooking or attending the meal). These differences suggest that it will be helpful to know which benefit is being used.

The Brand Ideal

One way to introduced higher-order benefits into your brand, according to Jim Stengel, the influential former CMO of P&G, is to develop a brand ideal, a shared goal of improving people’s lives.7 For P&G, it is to “touch lives and improve the lives of the world’s consumers.” P&G’s Olympic sponsorship, the “proud sponsor of Moms,” touched lives and resulted in a sales bump as well. P&G’s Tide has its “Loads of Hope” program in which Tide people improve lives of disaster victims by literally doing their laundry. So instead of being a peanut butter brand, become a partner with Mom in a children’s development.

Brand ideals come in five types:

Eliciting joy. Downey fabric softener (Lenor outside the U.S.) satisfies people’s need to stimulate and renew the senses of touch, smell, and sight.

Enabling connection. Think of the Zappos 24/7 call center that connects with customers on a personal level.

Inspiring exploration. REI provides clothes and equipment for real exploration. Evoking pride. Jack Daniels has a deep heritage that makes users proud. Impacting society. Method delivers green products with passion and authenticity.

According to Stengel, leaders of brands, companies, or countries should be able to concep- tualize a vision that both inspires and provides practical direction for strategy. Operations proficiency is not enough. Vision is important.

Personal Relationship Models

Another “beyond functional benefit” route is to consider the human relationship metaphor. It has been shown that relationships observed in humans, such as arranged marriages, casual friends, marriages of convenience, committed partnership, best friends, compartmentalized friendships,

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kinships, rebound relationships, childhood friendships, courtships, flings, secret affairs, and enslavements, appear in brand settings as well. Customers can identify brands that fit these types of relationships and more.

Exploring whether a brand relationship can be modeled after a human analogue can provide insights. For example, if Microsoft is perceived to be a slave–master relationship, looking at the causes and ways to soften the relationship can be helpful. Or learning that some consumers believe that American Express looks down on them can lead to potential changes in substance and tone. Or knowing that a brand like Schwab is regarded as a mentor or a colleague suggests role models and a way of looking at relationship goals that can have a clarity that would not be possible if the brand vision did not include a relationship component.

KEY LEARNINGS

Loyal customer groups based on strong brand relationship can be a significant competitive advantage in part because they are relatively easy to retain and expensive for competitors to attack. The customer experience is a key part of the relationship, and one way to enhance it is to prioritize brand touchpoints for improvement.

Focus on the customer sweet spot—activities, beliefs, and values—and a higher purpose. Find a way to connect to that sweet spot, hopefully as a partner. Getting involved in a sweet spot is usually more effective that trying to sell a brand or firm.

Get beyond the functional benefits to deliver emotional, self, or social benefits. The goal is to provide a deeper and more stable basis of a relationship.

FOR DISCUSSION 1. Consider the bank you have a relationship with. List all the brand touchpoints.

Evaluate which are the most important to you and why.

2. What are your sweet spots? Pick an activity or interest. What brand-connected programs touch that activity of interest? If you were Ford, how would you design a program that would be relevant to your sweet spot?

3. Do you agree that marketing executions are subject to the attribute fixation trap? For what brands might that not be true? Why?

4. What brands deliver emotional benefits for you? Self-expressive benefits? Social benefits? What is it about the brand that reinforces that ability to deliver benefits?

5. Think of some brands that have a relationship that you could describe as a fling, secret affair, or mentor relationships. Why?

6. What brands, if any, do you have a love relationship with? Why?

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BoxBEST DIGITAL PRACTICE

How Sephora Creates Beauty Across Brand Touchpoints

Sephora, a premium cosmetics retailer, has earned tremendous loyalty by extending their brand across what its customers value—all things beauty. The company understands that its customers want to enjoy and experience their passion for beauty in different ways, and it uses several brand touchpoints to enable this.

The first is by providing a sensory filled in-store experience. As they shop, Sephora customers have the unique opportunity to physically interact and experiment with different lines of products. Such accessibility has resonated especially well among Millennials, who view beauty buying as a “hunt” for their right individual look. The company has introduced numerous customer-facing tools to further facilitate finding a personalized style. For example, InstaScent spritzes raw notes of a perfume to help customers determine which defining scent they identify with the most before exploring specific fragrances with a store consultant. Sephora offers the Color IQ handheld device to aid customers in understanding what products match their skin tones.

Sephora’s commitment to the experiential element of shopping for beauty products extends to its web presence. Sephora Virtual Artist allows customers to try on dozens of lipstick color variations in seconds, with add-on features like the ability to compare different shades simultaneously or randomize options to test out. For customers either seeking something specific or hoping to be inspired, the Sephora Beauty Board is a great resource. Along with the option to simply browse through the site, users can post pictures of products to gain feedback from others. Sephora TV provides yet another platform where customers can see “how-to” instructional videos on how to achieve a certain look.

Lastly, Sephora views its online community valuable for connecting customers who share the same passion for beauty. The BeautyTalk forum provides an opportunity to converse with experts about makeup, skin care, fragrances, and more.

With 360 stores in North America and nearly 1,800 worldwide, Sephora’s footprint continues to grow. By offering programs that connect its brand to what customers’ value, Sephora has successfully strengthened customer–brand relationships and improved brand loyalty.

Questions:

1. Analyze how Sephora connects its brand to emotional, self-expressive, and social benefits for the customer.

2. How can Sephora’s brand touchpoints be improved to reach non-Millennials?

Sources: David Aaker, “Six Reasons to Admire the Sephora Brand,” Prophet, https://www.prophet.com/blog/ aakeronbrands/261-six-reasons-to-admire-the-sephora-brand

Sarah Halzack, “The Sephora Effect: How the Cosmetics Retailer Transformed the Beauty Industry,” The Washington Post, March 9, 2015, https://www.washingtonpost.com/news/business/wp/2015/03/09/ the-sephora-effect-how-the-cosmetics-retailer-transformed-the-beauty-industry/

“Sephora Concept Store Taps Next-Generation Experience,” Beauty Business Magazine, November 24, 2015, http://beautystorebusiness.com/sephora-concept-store-taps-next-generation-experience

Cameron Wolf, “Sephora’s New Lipstick Try-on App Works Creepily Well,” Racked, February 3, 2016, http://www.racked.com/2016/2/3/10905650/sephora-app-virtual-artist

Victoria Dawson Hoff, “Crowdsource Your Beauty Look with Sephora’s New Social Shopping Platform,” Elle, March 13, 2014, http://www.elle.com/beauty/news/a19096/sephora-beauty-board/

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Box BEST GLOBAL PRACTICE

Lifebuoy

Compelling storytelling is a powerful way for brands to get core product messages across in TV or video spots, especially if it taps into viewer emotions. Lifebuoy, the world’s leading health soap, effectively used storytelling to help one billion people in developing countries adopt better hand-washing habits. Every year, approximately 800,000 children under the age of 5 are killed by illnesses that could have been prevented by proper hand sanitation. Unilever, who owns Lifebuoy, saw an opportunity to promote healthier habits through a multi-channel campaign called “Help a Child Reach 5.”

Along with a dedicated website, Lifebuoy created a short film and series of videos aimed at telling impactful stories. The videos take place in rural Indian villages, where Lifebuoy piloted its program, and showcases community rituals that celebrate the milestone of a child turning five. In one, a father walks on his hands to a temple to give thanks; in another, a woman honors a tree the evening before her child’s fifth birthday that was planted the day he was born. The videos close by emphasizing the tremendous effect that the simple act of washing one’s hands can have on preventing avoidable illness and death among children.

The video series has been seen by nearly 30 million people, and Unilever estimates that its campaign reduced the incidence rate of illnesses from a lack of handwashing from 36 percent to 5 percent. Lifebuoy used five specific storytelling tactics to create such a persuasive effect:

Questions:

1. Lifebuoy used several storytelling tactics to communicate its brand message, including real, interesting and authentic characters and the use of statistics of global infant deaths were shocking. What other factors do you think contributed to the success of this approach?

2. What steps should Unilever take to ensure Lifebuoy is the only soap brand connected to health?

Source: David Aaker, “Creating Compelling Brand Stories: Lifebuoy,” Prophet, https://www.prophet.com/ blog/aakeronbrands/248-creating-compelling-brand-stories-lifebuoy

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C H A P T E R E L E V E N

Energizing the Business

Only the paranoid survive. —Andrew Grove, Former CEO, Intel

One never notices what has been done, one can only see what remains to be done. —Marie Curie

Where there is no wind, row. —Portuguese proverb

Businesses need growth and not only for financial reasons. Certainly, shareholders, employees, and partners look for increased sales and profits. However, growth also introduces vitality to an organization by providing challenges and rewards. An organization that cannot improve and grow may not even be viable.

There are four ways to grow a business, as suggested by Figure 11.1. The first, covered in Chapter 12, is about leveraging the current business. That can mean taking the existing products into new markets, finding new products or services for the existing customer base, or leveraging assets such as brand equity or competencies such as managing digital marketing. The second, introduced in Chapter 13, involves creating a new business based on finding a white space in the market or by transformational innovation, a business for which a substantial competitive advantage will exist and persist. The third, presented in Chapter 14, entails going global, leveraging the business into new countries to create a broader market or creating new or improved assets and competencies that will lead to sustainable advantage in a global marketplace.

The fourth route to growth, the subject of this chapter, is to energize the existing business, an attractive growth avenue because an established firm has market and operating experience, assets, competencies, and a customer base on which to build. An existing business can be energized by:

Innovating to improve the offering

Energizing the brand and marketing

Increasing existing customer’s usage

194

INNOVATING THE OFFERING The ultimate business energizer is to improve the offering through innovation. An innovation, or better, a series of innovations, provides a sense that a firm is dynamic, creative, and always improving its offering. Innovation means new, interesting, and energetic.

A service company can improve the customer experience. The Memphis Redbirds minor league baseball team changed the spectator experience with cheerleaders, a mascot named Rocky, five party settings, and two kids’ playgrounds—P.D. Parrot for under eight-year-olds and the Boardwalk with the Rocky Hopper ride for older kids. Add to that the Sonic Drive-In Kids Club, members of which get to run the bases, and more. The result is an experience that is involving and so unique that it engenders both loyalty and buzz.

Whole Foods Market is continuously innovating, always on-brand. It took an industry leadership role with its seafood sustainability program. The chain stopped selling wild-caught fish species labeled “red,” or threatened by overfishing, and introduced accepted labeling for sustainable seafood that is caught or farmed in ways that consider the long-term vitality of harvested species and the well-being of the oceans. The program not only had real substance, but also engaged Whole Foods’ customers in conversations around the sustainable seafood concept.

How can a firm innovate around the customer experience? One approach is to improve the important brand touchpoints as discussed in Chapter 7. Another is to exceed expectations with respect to the value proposition. What is expected, and what would surprise, delight, and even spur a “Wow!” reaction?

A product firm can enhance the product by adding a new dimension such as a feature or ingredient. P&G has introduced a steady stream of innovative diaper products from a Caterpillar Flex diaper and Feel ’n Learn training pants to Pampers Swaddlers, a diaper for newborns. Such activity provides vitality and credibility to the business. Product innovation, of course, does not just happen. It involves understanding unmet needs, organizational support, and the ability to evaluate proposed improvements in terms of customer relevance.

Line extensions can be a source of energy. New flavors, packaging, sizes, or services can add energy, interest, and the creation of new segments. Look for segments that are making do with the current offering and would prefer another option or more variety. Consider trends that are leaving your offering behind. Line extensions need to balance their value with the risk that the added cost might become a burden and that customers might rebel over the added confusion and complexity. Colgate made significant gains when it introduced Total, which simplified a purchase decision for consumers faced with a bewildering array of choices for toothpaste.

Creating a New Business

Energizing the Business

Leveraging the Business

GROWTH STRATEGIES

Going Global

Figure 11.1 Growth Strategies

Chapter 11 Energizing the Business 195

How can the organization create the sense and substance of continuous innovation rather than sporadic episodes of improvement in the product or service that are quickly copied and blend into the cluttered marketplace resulting in a transient advantage? A basic answer is to create an organizational culture that builds innovation into the business strategy and views it as a basis for winning over time. That is certainly true for the most innovative companies such as Google, Toyota, Microsoft, Nintendo, IBM, Walmart, Amazon, and P&G. These firms also have become skilled in reaching outside their organization to other firms to enhance their ability to innovate. P&G has a goal to source half of its innovation outside the company, a goal that potentially will double its R&D capability. In addition, the firms are good at branding their innovations.

Branding the Innovation

Innovations, no matter how exciting, novel, and relevant, will not energize the business unless they are communicated to the marketplace. Being innovative does not guarantee that a firm is perceived as such. Somehow the innovations need to be attached to the brand and to have an extended impact. An innovation that influences for a few months is of limited value and usually represents a lost opportunity to create a long-term asset.

Branding the innovation can make a difference. It can enhance the impact of an innovation and extend its life in the minds of customers. When the innovation is not branded, the impact is usually short-lived if it occurs at all. Putting “new” or “improved” on a box of Tide detergent is unlikely to create a lasting point of differentiation.

Amazon developed a powerful feature, the ability to recommend books and other items based on customers’ interests as reflected by their purchase history and the purchase history of those who bought similar offerings. But they never branded it. How tragic is that? As a result, the feature became basically a commodity that is an expected feature of many e-commerce sites. If Amazon had branded it and then actively managed that brand, improving the feature over time, it would have become a lasting point of differentiation that today would be invaluable. They missed a golden opportunity. They did not make that same mistake with One-Click, a branded service that plays a key role in defining Amazon in what has become a messy marketplace.

The problem with sliding innovations into the existing offering is twofold. First, the market is made up of those who are not motivated or perhaps not able to sort out claims and the rationale behind those claims. These people develop a coping strategy that ignores what are seen to be confused and contradictory competitive claims. As a result, the claims of “new and improved” simply fade into the muddled environment. Second, any dramatic visible improvement is likely to be quickly copied or appear to be copied by competitors, so that any belief that a unique point of differentiation has been achieved will recede as the perception that competitors have matched the advance carry the day.

Branding changes all that. A new offering can have its own brand (Netflix), endorsed brand (Apple’s iPod), or subbrand (Glad Press’n Seal). Further, an innovation that represents a feature (Cadillac’s On-Star), ingredient (Dove’s Weightless Moisturizer), or service (Best Buy’s Geek Squad) could also be branded directly. A brand provides several powerful functions, most of which go back to the basic value of a brand in any context. A brand as summarized in Figure 11.2 allows ownership of the innovation, adds credibility and legitimacy, enhances visibility, and helps communicate sometimes detailed facts.1

First and foremost, a brand provides the potential to own an innovation because a brand is a unique indicator of the source of the offering. With the proper investment and active management

196 Part Two Creating, Adapting, and Implementing Strategy

of both the innovation and its brand, this ownership potential can be extended into the future indefinitely. A competitor may be able to replicate the offering or its new feature, ingredient, or service, but if it is branded, they will need to overcome the power of the brand. Another firm can copy the objective features of Apple’s iPhone or Westin’s Heavenly Bed, but there will only be one authentic product, and that is the one carrying the brand name; others are perceived as only copies. In fact, it is sometimes possible to have such a strong brand that it gets credit for innovations by others. Dolby may be an example. An advance in audio technology may be attributed to Dolby no matter where it originates.

Second, a brand can add credibility and legitimacy to a claim. An unbranded claim—such as a “better fabric” or a “more reliable engine”—is likely to be interpreted as another example of puffery. The brand specifically says that the benefit was worth branding, that it is not only meaningful but also impactful. The observer will instinctively believe that there must be a reason why it was branded. Subaru has long emphasized four-wheel drive, and many car brands now offer this feature. Audi, however, has a branded version, Quattro, which gives it credibility and relevance that the others lack. In essence, there are four-wheel drives, and then there is Quattro.

The ability of a brand to add credibility was rather dramatically shown in a remarkable study of branded attributes. Carpenter, Glazer, and Nakamoto, three prominent academic research- ers, found that the inclusion of a branded attribute (such as “Alpine Class” fill for a down jacket, “Authentic Milanese” for pasta, and “Studio Designed” for compact disc players) dramatically affected customer preference toward premium-priced brands.2 Respondents were able to justify the higher price because of the branded attributes. Remarkably, the effect occurred even when the respondents were given information implying that the attribute was not relevant to their choice.

Third, a brand name can help make the innovation visible because it provides a label for the “news.” As a result, it is likely that it will be easier to achieve higher recall and recognition scores around the new offering or a branded feature, ingredient, or service. It is just much easier to remember a brand name such as the Memphis Redbird’s baseball team, its Boardwalk zone for

Branding the Innovation

Own the Innovation

Better Withstand Competition

Add Credibility/ Legitimacy

Brand Signals Worth

Visibility Enhanced Aids Recall

and Recognition

Aids Communication

Brand Can Represent

Complex Narrative

Figure 11.2 Why Brand Innovation?

Chapter 11 Energizing the Business 197

fans, or its Rocky Hopper ride for kids, than the details of a new feature or service. In fact, one of the characteristics of a good brand name is that it is easy to recall. Further, the job of linking the point of differentiation to the parent brand is also made much easier. The iPod is more memorable than Apple’s MP3 player.

Fourth, a brand makes communication more efficient and feasible. A new product or product feature, even one regarded as a breakthrough by its designers, may engender a monumental lack of interest among the target audience. Even when the communication registers, it can be perceived as too complex to warrant processing and linking to an offering. The act of giving the product or feature a name can help by providing a vehicle to summarize a lot of information without learning the details. A name such as Oral B’s Action Cup provides a way to crystallize detailed character- istics, making it easier to both understand and remember. Imagine if Chevron attempted to explain why “Chevron gasoline” was different without the use of the Techron brand. It would not be persuasive or even feasible.

There is the danger of overbranding, to put brands on innovations that do not warrant brand investments. So there is a yin and yang of branding innovation based on the Shakespeare- inspired conundrum—to brand or not to brand. The solution is to demand that any innovation that is branded have three characteristics. First, it should be a significant advance, not a marginal improvement. Second, it should be meaningful enough to customers to affect purchase and loyalty. Third, it should merit a long-term commitment to building and managing the brand.

The concept of a branded differentiator provides another more formal look at branded innovation.

Branded Differentiators

A branded differentiator is an actively managed, branded feature, ingredient or technology, service, or program that creates a meaningful, impactful point of differentiation for a branded offering over an extended time period.

For example, the Westin hotel chain created the “Heavenly Bed” in 1999, a custom-designed mattress set (by Simmons) with 900 coils, a cozy down blanket adapted for climate, a comforter with a crisp duvet, high-quality sheets, and five goosedown pillows. The Heavenly Bed became a branded differentiator in a crowded category in which differentiation is a challenge.

A branded differentiator does not occur simply by slapping a name on a feature. The definition suggests rather demanding criteria that need to be satisfied. In particular, a branded differentiator needs to be meaningful (i.e., it matters to customers) and impactful (i.e., not a trivial difference). The Heavenly Bed was meaningful in that it was truly a better bed and addressed the heart of a hotel’s promise—to provide a good night’s sleep. It was also impactful. During the first year of its life, those hotel sites that featured the Heavenly Bed had a 5 percent increase in customer satisfaction; a noticeable increase in perceptions of cleanliness, room decor, and maintenance; and increased occupancy.

A branded differentiator also needs to warrant active management over time and justify brand-building efforts. It should be a moving target. The Heavenly Bed has received that treatment with an active and growing set of brand-building programs. The reception to the bed was so strong that Westin started selling thousands per year. Imagine, selling a hotel bed. Think of the buzz. Further, in 2005 the bed became available in Nordstrom’s At Home department. The concept has been extended to the Heavenly Bath, with dual shower heads

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plus soap and towels. The Heavenly Online Catalog is a place to connect and order all the branded products.

The Heavenly Bed was developed and owned by Westin. It is not always feasible to develop such products and brands, in part because the time and resources may not be available and in part because it is simply difficult. An alternative is to explore alliances in order to create branded differentiators with instant credibility. The Ford Explorer Eddie Bauer Edition, for example, was an offering that sold more than one million vehicles over two decades. It was successful from the outset because the Eddie Bauer brand was established with associations of style, comfort, and the outdoors. Ford never could have achieved that success with its own brand (the Ford Explorer LeatherRide, for example). It would be difficult to imbue such a brand with the self-expressive benefits offered by the Eddie Bauer brand even if the necessary brand-building resources and time had been available.

A branded differentiator, as suggested by Figure 11.3 and the definition, will be a feature, ingredient or technology, service, or program affecting the offering. A branded feature such as General Motor’s OnStar often provides a graphic way to signal superior performance. The OnStar system provides automatic notification of air bag deployment to roadside assistance agencies, stolen vehicle location, emergency services, remote door unlocking, remote diagnostics, and concierge services.

A branded ingredient (or component or technology) such as Uniqlo’s Heattech, the fabric that absorbs body moisture and turns it into heat so that clothing can keep people warm without layering, has been a key differentiator for the fast-growing retailer. A branded service such as the Tide Stain Detective, which provides stain removal information on the Tide website, provides product reinforcement and credibility to Tide. A branded program such as the Harley-Davidson Ride Planner can provide a way to deepen customer relationships.

Master Brand/ Subbrand

Branded Differentiator

Branded Feature

Branded Ingredient or

Technology

Branded Service

Branded

Program

• Ownability

• Communicate Benefits

• Credibility

• Visibility

Figure 11.3 Branded Differentiators

Box CREATIVE THINKING METHODS

Not all growth strategies are obvious. In fact, the obvious ones may well be marginal in terms of likely success and impact, so it is useful to look for breakthrough ideas. Methods and concepts of creative thinking can help in this process. Among the guidelines suggested most often are:

Pursue creative thinking in groups, as multiple perspectives and backgrounds can stimulate unexpected results.

(continued)

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ENERGIZING THE BRAND AND MARKETING Relevance and differentiation have long been considered the basis of success for a brand. But recent studies involving the mammoth Y&R’s Brand Asset Valuator (BAV) database—70 brand metrics for each of 40,000 brands spread over 44 countries—find that another component is needed—energy.3 An analysis of the total database from 1993 to 2007 showed that brand equities as measured by trustworthiness, esteem, perceived quality, and awareness have been falling sharply over the years. For example, trustworthiness dropped nearly 50 percent, esteem fell by 12 percent, brand quality perceptions fell by 24 percent, and, remarkably, even awareness fell by 24 percent. Only those brands with energy remained healthy and retained their ability to drive financial return.

Inadequate energy can also lead to relevance problems in two ways. First, as energy declines, so does visibility. The brand is no longer among those that come to mind when considering a purchase. It is lost in the noise of the environment and is therefore no longer considered, which means, by definition, it is not relevant.

Second, many brands that lack energy struggle with impressions that they are old fashioned, out of touch, and boring, an impression that can affect their relevance for some segments. That risk is especially high for the traditional brands of the world such as AT&T, John Deere, Dow, Brooks Brothers, Toshiba, and Wells Fargo Bank, which are usually portrayed as being reliable, honest, dependable, and accessible. Remember Oldsmobile, which had an ill-fated effort to become “Not your father’s Oldsmobile.” The remedy for this all too common profile is to inject energy and vitality. The need for energy for mature respected brands is especially true to attract younger segments, the lifeblood of the company’s future.

The best way to energize a business is by improving the offering through innovation. However, that route is not always open. In many cases, successful innovation, even with well-conceived

Begin with warm-up exercises that break down inhibitions. To make whimsy acceptable, for example, ask individuals to identify what animal expresses their personality and to imitate the sound made by that animal. To stretch minds, ask someone to start a story based on two random words (e.g., blue and sail); then ask the group to create a position for a brand based on that story. Focus on a particular task, such as how to build or exploit an asset (a brand name, for example) or a competence (such as the ability to design colorful plastic items). Develop options without judging them. Discipline in avoiding evaluation while generating alternatives is a key to creative thinking. Engage in lateral thinking to change the perspective of the problem. Make a list of associations with the brand or the usage situation (the more incongruous the fit the better), or simply pick a random object or activity (such as tiger or picnic) to stimulate a new line of thought. Evaluate the options based on potential impact without regard to how feasible they are. Engage in a second stage of creative thinking aimed at improving the success chances of an attractive option—possibly one with high potential impact that seems too expensive or too difficult to implement. Evaluate the final choices not just rationally (“What do the facts say?”) but emotionally (“What does your gut say?”). Create an action plan to go forward.

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efforts and adequate budgets, is elusive and infrequent. And innovations that really make a difference, that rise above those that simply maintain a market position, are even rarer. Further, some businesses compete in product categories that are either mature, boring, or both. If you make hot dogs or market insurance, it is hard to conceive of new offerings that are going to energize the brand.

The need is to look beyond the offering for ways to give the brand energy, to make it:

Interesting/exciting. There is a reason to talk about the brand (AXE, Las Vegas (the city), Nike, Red Bull, HBO).

Involving/engaging. People are engaged; the brand can be part of a valued activity or lifestyle (Coca-Cola, Disney, Lego, Starbucks).

Innovative/dynamic. The brand is likely to be continually innovative or capable of creating “must-have” innovations that create new subcategories (Airbnb, Amazon, Apple, GE, Google, Netflix, Task Rabbit, Uber).

Passionate/purpose driven. There is a higher purpose that propels passion (Muji, Nike, Warby Parker, Whole Foods).

Some suggestions follow:

Create an involving promotion. Coke Zero asked basketball fans to upload their most fanatical videos and photos supporting their favorite teams. Winners were shown in a special show before the championship game. Create a promotion to attract new customers. Denny’s gave away more than two million Grand Slam Breakfasts in one day with the help of a Super Bowl commercial and online buzz. Free breakfasts broke through the clutter to grab the attention of new customers. Go retail. The Apple Store is a good part of the success of its products and brand because it presents the Apple line in a way that is completely on-brand. Nike and Sony also have statement stores that serve to present the brand and offering story in a compelling and integrative way.

Bring the brand to the customer. TaylorMade golf equipment representatives travel to golf clubs to demonstrate and sell its equipment, giving customers a more vivid and on-brand way to experience them than they would get in a sporting goods store. Target created the 30-day Bullseye Bazaar in Chicago to introduce the Tracy Feith Clothing collection, the private-label food line from Archer Farms, and Target furniture.

Hold publicity events. Consider the balloon adventures of Virgin’s Richard Branson, the BMW short films created by top directors, or the incredible Red Bull sponsorship of a person jumping out of a balloon 24 miles above the New Mexico desert.

Support the higher order purpose. Whole Foods Market provides information and support to those interested in organic and natural foods.

The development of a customer community is one of the best ways to energize a brand. It can connect the brand to a customer sweet spot, as discussed in Chapter 10, that stimulates interest, involvement, and even passion. Consider America Express’s Open Forum where small businesses

Chapter 11 Energizing the Business 201

can interact about issues. On the Udi’s Glutenfree site, visitors can access a social network for those interested in gluten-free eating. Bikers on the Harley-Davidson website can post pictures of their most recent rides and plan new ones. Beinggirl, the Procter & Gamble feminine care site, offers advice and promotions to 11- to 14-year-old girls.

The key to an effective site is not only to be motivated by the customer’s sweet spot rather than the offering, but also to engender trust, to have real substance, to have dynamic content, to stimulate interaction, and to be on-brand. It is not easy, but the payoff can be significant.

Another approach, very different than trying to make the brand or business interesting or involving, is to find something with energy and attach your brand to it and build a marketing program around the connection. Find a branded energizer.

Branded Energizers

A branded energizer is a branded product, sponsorship, endorser, promotion, symbol, social program, CEO, or other entity that by association significantly enhances and energizes a target brand. The branded energizer and its association with the target brand are actively managed over an extended time period.

As Figure 11.4 and the definition suggest, a branded energizer can be a wide variety of branded entities and should have several characteristics. First, a branded energizer should itself have energy and vitality. An effective branded energizer should be:

Interesting versus stale

Youthful versus mature

Interesting versus boring

Dynamic versus unchanging

Contemporary versus traditional

Assertive versus passive

Involving versus separated

Second, the branded energizer needs to be connected to the master brand even if, unlike a branded differentiator, it is not part of the master brand offering and does not promise any

Master Brand/ Subbrand

Branded Energizer

Sponsorships

Endorsers

Promotions

Symbols

Social Programs

CEOs

Etc.

• Energy

• Personality

• Associations

Figure 11.4 Branded Energizers

202 Part Two Creating, Adapting, and Implementing Strategy

functional benefits. This connection task can be difficult and expensive. Even the Energizer Bunny, one of the top icons among U.S. brands, often is associated with Duracell rather than Energizer despite the exposure over a long time period.

One connection route is to use a subbrand such as Ronald McDonald House, where the master brand has a connection in the name. A second is to select a program or activity that is so “on-brand” that it makes the link easier to establish. A baby-oriented program would require little effort to connect to Gerber. A third is to simply forge the link by consistently building it over time with significant link-building resources, as MetLife has done with the Peanuts characters.

Third, a branded energizer should significantly enhance as well as energize the target brand and should not detract or damage the brand by being “off-brand” or making customers uncomfortable. Offbeat, underdog brands such as Virgin, Apple, and Mountain Dew, which are perceived as quirky to begin with, have more leeway. “Senior” brands, in contrast, can develop branded energizers that are edgier than the parent brand but with a lot of options foreclosed.

Fourth, the problems of finding and managing internal branded energizers leads firms to look outside the organization. The challenge is to find an external energizer brand that is linked into the lifestyle of customers, that will have the needed associations to energize and enhance, that is not tied to competitors, that can be linked to the target brand, and that represents a manageable alliance. The task takes discipline and creativity.

Fifth, branded energizers (like branded differentiators) represent a long-term commitment; the brands involved should be expected to have a long life and merit brand-building investments. If the energizers are internally developed, the cost of brand building will have to be amortized over a long enough period to make it worthwhile. If they are externally sourced, the cost and effort of linking them to the parent brand will take time as well. And they need to be actively managed over time so that they can continue to be successful in their roles. The concepts of branded energizers and differentiators do not provide a rationale to add brands indiscriminately.

There are many types of branded energizers. Some of the most useful include sponsorships, symbols, endorsers, promotions, programs, and even CEOs.

Branded Sponsorships

The right sponsorship, handled well, can energize a brand and create strong relationships with customers. Consider a rather utilitarian product like motor oil and a venerable brand like Valvoline. Such a brand would normally have trouble generating interest and energy, to say nothing of becoming an important part of a person’s life. Few would be motivated to read ads about motor oil, which is perceived by many to be an undifferentiated product. However, through sponsorship activities, Valvoline becomes part of the NASCAR scene, and everything changes.

The Valvoline racing program is multidimensional. Valvoline is not just a sponsor of NASCAR, but has a NASCAR racing team as well. At the Valvoline website, a destination site for those involved with racing, a visitor can access the schedule for NASCAR and other racing circuits and learn the results of the most recent races, complete with pictures and interviews. A “Behind Closed Garage Doors” section provides inside information and analyses. The visitor can adopt the Valvoline NASCAR racing team and learn about their current activities and recent finishes. In addition, it is possible to send Valvoline racing greeting cards, buy Valvoline racing gear, download a Valvoline racing screensaver, and sign up for a weekly newsletter (TrackTalk) that provides

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updates on the racing circuits. Valvoline thus becomes closely associated with the racing experience, much more than simply being a logo on a car.

The core segment for Valvoline is buyers who change their own oil, are very involved in cars, and live for NASCAR races. The Valvoline racing program has the potential to influence this group in several ways. At a most basic level, it provides credibility and associations of being a leader in motor oil technology. Top teams would not use Valvoline if it was not superior—there is too much riding on the engine’s performance. But there are more subtle possibilities. A customer, by choosing Valvoline, can receive self-expressive benefits, as it is a way to tangentially associate oneself with the top drivers and teams. And research shows that it has tangible benefits. One study found that 47 percent of the U.S. public had an interest in watching NASCAR racing. In another, 60 percent of NASCAR fans said they trusted sponsors’ products (compared with 30 percent of NFL fans), and more than 40 percent switch brands when a company becomes a sponsor.4

A sponsorship can provide the ultimate in relevance, the movement of a brand upward into the acceptable if not leadership position. A software firm trying unsuccessfully to make a dent in the European market became a perceived leader in a few months when it sponsored one of the top three bicycle racing teams. Part of Samsung’s breakthrough from being just another Korean price brand to becoming a real player in the U.S. market was its sponsorship of the Olympics, which began with the Winter games in 1988. It says so much about the brand, so much more than product advertising could ever say. Tracking data confirm that well-conceived and well-managed sponsor- ships can make a difference. The Visa lead in perceived credit card superiority went from 15 percentage points prior to the Olympics, to 30 points during, and to 20 points one month after— huge movements in what are normally very stable attitudes.5

A significant problem with sponsorship—indeed, with any external branded energizer—is linking it to the brand. DDB Needham’s Sponsor-Watch, which measures such linkage, has shown that sponsorship confusion is common.6 Of the 102 official Olympic sponsors tracked since 1984, only about half have built a link (defined as having sponsor awareness of at least 15 percent and at least 10 percent higher than that of a competitor that was not a sponsor—hardly demanding criteria). Those successful at creating links, such as Visa and Samsung, surround the sponsorship with a host of brand-driven activities, including promotions, publicity events, website content, newsletters, and advertising, over an extended time period.

Although most sponsorships are external to the firm, there are cases of internally controlled sponsorships. The Adidas Streetball Challenge is a branded weekend event centered around local three-person basketball tournaments and featuring free-throw competitions, a street dance, graffiti events, and extreme sports demonstrations, all accompanied by live music from bands from the hip-hop and rap scenes. The Challenge was right in the sweet spot of target customers, a party. And it was connected to Adidas by its brand and supporting signage and Adidas-supplied caps and jackets. It revitalized Adidas at a critical time in its history. Owning a sponsorship means that the cost going forward is both controllable and predictable and the event can evolve over time.

Endorsers

A brand may lack energy, but there are plenty of personalities who are contemporary, on-brand, energetic, and interesting. Think of what LeBron James has brought not only Nike but also Beats, Coca-Cola, KIA Motors, and Upper Deck. And Roger Federer to Credit Swiss, Mercedes, Nike, and Rolex.

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Selecting and engaging an endorser is a critical first step in creating a strategic brand energizer. There are a host of considerations. An endorser target should have:

An appealing image Visible among the target audience (low visibility will limit the impact) Attractive, liked (simple liking can and does get transferred to the endorsed brand) Sincere (will there be a feeling that the endorser is doing it for money and lacks a sincere belief in the product?) Fresh, not overexposed (an endorser’s impact can be diluted by overexposure as an endorser)

On-brand associations Matching the brand identity goals A natural match to the brand (does the link make sense?) Confidence that the positive associations can be leveraged and that the negative ones can be managed

Potential for a long-term relationship (how long will the endorser have the desired associations and how likely will a compatible relationship endure?)

Potential to create programs surrounding the endorser

Cost effectiveness and availability, which need to take into account the cost of the programs surrounding the endorser

Branded Promotional Activities

Kraft’s Oscar Mayer Wienermobiles provide energy to a very boring category. There are eight vehicles shaped like a huge Oscar Mayer Weiner touring the United States, with license plates with appropriate wording like “HOT DOG.” They turn up at events and parties and support the annual contest to find a child to sing the signature Oscar Mayer jingle. The Wienermobile, which has been shown to bump product sales, also lives on the Web, where visitors can be taken on a tour of Oscartown featuring the Oscar Museum, the OscarMart, and Town Hall. The brand Weinermobile, by its linkage to the product category, also links it to Oscar Mayer.

Memorable Branded Symbols

Brands that are blessed with strong relevant symbols such as the Pillsbury Doughboy, the Maytag repairman, P&G’s Mr. Clean, the Redbird’s Rocky, or the Michelin Man can actively manage and use the symbols to become energizer brands. Such symbols can give a personality to even the blandest of brands. They can also suggest attributes. The Doughboy is upbeat, with a sense of humor, and means freshness and superb quality. The Maytag repairman is famous for being lonely due to few calls for repairs, and symbolizes the reliability of Maytag. The Michelin Man is strong and positive and means safety. Mr. Clean is strong and reliable. Rocky is fun, friendly, and energetic.

Symbols can be leased as well as developed. MetLife adopted the Peanuts characters in 1985. The goal was to provide a warm, light, nonthreatening approach to insurance—a tough sell in the context of an industry perceived by many to be boring, greedy, and bureaucratic. The familiar, funny characters provide a vehicle toward those objectives while also providing

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interest and energy. Snoopy’s appearance on the website, on a blimp, in ads, and even on the logo also serves to inhibit what psychologists call counterarguing. The natural tendency to be cynical toward an insurance company’s ad or claim is reduced for MetLife in the presence of the likable Snoopy, in part because it would make no sense to argue with a cartoon character. A similar tact is to introduce or enhance a lively, humorous personality. Most competitors are serious about their offerings, and a business that takes itself lightly will often stand out. This is especially true in the insurance industry. Aflac made great strides on the awareness front by developing the Aflac duck.

It is important to understand the role of the symbol. Is it to create a personality? To suggest or reinforce associations? To be a vehicle to interject humor and likability into an otherwise bland and uninteresting message? To create interest and visibility, like the duck has done for Aflac? With the role in mind, it is possible to proactively look for or develop the right one.

Branded Social Programs

Branded social programs can pay off by providing the foundation of a customer relationship based on trust and respect. However, they can also provide energy by generating interesting ideas and programs and even passion, tangible results, and opportunities for customer involvement. Consider the energy created by the Avon Breast Cancer Crusade with its signature Avon 39 The Walk to End Breast Cancer, a program with substance (over $620 million raised for the fight against breast cancer) and incredible involvement not only with participants of the walks, but with family members and sponsors as well. That interest and energy could never have been created by new Avon products, however different they might be. And it is branded as Avon, which means that its track record is linked to Avon.

Creating branded social programs can effectively be costless in that existing philanthropy dollars that are being spent without focus or impact can be diverted into branded social programs. However, they are also extremely hard to generate; there are firms that would like to create an Avon Walk program but simply can’t come up with one. Kellie McElhaney, the Director of the Center for Responsible Business at the Haas School at UC Berkeley, has suggested several principles to guide development of a branded social program.7

Know Thyself

The goal is to create branded programs that are authentic and effective. Ideally, they should support the business strategy, draw on firm assets and competencies, and enhance the image of the brand. That means that the firm should address very basic questions about who they are, their strengths and weaknesses, and what they want to stand for.

Get a Good Fit

Being authentic, being connected to the program, and being effective will all be easier if there is a fit. Avon’s program hits on a key concern of the target market and reflects a relationship with customers that goes beyond product. The same can be said with Crest’s Healthy Smiles (low-cost dental care for poor children), Home Depot’s relationship with Habitat for Humanity, and Dove’s Real Women. In contrast, the Ford association with the “Susan G. Komen for the Cure” breast cancer foundation (with its donations attached to buying a pink-trimmed Mustang) lacks a logical fit.

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Brand It

If the program has a strong visible brand, it is much more likely that people will learn and remember it. Home Depot is linked to the Habitat for Humanity program of building homes for less fortunate, a strong brand. Another challenge is to link the program brand to the brand to which it is lending energy. In the case of Home Depot, that is done with in-store communication and promotion and by having its employees involved in working on Habitat projects. An owned brand such as Ronald McDonald House or Avon Breast Cancer Crusade has the advantage of having the corporate brand as part of the program brand.

Create Emotional Connection

An emotional connection in general communicates much stronger than does a set of facts and logic. The message is punchier and simpler. Further, an emotional connection will tend to enhance the relationship between the brand to which it is attached and the customer. So Pedigree Adoption Drive with its pictures of adorable dogs triggers an emotional response. Ronald McDonald House presents a program that helps children with serious medical conditions and their families.

Communicate the Program

There are a host of companies that are spending real money on programs that are unknown to their customers and, often, even to their employees. To achieve its objectives of advancing a social cause, energizing employees, and enhancing the reputation of a corporate brand, the program needs to be communicated. That involves accessing the right set of communication vehicles including a website, social media, PR, and active employees. Beware of making it too complex, too detailed, too quantitative. Simple with understandable symbols, taglines, and stories is needed.

Involve the Customers

Involvement is the ultimate way to gain supporters and advocates. Method, a maker of environ- mentally safe cleaning products, has a brand ambassador program in which customers who sign on will get products and T-shirts and information about why their friends should use the product. Avon’s Walk for Breast Cancer involves hundreds of thousands each year either as participants or supporters of walkers.

Branded CEOs

Some firms have branded CEOs who can serve to capture and magnify the energy in the brand or even create energy that can be transferred to the brand. Lee Iacocca helped save Chrysler by exuding confidence and competence when customers and investors had assumed the firm would collapse. Richard Branson’s outlandish stunts (some involving hot-air balloons) have been a large part of the energy and personality of the Virgin brand. Herb Kelleher personified the Southwest Airlines brand with his visible and colorful expression of its culture. Steve Jobs and Bill Gates have driven much of the energy of Apple and Microsoft with their visible thought leadership. Mark Zuckerberg is a key personality in Facebook’s success.

The right CEO with the right message can often create news with credibility and has the advantage of being able to access media. To be an energizer, however, the CEO should have energy with respect to ideas, have a distinctive personality, and be around for a long enough time period to become a recognized representative of the brand.

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INCREASING THE USAGE OF EXISTING CUSTOMERS Attempts to increase market share will very likely affect competitors directly and therefore precipitate competitor responses. An alternative, attempting to increase usage among current customers, is usually less threatening to competitors.

When developing programs to increase usage, it is useful to begin by asking some fundamental questions about the user and the consumption system in which the product is embedded. Why isn’t the product or service used more? What are the barriers to increased use? Who are the light users, and can they be influenced to use more? What about the heavy users?

Greater usage can be precipitated in two ways, by increasing either the frequency of use or the quantity used. In either case, there are several approaches that can be effective (see Figure 11.5). All are based on becoming obsessed with what stimulates use and the use experience itself.

Motivate Heavy Users to Use More

Heavy users are usually the most fruitful target. It is often easier to get a holder of two football season tickets to buy four or six than it is to get an occasional attendee of games to buy two. It is helpful to look at the extra-heavy user subsegment—special treatment might solidify and expand usage by a substantial amount. Examples include Schwab’s Gold Signature Services, the special dinner parties and courier service offered by Chase Manhattan to its biggest accounts, or the first-class treatment provided to high rollers by Las Vegas casinos.

Make the Use Easier

Asking why customers do not use a product or service more often can lead to approaches that make the product easier to use. For example, a Dixie cup or paper-towel dispenser encourages use by reducing the usage effort. Packages that can be placed directly in a microwave make usage more convenient. A reservation service can help those who must select a hotel or similar service. The classic but long-dormant Crock-Pot slow cookers were in 80 percent of homes, but used by only 20 percent. A hot product in the early 1970s, it fell victim to out-of-home eating but is making a sharp comeback in part due to a desire to have home-cooked meals with minimal preparation. A catalyst is the Banquet line of frozen entrees called Banquet Crock-Pot Classics, which have made the process of cooking with the Crock-Pot much easier.

Strategy Examples

Motivate heavy users to use more Perks with more season tickets Make the use easier Microwaveable containers Provide incentives Frequent flyer miles Remove or reduce reasons not to buy Gentle shampoo for frequent use Provide reminder communication E-mail birthday reminder Position for regular use Floss after meals Find new uses Snowmobiles for delivery

Figure 11.5 Increasing Usage in Existing Product Markets

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Provide Incentives

Incentives can be provided to increase consumption frequency. Promotions such as double mileage trips offered by airlines with frequent-flyer plans can increase usage. A fast-food restaurant might offer a large drink at a discounted price if it is purchased with a meal. A challenge is to structure the incentive so that usage is increased without creating a vehicle for debilitating price competition. Price incentives, such as two for the price of one, can be effective, but they also may stimulate price retaliation.

Remove or Reduce the Reasons Not to Buy

A business often reaches a ceiling because there are potential buyers who have a reason not to buy or to buy more. Thus, bags of snacks with 100 calories provide a way for users to partake without losing control of their eating habits. Hyundai addressed the problem of job insecurity with the breathtaking offer to buy back a car if the buyer lost his or her job. A gentle shampoo could be used daily.

Provide Reminder Communications

For some use contexts, awareness or recall of a brand is the driving force. People who know about a brand and its use may not think to use it on particular occasions without reminders. An e-mail program to remind Wine.com customers about an upcoming birthday may ensure that they buy a present. Several brands, including Jell-O, have conducted advertising campaigns aimed at getting their products out of the cupboard and onto the table. It is not enough for people to have recipes if they never get around to using them. Routine maintenance functions such as dental checkups or car lubrication are easily forgotten, and reminders can make a difference.

Position for Regular or Frequent Use

Provide a reason for more frequent use. On websites, what works is to have information that is frequently updated. People go to My Yahoo to see the latest headlines or learn how their stocks are doing, as often as every few minutes when important things are happening. Other incentives might include a new cartoon each day at a teen website or a best-practices bulletin board at a brand consulting site.

The image of a product can change from that of occasional to frequent usage through a repositioning campaign. For example, the advertising campaigns for Clinique’s “twice-a-day” moisturizer and “three glasses of milk per day” both represent efforts to change the perception of the products involved. The use of programs such as the Book-of-the-Month Club, CD clubs, DVD clubs, and flower-of-the-month or fruit-of-the-month delivery can turn infrequent purchasers into regular ones.

Find New Uses

The detection and exploitation of a new functional use for a brand can rejuvenate a business that has been considered a has-been for years. Jell-O, for example, began strictly as a dessert product but found major sources of new sales in applications such as Jell-O salads. Another classic story is that of Arm & Hammer baking soda, which saw annual sales grow 10-fold by persuading people

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to use its product as a refrigerator deodorizer. An initial 14-month advertising campaign boosted the use as a deodorizer from 1 to 57 percent. The brand subsequently was extended into other deodorizer products, dentifrices, and laundry detergent. A chemical process used in oil fields to separate waste from oil found a new application when it was applied to water plants to eliminate unwanted oil. Kraft encouraged people to use cream cheese, stuck in the bagels for breakfast slot, with crackers or celery as a snack.

New uses can best be identified by conducting market research to determine exactly how customers use a brand. From the set of uses that emerge, several can be selected to pursue. Customer application tracking allowed BENGAY to learn that much of its volume was going toward arthritis sufferers. A separate marketing strategy was developed, and the result was a wave of growth. Another tactic is to look at the applications of competing products. The widespread use of raisins prompted Ocean Spray to create dried cranberries, which can be found in cookies and in cereal such as Mueslix with a “made with real Ocean Spray cranberries” seal on the package. They are also being sold as a snack food called Ocean Spray Craisins.

Sometimes a large payoff will result for a firm that can provide applications not currently in generaluse. Thus, surveys ofcurrentapplications may be inadequate.Firms such asGeneralMills have sponsored recipe contests, one objective of which has been to create new uses for a product by discovering a new “recipe classic.” For a product that can be used in many ways, such as stick-on labels, it might be worthwhile to conduct formal brainstorming sessions or other creative exercises.

If some application area is uncovered that could create substantial sales, it needs to be evaluated. Consideration needs to be given to the possibility that a competitor will take over an application area, whether through product improvement, heavy advertising, or engaging in price warfare. Can the brand achieve a sustainable advantage in its new application to justify building the business? Ocean Spray is associated with cranberries, which might protect its entry into a cranberry snack, but the firm’s name will be less helpful in a processed application such as cookies or cereals.

KEY LEARNINGS

Energizing an existing business is a fruitful source of growth because it avoids the risks of venturing into new competitive arenas requiring new assets and competencies. Improving the offering through innovation is always the best route to growth and profitability. However, innovations can represent short-lived advantages unless branded. A brand provides ownability, credibility, visibility, and communicability. A branded differentiator is an actively managed, branded feature, ingredient or technology, service, or program that creates a meaningful, impactful point of differentiation for a branded offering over an extended time period. Sometimes innovation is not feasible, and then energizing the brand/marketing or creating a branded energizer is the best option. A branded energizer is a branded product, promotion, sponsorship, symbol, program, or other entity that by association significantly enhances and energizes a target brand—the branded energizer and its association with the target brand are actively managed over an extended time period.

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Growth less vulnerable to competitive response can also come from increasing product usage by motivating heavy users to use more, making the use easier by removing or reducing reasons not to buy, providing usage incentives, reminder communications, positioning for frequent use, and finding new use.

FOR DISCUSSION 1. Why are Google, Apple, Tesla, Fitbit, Dyson, and Intel considered innovative?

Did branding play a role? For which brands? What other brands would you nominate? Why? What role did branding play in your judgment for those brands?

2. Think of some highly differentiated brands. Do they have branded differentiators? If not, how did they achieve differentiation? Will it be lasting?

3. Think of some branded differentiators. How differentiated are they? Do the customers care? Are they impactful? Have they been managed well over time? Do they have legs? Evaluate Best Buy’s Geek Squad.

4. Think of some brands that have high energy. What gives them that energy? Will that continue into the future?

5. Think of some brands that have branded energizers that made a difference. Evaluate them in terms of whether they are “on-brand,” energetic, and linked to the master brand.

6. Using the creative thinking guidelines, think about how you would increase the usage of products or services if you were the manager of:

a. Doritos b. Charles Schwab c. GAP

Box BEST DIGITAL PRACTICE

Chiquita Banana

If you were asked to think of noteworthy marketing campaigns, produce companies probably do not immediately come to mind. However in 2015, Chiquita Banana launched a co-branded and interactive email campaign that successfully increased brand engagement among a key customer segment: mothers with young children.

While bananas are typically thought of as a breakfast food or snack, Chiquita Banana saw an opportunity to also promote them as an ingredient. Specifically, the company realized it could expand product use by creating a series of recipes that featured bananas. To push these recipes out, Chiquita Banana developed content that was easily shared across channels. For example, recipes were emailed as mobile-friendly in an attempt to cater to customers on the go. Additionally, the emails were made

(continued)

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interactive to encourage customers to “check off” what ingredients they already had versus what they needed to purchase.

Chiquita also increased reach by tying certain tactics to Universal Pictures’ recently released film, Minions. To do so, a series of collectible stickers were mass-produced and placed on bananas, and a branded “Minions Love Bananas” website was created featuring arcade games and digital content. Customers received instant prizes every time they scanned a new sticker with their mobile phone or engaged with the website. Along with mega-rewards like a vacation to London or movie-themed consumer goods, shoppers could also win mobile-friendly wallpapers, videos, and other digital goodies.

The campaign’s structure struck a strong note with Chiquita’s intended demographic: 75 percent of traffic came from women, who were also more likely to opt into future marketing attempts or to log a return visit to the website. Within the first three weeks of the campaign, over 400,000 prize-redeeming activities had been completed. Traffic to Chiquita’s retail partners also increased, creating a spillover effect that helped strengthen the company’s relationship with distributors, including the possibility of sharing future campaigns.

Questions:

1. Develop an additional tactic for Chiquita’s campaign that further penetrates its key mother segment.

2. Develop a completely new campaign to increase product usage among athletes—a key secondary market. What would you emphasize and what digital strategies and partnerships would you use?

Sources: Alex Samuely, “Chiquita Bananas’ Interactive Recipes Drive 52pc Email Engagement on Mobile,” Mobile Marketers, June 6, 2016, http://www.mobilemarketer.com/cms/sectors/food-beverage/22976. html

“Chiquita: Minions Love Bananas,” Mobile Marketing Association, http://www.mmaglobal.com/case- study-hub/case_studies/view/36696

BoxBEST GLOBAL PRACTICE

Maersk

Historically, B2B marketers have, in general, been digital laggards. B2B companies’ websites tend to offer a plethora of information on product features but do not make a strong connection to customers’ emotions or problems. The generally accepted view is that this is what business customers want. Maersk Line, a Denmark-based international shipping company, used an experimental social media approach that challenged these expectations.

Maersk Line began by publishing archived photos of its ships and ports alongside stories from ships’ journeys. One such narrative recounted the rescue of over 60 Vietnamese refugees in the South China Sea. The group was fleeing the country after the war, and upon sighting them the captain of the Arnold Maersk decided to carry the individuals safely to Denmark. These captivating and nostalgic anecdotes inspired current and prospective customers as well as employees themselves to take their own photos of Maersk ships around the world and share them. As the images gained more and more traction, Wichmann decided to expand the company’s social media footprint. On Twitter, Maersk focused on converting content from compelling internal blogs to eye-catching, pithy tweets. On

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LinkedIn, shipping experts were brought together to discuss hot topic industry issues like piracy or environmental policy.

One year into testing the waters of social media, Maersk Line conducted a survey asking customers about their perceptions of the company. Amazingly, 67 percent said that the social media effort had improved their perceptions. With 48,000 followers on LinkedIn, 81,000 followers on Twitter, and more than 400,000 on Facebook within the first year, the strategy appears to have helped the company reach current and potential customers. Perhaps most impressive though was that Maersk Line executed all of this for less than $100,000.

Estimated impacts include improved sales (15–17 percent of Facebook likes are from customers) and reported customer engagement levels rivaling Lego and Disney levels. There was an impressive impact on the employee side as well with improved engagement and commitment levels from employees.

Maersk Line’s success story is an example of how social media can be a cost effective opportunity to energize the brand for all types of companies, even those not traditionally considered edgy or innovative.

Questions:

1. What are the risks of using social media campaigns for big industrial companies such as Maersk?

2. Why did this digital strategy work?

Sources: Zsolt Katona and Miklos Savory, “Maersk Line: B2B Social Media – “It’s Communication, Not Marketing,” California Management Review, 56 (3) 2014, pp. 142–156.

Jonathan Wichmann, “Being B2B social: A Conversation with Maersk Line’s Head of Social Media,” McKinsey & Company, May 2013, http://www.mckinsey.com/business-functions/marketing-and-sales/ our-insights/being-b2b-social-a-conversation-with-maersk-lines-head-of-social-media

Mark Kovac, “Social Media Works for B2B Sales, Too,” Harvard Business Review, January 4, 2016, https://hbr.org/2016/01/social-media-works-for-b2b-sales-too

Jim Flannery, “A Captain’s Good Deed Fuels a Dream,” Soundings, June 21, 2016, http://www. soundingsonline.com/features/in-depth/295048-a-captains-good-deed-fuels-a-dream

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C H A P T E R T W E L V E

Leveraging the Business

Results are gained by exploiting opportunities, not by solving problems. —Peter Drucker

The more opportunities I seize, the more opportunities multiply before me. —Sun Tzu

The most dangerous moment comes with victory. —Napoleon

Ultimately, growth avenues outside the existing business need to be explored. While it is risky to leave the comfort of the familiar and the tested, it also removes the ceiling on the firm’s growth potential. There is virtually unlimited potential when you agree to extend the business.

The goal discussed in this chapter is to leverage the existing business into new product markets. The assets and competencies of the business are potential sources of advantage in a new marketplace. The capabilities around marketing skills, distribution clout, developing and manufacturing products, R&D, and brand equities are among the potential bases for advantage for a new growth business. The idea is to build on the core business to create synergy. The challenge, though, is to achieve real synergy with real impact on the customer value proposition, costs, or investments. Too often, apparent synergy is not realized.

The spectrum of available choices can be categorized generally as to how removed they are from the core business. Those that are close will represent less risk and have the greatest chance of leveraging business assets and competencies to achieve a real advantage. As more distance is allowed from the current business, opportunities become more plentiful, but the risk goes up as well. It can be difficult to gain the necessary knowledge and operational competence to run a business successfully that is far removed from one’s core abilities. Of course, creating a new core business can have a huge upside and taking the risk of moving far from the core business may pay off. But the risk should be visible and part of the analysis.

There are many ways to generate growth options that leverage the core business. Creative thinking processes, introduced in Chapter 11, can help. Good outcomes more often come from having good options on the table rather than making optimal decisions among mediocre ones.

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The creative-thinking exercises can best be engaged around the following series of questions, which have proved to be a good source of options.

Which assets and competencies can be leveraged?

What brand extensions are possible?

Can the scope of the offering be expanded?

Do viable new markets exist?

After these questions have been discussed, some option evaluation issues will be addressed and, finally, the critical concept of synergy will be analyzed.

WHICH ASSETS AND COMPETENCIES CAN BE LEVERAGED? A focus on assets and competencies starts by creating an inventory in order to identify the real strengths of the business. In doing so, the discussion in Chapter 3 around identifying and evaluating assets and competencies can be helpful. What are the key assets and compe- tencies that are supporting the core business? What are their characteristics? How strong is each?

The second step is to find a business area where the assets and competencies can be applied to generate an advantage. A line of greeting cards sold through drugstores might have an artistic capability and a distribution asset that could be leveraged. What other items are in drugstores that might employ artistic talents? Are there items in the drugstore that the retailers have difficulty sourcing, for whatever reason? A retailer problem might suggest an opportunity.

One fruitful exercise is to examine each asset for excess capacity. Are some assets under- utilized? A legal firm that considered this question took advantage of excess office space to offer tax services. A supermarket chain with obsolete sites went into the discount liquor business. A cookie plant began making muffins. If a growth initiative can use excess capacity, a substantial, sustainable cost advantage could result.

The final step is to address implementation problems. Assets and competencies may require adaptations when applied to a different business. Further, new capabilities may have to be found or developed. Existing core businesses are sometimes best leveraged by making an acquisition because developing the business internally may not be economic or even feasible. When acquisitions are involved, two organizations with different systems, people, and cultures will have to be merged. Many efforts at achieving synergy falter because of implementation difficulties.

As the partial list profiled in Chapter 3 suggests, there are a wide range of exportable assets and competencies. To give a flavor of the opportunities, consider the following: marketing skills, sales and distribution capacity, design and manufacturing skills, and R&D capabilities.

Marketing Skills

A firm will often either possess or lack strong marketing skills for a particular market. Thus, a frequent motive for expanding into new product markets is to export or import marketing skills. Black & Decker had developed and exploited an aggressive new-products program (e.g., cordless screwdrivers and HandyChopper), effective consumer marketing (for brands such as SpaceMaker, DustBuster, and ThunderVolt cordless tools), and intensive customer service and dealer relations. The acquisition of Ernhart, with its branded door locks, decorative faucets, outdoor lighting, and

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racks, provided Black & Decker with an opportunity to apply its marketing skills and distribution clout to a firm that lacked a marketing culture.

Applying marketing skills is not always as easy as it appears. Philip Morris, a successful marketer of Miller Lite and other brands, failed with 7-Up, which it attempted to position as a caffeine-free soft drink in response to health interests of consumers. After a seven-year battle, Philip Morris gave up and sold the line. The problems that beset Philip Morris included the reaction of competitors who rushed caffeine-free drinks to the market, the power of existing distributors, and the limited appeal of lemon-lime drinks. Coca-Cola made a similar misjudgment when it created Wine Spectrum and failed in its efforts to overcome Gallo, in part because of Gallo’s control over distribution.

Capacity in Sales or Distribution

A firm with a strong distribution capability may add products or services that could exploit that capability. Thus, Black & Decker’s distribution strength helped provide a boost to the Ernhart lines. A joint venture between Nestle and Coca-Cola in the canned tea business combined Coke’s distribution strength with the product knowledge and name of Nestle.

E-commerce firms such as Amazon or Wine.com often have operations that can add capacity just by adding a button to access another product group. The result can be additional sales and margins to offset the fixed costs of the operation.

Design and Manufacturing Skills

Design and manufacturing ability can be the basis for entry into a new business area. The ability to design and make small motors helped Honda succeed in the motorcycle business and led to its entry into lawn-care equipment, outboard motors, and a host of other products. The ability to make small products has been a key for Sony as it has moved from product to product in consumer electronics. Schwinn’s experience with bicycles provided a basis to market the stylish Tailwind electric bike that features a 30-minute fast charge.

R&D Skills

Expertise in a certain technology can lead to a new business based on that technology. GE’s early research has spawned very successful businesses. For example, its research on turbines for electricity generation provided the basis for its aircraft engine business and its light bulb research provided the foundation for what became the medical instrumentation business. P&G has actively applied technology from one business area to another such as fragrance technology applied to detergents to create both incremental and game-changing innovations. In general, breakthroughs in a business area tend to come from technologies owned by other industries. Creativity, often in short supply, is needed to provide opportunities for basic technology and the R&D capability that supports it.

Brand Extensions

One common exportable asset is a strong, established brand name—a name with visibility, associations, and loyalty among a customer group. The challenge is to take this brand asset and use it to enter new product markets. The name can make the task of establishing a new

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product more feasible and efficient because it makes developing awareness, trust, interest, and action easier.

Lenox, a maker of fine china, exploited its traditional, high-quality image and its distribution system by expanding into the areas of jewelry and giftware. H&R Block added legal services to its chain of income tax services, hoping to gain synergy by exploiting (and enhancing) its brand. A ski boot manufacturer leveraged its brand into skis and then ski clothing.

Many firms have built large, diverse businesses around a strong brand, including Sony, IBM, Siemens, GE, Schwab, Virgin, Mitsubishi, and Disney. More than 300 businesses carry the Virgin name, and all gain from the public-relations flair of Richard Branson, its owner. Mitsubishi has its name on thousands of products, each of which contributes two benefits that are often under- appreciated, name exposure and cumulative new-product vitality.

Disney, founded in 1923 as a cartoon company with Mickey Mouse (made famous in the cartoon “Steamboat Willie”) as its initial asset, might be the most successful firm ever at leveraging its brand. In the 1950s, the company built Disneyland and launched a long running TV show (The Wonderful World of Disney), dramatically changing the brand by making it much richer and deeper than before. Particularly after extending the theme parks to Florida, Paris, and Japan; establishing its own retail stores, resorts, and a cruise line; and supporting a host of Disney- endorsed offerings such as the California Adventure Park, Disney can deliver an experience that goes far beyond watching cartoons. As a result of this brand power, the Disney Channel has become a strong, differentiated TV network, an incredible achievement if you consider what others have put into that space.

It is instructive to see why Disney has done so well with an aggressive brand extension strategy. First, from the beginning, the company has known what it stands for—magical family entertainment, executed with consistent excellence. Everything Disney does reinforces that brand identity; when it went into adult films, it did so under the name Touchstone rather than Disney so as not to dilute the Disney identity. Second, Disney has a relentless, uncompromising drive for operational excellence that started with Walt Disney’s fanatical concern for detail in the earliest cartoons and theme parks. The parks are run so well that Disney holds classes to teach other firms how to maintain energy and consistency. The cruise line was delayed, despite ballooning costs, until everything was judged perfect. Third, the organization actively manages a host of subbrands that have their own identities, including Mickey Mouse, Donald Duck, a mountain (the Matterhorn), a song (“It’s a Small World”), film characters such as Mary Poppins and the Lion King, and on and on. Fourth, Disney understands synergyacrossproducts. TheLion King isnot onlyafilm,butalsosupports aBroadwaymusicaland an exhaustive set of promotions at fast-food chains and elsewhere.

Brand extension options can be created by determining the current brand image and what products and services would fit these associations (see Figure 12.1). In what arenas would the brand be considered relevant? McDonald’s has associations with fun and kids, fast delivery of

New Offering Brand

Add Value

Enhance Brand

Fit

Figure 12.1 Brand Extension Logic

Chapter 12 Leveraging the Business 217

consistent food, Big Macs, and fries. The fun and kids might suggest a theme park, a line of toys, or a day-care center.

A brand, of course, can evolve over time in part by the brand extensions and then get permission to drive a broader assortment of offerings. So the addition of a healthy submenu to McDonald’s may allow the firm to venture into areas that would have not made sense before. Virgin was a record company, and an airline under that brand name made no sense. But after the organization became not only successful, but also known for an over-the-top attitude, customer service, innovation, and an ability to face up to large, established competitors, its new associations provided the basis to go into a host of business areas.

The evaluation of each extension alternative is based on three questions. Each must be answered in the affirmative for the extension to be viable.

1. Does the brand fit the new product context? If the customer is uncomfortable and senses a lack of fit, acceptance will not come easily. The brand may not be seen as having the needed credibility or expertise, or it may have the wrong associations for the context. In general, successful extensions will have one or more bases of fit such as a:

Base product—Starbucks Frappuccino (a packaged drink), VIA (instant coffee), and Dreyer’s Starbucks Coffee Ice Cream

Companion product—Coppertone sunglasses, Duracell Durabeam flashlights

Common user—Gerber baby clothing, The Mint Cookie (Girl Scout) Google Flights

Distinctive attribute/benefit—Arm & Hammer Carpet Deodorizer, Sunkist Vitamin C

Expertise—Mr. Clean Performance Car Washes, Zagat Physician Rating, David Beckham (Soccer) Academy

Personality/self-expressive benefits—Pierre Cardin wallets, Festify (by Spotify)

In general, a brand that has strong ties to a product class and attributes (e.g., Boeing, Netflix, or Kleenex) will have a more difficult time stretching than a brand that is associated with intangibles such as a brand personality. For example, Cosmopolitan magazine could not extend its brand into a yogurt line or Colgate toothpaste into a line of ready-to-eat meals. Thus, brands like Disney, Virgin, and Gucci have permission to extend further. In a TippingSprung survey of brand extensions, consumers were not enthused about Burger King men’s apparel, Kellogg hip-hop streetwear, and Playboy energy drink in part because of a fit problem.1

2. Does the brand add value to the offering in the new product class? A customer should be able to express why the brand would be preferred in its new context. Despite the fact that cruise ships are difficult to tell apart, nearly anyone could verbalize rather clearly how a Disney cruise ship would be different from others—it would have Disney characters aboard, contain more kids and families, and provide magical family entertainment. Coppertone sunglasses, the top rated extension in the TippingSprung survey, would be expected to benefit from the years of experience that Coppertone has with activities in the sun.2 Mr. Clean Performance Car Washes, the second rated extension in the same survey, offers the credibility of the Mr. Clean brand to an area that can have high variability of service. Starbucks provides a premium quality association to its Frappuc- cino and VIA lines and a sense of authenticity to coffee-flavored ice cream.

If the brand name does not add value in the eyes of the customer, the extension will be vulnerable to competition. For example, Pillsbury Microwave Popcorn initially benefited from the Pillsbury name, but was vulnerable to the entry of an established popcorn name. Thus, although

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Orville Redenbacher entered the microwave category late, it still won with a name that meant quality and authenticity in popcorn. Rice-a-Roni’s Savory Classics did not fit the consumer’s notion of the role of Rice-a-Roni in the kitchen. The Arm & Hammer name also spawned two failures— a spray underarm deodorant, for which the Arm & Hammer name may have had the wrong connotations, and a spray disinfectant.

A concept test can help determine what value is added by the brand. Prospective customers can be given only the brand name and then asked whether they would be attracted to the product and why. If they cannot articulate a specific reason why the offering would be attractive to them, it is unlikely that the brand name will add significant value.

3. Will the extension enhance the brand name and image? With the focus on the extension, its impact on the brand can be overlooked. An extension that fails or has inappropriate associations can damage the brand. The ideal is to have extensions that provide visibility, energy, and associations that support the brand. Coach was a successful but a bit stodgy maker of leather bags until it hired a new designer and extended the brand to hats, shoes, sunglasses, coats, watches, and even straw beach hats, all with the signature “C” in leather. The extensions provided energy to the brand and attracted younger customers, vital to the firm’s long-term future. Sunkist’s associations with oranges, health, and vitality are reinforced by the promotion of Sunkist juice bases and vitamin C tablets, while Sunkist fruit rolls may be a risk. Extensions need to deliver on the brand promise to avoid harming the brand. Coppertone sunglasses need to have sun protection and not just be a stylish design, and Mr. Clean and the Starbucks extensions need to deliver the expected experience for the brand.

If an extension will damage the brand but represents a viable business opportunity, another brand option needs to be found. When Gap introduced a value chain and called it Gap Warehouse, the Gap brand was in danger of being confused and tarnished. Gap quickly reconsidered and protected its namesake brand by changing the name of the new chain to Old Navy. The use of subbrands and endorsed brands provides alternatives to creating a new brand with all its costs and risks.

Subbrands and Endorsed Brands

Subbrands and endorsed brands become options when two unfortunate realities exist. First, the existing brands are judged to have the wrong associations or to have a risk of being damaged by the extension. Second, the organization does not have the size or resources to build a new brand, perhaps because the task is too difficult in a cluttered context or because the business does not justify the needed investment.

In such a situation, the answer may lie in the use of subbrands or endorsed brands. The GE Profile subbrand of consumer appliances allowed General Electric to stretch into a premium segment in order to participate in the energy and high margins afforded by that submarket. Similarly, the Pentium Zeon subbrand allowed Intel to offer a high-end server microprocessor. A subbrand lets the offering separate itself somewhat from the parent brand and offers the parent brand some degree of insulation.

An endorsed brand offers even more separation. The Schwinn brand name in bicycles has given its Johnny G. Spinner bike an edge with its endorsement. And Marriott needed to enter the huge and growing business hotel part of the market. Because it would have been extremely expensive to create a stand-alone brand in that area and the existing brands were deemed to be insufficient in quality to buy, the company created Courtyard by Marriott. The endorsement

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indicated that Marriott as an organization stood behind the Courtyard brand, so visitors could be confident that the chain would deliver a reliable experience. Leveraging a brand by using it to endorse other brands provides a trust umbrella.

EXPANDING THE SCOPE OF THE OFFERING A firm may look to its in-depth knowledge of and access to a market segment as an under- leveraged asset. Dometic, a Swedish company that pioneered absorption refrigerators charac- terized by silent operation, built a business selling them to hotels for use as minibars and to the RV industry.3 The RV industry success led Dometic to add other products directed at the RV industry, such as air conditioning, automated awnings, generators, and systems for cooking, sanitation, and water purification. The product scope was broadened from refrigeration to RV interior systems, enabling Dometic to create a direct-to-dealer distribution system that became an ongoing competitive advantage. The Dometic experience illustrates how success in a market can be leveraged.

Considering the broader use context is a powerful idea. Thus, instead of being in the orange juice business, be in the breakfast business. Instead of selling only basketballs, consider making baskets and courts. GE’s Jack Welch was quoted as saying that dominant companies in slow- growing businesses should redefine their markets, looking at a broader scope that will have more opportunities.

Slywotsky and Wise make a similar suggestion in their book How to Grow When Markets Don’t.4 They recommend identifying and serving the customer needs that emanate from the use of existing products. Cardinal Health, for example, moved beyond distributing drugs to pharmacies to managing hospital drug dispensing and related record-keeping and creating medical-supply kits for surgeons. Clarke American Checks went from check printing for banks to managing their customer relations, including running call centers and helping banks come up with incentives to increase customer retention. John Deere, the equipment manufacturer, decided to offer a one- stop shop for landscaping.

An analysis of the total set of tasks surrounding the customer use experience is a good way to begin determining whether there is a viable growth option in expanding the view of the offering. The use experience can be modeled by walking through exactly what the customer needs to do in order to use the product or service. This task set for a Healthy Choice frozen meal could include buying, paying, transporting, storing, preparing for use, using, and disposal. Can any of these tasks be made easier or eliminated by adding a feature or service to the product strategy? ABB extended its business to include importation services that its customers had to perform to move machinery they had rented from the company to oil drilling sites around the world.

The analysis of a consumption system may not result in an end-to-end solution. But even if two parts can be combined, replaced by an alternative, or made to work better, the result may have added value or a point of differentiation for the customer. Annie Chun created a meal kit whereby the sauce and noodles are combined into an easily microwaved dinner dish. In doing so, several steps for the cook were eliminated or combined and the easy cook/serve features were appealing.

Another perspective on expanding the offering scope is simply to serve additional needs of the customer. What other products or services do existing customers buy that could be provided by the firm’s operations? Fast-food chains have expanded their offerings

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to attract customers in a time slot for which they have capacity. McDonald’s, for example, ohas gourmet coffee for afternoon snack needs. Jamba Juice and Starbucks both added oatmeal so that they would be appealing as breakfast locations. Dometic added products RV owners bought.

NEW MARKETS A logical avenue of growth is to move existing products into new markets by duplicating the business operation, perhaps with minor adaptive changes. With market expansion, the same expertise and technology and sometimes even the same plant and operations facility can be used. Thus, there is potential for synergy and resulting reductions in investment and operating costs. Of course, market development is based on the premise that the business is operating successfully; there is no point in exporting failure or mediocrity.

Expanding Geographically

Geographic expansion may involve changing from a regional operation to a national operation, moving into another region, or expanding to another country. KFC, McDonald’s, GE, IBM, and Visa have successfully exported their operations to other countries. Most of these companies and many others are counting on countries such as China, India, and Russia to fuel much of their growth for the coming decades. They realize that success will involve significant investment in logistics, distribution infrastructures, and organization building and adaptation. Chapter 14 will elaborate on how this occurs in global markets.

Moving from local to regional to national is another option. Samuel Adams and other microbreweries have generated growth by geographic expansion. The challenge is to build a brand in the face of established competitors. See’s Candies faced this hurdle as it expanded into the East Coast. The company was aided by the fact that its reputation has seeped into markets due press reports and because consumers had moved from the West Coast where the company is a household name. See’s also used “holiday gift centers,” seasonal carts that appeared in shopping malls to raise awareness of the brand in these new markets.

Expanding into New Market Segments

A firm can also grow by reaching into new market segments. If the target segments are well defined, there are always a host of other segments to consider that would provide growth directions. Consider, for example:

Distribution channel. A firm can reach new segments by opening up a second or third channel of distribution. A retail sporting goods store could market to schools via a direct sales force. A direct marketer such as Avon could introduce its products into department stores, perhaps under another brand name. Age. Johnson & Johnson’s baby shampoo was languishing until the company looked toward adults who wash their hair frequently.

Home versus office. A supplier of office equipment to businesses might look to the home office market.

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Move upscale. Olay, which was a tired mass market P&G brand, was injected with innovation (such as Regenerist, Definity, and Pro-X), eye-catching packaging, and new positioning and was able to demonstrate that the mass market would be willing to pay premium prices if the offering merited them. In the process, a $2.5 billion business was created.

A key to detecting new markets is to consider a wide variety of segmentation variables. Sometimes looking at markets in a different way will uncover a useful segment. It is especially helpful to identify segments that are not being served well, such as the women’s computer market or the fashion needs of older people. In general, segments should be sought for which the brand can provide value. Entering a new market without providing any incremental customer value is very risky.

EVALUATING BUSINESS LEVERAGING OPTIONS There will be no shortage of ways to leverage the existing business. Ultimately, these need to be evaluated to see whether one or more should be pursued either immediately or within a planning horizon. This section proposes several questions that represent important criteria to consider.

These criteria are all supported by a series of studies of initiatives that leverage existing businesses conducted by Chris Zook of Bain and Company (as reported in two books, Profit from the Core with James Allen and Beyond the Core).5 The first study provides case studies of 25 companies that achieved sustainable growth performance from 1992 to 2002 far in excess of their peers. The second study examined 12 pairs of firms. Each pair was within the same industry and with a similar starting point, but with very different financial trajectories over a 10-year period. The resulting database contained 150 attempts to leverage a business. The third study focused on 180 attempts to leverage a core business in the United States and the United Kingdom. The focus of these studies was to attempt to determine what was associated with successful initiatives to leverage core businesses.

Is the Product Market Attractive?

Successful initiatives involve forays into markets that have robust profit going forward. Recall the five-factor Porter model introduced in Chapter 4. The most logical expansion will fail if there simply are no profits to be had because competitors control them or because the margins have been squeezed by overcapacity or the nature of customer demand. The stampede of utility companies into telecommunications turned out to be a disaster because the profit pool was shrinking to the point that their ventures were uneconomic. In contrast, the controlled product expansion of EAS, the vitamin supplement firm, was always into areas in which the margins were healthy. Projecting a market forward, particularly a new one with potential new entrants, is difficult, but the risk of entering a hostile market can be significant. Recall the discussion of the risks of growth markets in Chapter 4.

Is the Core Business Successful?

There is no point in extending mediocrity. A weak business will seldom have either resources or assets and competencies to spin out to a growth initiative. The chances of successfully leveraging

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a business has been estimated by the Zook studies to be around 25 percent.6 And this falls to well under 8 percent when the core business is weak.7 Budget Rent-A-Car, for example, attempted a host of strategies without success to improve on their also-ran status, including efforts to enter the travel arena and the truck rental business.

Can the Core Business Be Transferred to the New Product Market?

The ability of the business to adapt to a new product market and the chances for success increase the closer the leveraged business is to the core business. Tesco, the United Kingdom grocery chain, refined its retail offering by improving the checkout experience, parking, and fresh produce. They grew in part by expanding into in-store pharmacies, optical product stations, auto fuel, kitchen products, and coffee shops. Each of these leverage efforts enhanced the core business. Such synergy is healthy not only because the core business benefits, but because the new business is more likely to draw on the strengths of the core as well. In contrast to this disciplined expansion, Tesco’s competitor Sainsbury strayed further from its core, investing in a grocery chain in Egypt and two do-it-yourself chains in the United Kingdom.

This effect has been quantified by the Zook studies in which the new business initiative was separated from the core in terms of whether the involved customers, competitors, channels of distribution, cost structure, and assets and competencies were the same or different. The sum of differences could range from zero to five (there could be a partial match on some dimensions). The success probability sinks from over 25 percent to under 10 percent if the sum of differences was two or more.8

The task of adapting a business into a new market is easy to underestimate as illustrated by the experience of FedEx when it attempted to duplicate its concept in Europe. Setting up a hub-and-spoke system in Europe was inhibited by regulatory roadblocks at every turn. Attempts to short-circuit regulations by acquiring firms with related abilities resulted in something of a hodgepodge—FedEx at one point owned a barge company, for example. The firm also lacked a first-mover advantage in Europe because DHL and others had employed the FedEx concept years earlier. A reliance on the English language and a decision to impose a pickup deadline of five o’clock in Spain (where people work until eight o’clock) caused additional implementation problems.

Will the New Business Be Successful, Become a Market Leader?

The first question, which is not trivial, is whether the new business can avoid failure. The acceptance of new products is low. Even for firms with high levels of competence in a market and with real synergy to buttress the new entry, failure rates are extremely high. And we know the primary reason. Dozens of studies in very different contexts and in different markets have concluded that the main reason for failure is that the new products lacked a point of difference, a reason to succeed. Too often they were “me-too” products, at least as perceived by customers. There was in essence no reason to succeed, so they didn’t. There should be evidence that customers will value the product or service and that the offering can withstand the response of existing and potential competitors.

Even real advances may not be perceived by customers. They may even read an advance as a reason not to buy. Clairol failed with Small Miracle hair conditioner, which could be used through

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several shampoos, in part because customers could not be convinced that the product would not build up on their hair if it was not washed off with each use. Even the use of an established brand cannot guarantee success. The concept of a colorless cola, Crystal Pepsi, did not achieve acceptance, because the appearance had a negative flavor connotation.

The goal, of course, should not be simply to survive, but to become a market leader at least with an attractive submarket. Simply becoming the fourth or fifth or even third player creates the danger that it will be impossible to keep up with the ongoing investment needed. Without substantial market and financial success, needed resources from the firm may be hard to justify. There is always a competition for resources even in “wealthy” organizations.

Is the Leverage Strategy Repeatable?

There is great value in creating initiatives that are repeatable. Repeatability leads to learning curve effects, speed of execution, organizational simplicity, strategic clarity, and the ability to get the details right. In the Zook database, around two-thirds of the most successful, sustained growth companies had one or two repeatable formulas.9 Nike, for example, has done much better over time than Reebok. While Reebok was buying a boat company, Nike was duplicating its success in basketball with moves into tennis, baseball, football, volleyball, hiking, soccer, and golf. In all these efforts, the strategy was very similar, starting with a prominent credible endorser from Michael Jordan to Tiger Woods and systematically moving from shoes to clothing to equipment.

THE MIRAGE OF SYNERGY Synergy, as suggested in Chapter 6, is an important source of competitive advantage. However, synergy is often more mirage than real. Synergy is often assumed when in fact it does not exist, is unattainable, or is vastly overvalued.

Potential Synergy Does Not Exist

Strategists often manipulate semantics to delude themselves that a synergistic justification exists. But when a packaged-goods manufacturer bought Burger Chef, a chain of 700 fast- food restaurants, the fact that both entities were technically in the food business was of little consequence. Because the packaged-goods firm never could master the skills needed to run restaurants, there was considerable negative organizational synergy.

There are many examples of expected synergy based on a superficial analysis that did not materialize. A large school bus operator bought into the ambulance business thinking that since both involved vehicles and drivers there would be synergy. But because ambulances were more complex and heavily regulated, the synergy never happened. A supermarket chain struggled to expand into other countries because of the lack of common suppliers and the difficulty of creating an information system. eBay bought Skype thinking that it might be another way to connect buyers and sellers, but the connection did not work in e-commerce, and the Skype had to be divested.10 Skype was later bought by Microsoft, which is a better fit for its current business and customers.

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Potential Synergy Exists But Is Unattainable

Sometimes there is real potential synergy, but implementation difficulties—usually far greater than expected—inhibit or block this synergy from being realized. When two organizations (perhaps within the same firm) have different cultures, strategies, and processes, there are significant issues to overcome. The effort to combine United Airlines, Westin Hotels and Resorts, and Hertz into one organization was a classic case in which the operational problems coupled with presenting a confused brand face to customers doomed the idea. The efforts to create multiservice telecommunication companies and fully integrated entertainment companies in order to achieve synergies have struggled.

Even when progress occurs, the patience and resources may not last long enough to see success. The ultimate integration challenge occurs when a group of entities are integrated to provide a comprehensive customer solution. Lou Gerstner indicated that integrating the country, product, and service silos at IBM, in part to provide integrated customer solutions, was his most significant task and legacy.11 He noted that it took five years to make this progress. The synergies expected from the merger of Daimler-Benz and Chrysler never materialized; they finally gave up and engaged in a costly separation.

Potential Synergy Is Overvalued

One risk of buying a business in another area, even a related one, is that the potential synergy may seem more enticing than it really is. Perhaps carried away by its success with Gatorade, Quaker

Box THE ELUSIVE SEARCH FOR SYNERGY

The concept of a total integrated communications firm that comprises advertising, direct marketing, marketing research, public relations, design, sales promotions, and Internet communications has been a dream of many organizations for two decades. The concept has been that synergy will be created by providing clients with more consistent, coordinated communication efforts and by cross-selling services. Thus, Young & Rubicam had the “whole egg” and Ogilvy & Mather talked about “Ogilvy orchestrations.”

Despite the compelling logic and considerable efforts, though, such synergy has been elusive. Because each communication discipline involved different people, paradigms, cultures, success mea- sures, and processes, the disparate groups had difficulty not only working together but even doing simple things such as sharing strategies and visuals. Their inclination was to view other disciplines as inferior competitors rather than partners. Further, they were often reluctant to refer clients to sister units that were suspected to deliver inferior results, which created client-relationship ownership issues.

The firms with at least some success stories to their credit—Young & Rubicam, Denstu, and McCann Ericson—have a set of communication modalities such as direct marketing, public relations, Internet communications, and advertising in one organization, with shared locations and client- relations leadership. These firms make sure there is a strong, credible team leader with a dedicated space and a team-oriented performance measure. Even with such assets, sustained success is extremely rare. When a virtual team is formed with separate companies under one umbrella, even if they are within the same communication holding company, success is even rarer.

The lesson here is that synergy does not just happen despite logic and motivation. It requires real innovation in implementation—not just trying harder.

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Oats purchased the Snapple business in 1994 for $1.6 billion, only to sell it two years later for a mere $300 million. Quaker had difficulties in distribution and was inept at taking a quirky personality brand into the mainstream beverage market (its program was based on pedestrian advertising and a giant sampling giveaway). Moreover, the fact that Quaker paid several times more than Snapple was worth was a fatal handicap.

The acquisition of The Learning Company—a popular children’s software publisher with titles such as Reader Rabbit, Learn to Speak, and Oregon Trail—seemed like a logical move by Mattel, the powerful toy company with Barbie among its properties. Yet less than a year and a half after paying $3.5 billion for it, Mattel basically gave The Learning Company away to get out from under mounting losses.

One study of 75 people from 40 companies that were experienced at acquisition led to several conclusions. First, few companies do a rigorous risk analysis, looking at both the least and the most favorable outcomes. When optimistic vibes abound, it is particularly wise to look at the downside: What can go wrong? Second, it is useful to set a maximum price that you will not exceed. Avoid getting so exuberant about the synergistic potential that you ultimately pay more than you will ever be able to recoup.12

KEY LEARNINGS

Leveraging assets and competencies involves identifying them and creatively determining in what business areas they might be able to contribute.

Brand extensions should both help and be enhanced by the new offering in addition to being perceived to have a fit with it.

The business can be leveraged by introducing new products to the market or expanding the market for the existing products.

Entering a new product market is risky, as the new offering might lack market acceptance or needed resources. Success likelihood goes up if the core business is healthy, if the new product market is attractive (competitors will be profitable), if the business model is repeatable, if market leadership is possible, and if the stretch from the core is small.

Synergy can be a mirage. Too often, it does not exist, or it exists but is unattainable or overvalued.

FOR DISCUSSION 1. Pick an industry and a product or service. Engage in a creative-thinking process, as

outlined on pages 199–200 in Chapter 11, to generate an improved offering. Do the same to create an entirely new offering that uses one or more of firm assets and competencies.

2. Evaluate the following extension proposals: a. Bank of America into home safes b. Crest into a chain of dentist offices

226 Part Two Creating, Adapting, and Implementing Strategy

c. Caterpillar into automobiles d. Google into flight reservations

3. Pick a branded offering such as Southwest Airlines. Come up with 20 products or services that are alternative extension options. Include some that would be a stretch. Then evaluate each using the three criteria provided in the chapter.

4. Consider the following mergers or acquisitions. What synergy was or would be logically possible? What would inhibit synergy? Consider operations, culture, and brand equities.

a. Citicorp acquired Providian, a credit card firm serving low-income segments b. Pepsi (the owners of Frito-Lay) acquired Quaker Oats c. Toyota acquiring Jeep

5. Evaluate Starbucks’ extension decisions: to put Starbucks on United Airlines, to open Starbucks in bookstores and supermarkets, to license Starbucks ice cream to Dreyer’s, to offer oatmeal in Starbucks stores, to sell the soluble coffee VIA in supermarkets, and to sell Frappuccino as a packaged drink. What were the risks both as individual decisions and cumulatively?

6. Identify and evaluate a combination of businesses that have achieved synergy and another that has failed to do so.

Box BEST DIGITAL PRACTICE

Growing the Audience for Hamilton

Since its debut in 2015, Broadway’s hit musical Hamilton has received critical acclaim and realized unprecedented box office sales. Just a year after opening, shows were sold out through January 2017 and ticket prices had climbed to $500. Such widespread success inspired the play’s management to think about how they could extend Hamilton’s footprint beyond Broadway.

Hamilton’s digital team focused on attracting an even wider audience by establishing a presence on the Internet and in social media. They understood how these channels provided a unique opportunity for fans who had never seen the live show to experience the Hamilton brand. At the cornerstone of the team’s efforts were a series of online “Ham4Ham” videos. In these, the cast of Hamilton produced short and playful scenes—some were reenactments from the play; others were unrelated vignettes. In one, the cast recreated a popular scene from the West Wing of the White House right before they were set to perform for President Obama. In another, lead actor Lin Manuel-Miranda and Hamilton’s composer Alan Menken sang songs from Disney’s The Little Mermaid. The show also regularly publishes digital content across Instagram, Snapchat, Twitter, and YouTube, including user- generated postings. For example, the team manages an Instagram series called #HamArt, which depicts drawings and paintings of characters or scenes from the play created by its fans.

Hamilton’s ability to reach unexpected markets stems from the producer’s adeptness at managing both an entertainment brand and a Broadway musical. By understanding the strength of creative content creation and uncovering new distribution opportunities, Hamilton’s digital team has been

(continued)

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instrumental in earning the franchise a larger online audience than any other Broadway show, including long-standing blockbusters such as Wicked and the Lion King.

Off Broadway, several factors have pointed to the play’s enduring success. In 2017, the cast and crew will begin a national tour across at least 15 U.S. cities. Additionally, various pieces of merchandise—from sweatshirts to hats—and other collectible souvenirs from the show continue to be in high demand. Finally, Hamilton has connected with a youthful demographic who likely were uninterested in the theater previously but now have the potential to become habitual playgoers.

Questions:

1. How can Broadway leverage its success with Hamilton to increase its convert the younger demographic to be become habitual playgoers?

2. Using the criteria to evaluate business leveraging options, what other growth options exist as revenue-generating for Hamilton?

Sources: Issie Lapowsky, “Hamilton’s Savvy Plan to Keep Fans Stoked Even if They Never Get Tickets,” WIRED, May 10, 2016, http://www.wired.com/2016/05/cant-get-hamilton-tickets-show-goes-online/

Robert Viagas, “Hamilton Tour Adds Stops in California and North Carolina,” Playbill, June 10, 2016, http://www.playbill.com/article/hamilton-tour-adds-two-more-stops

BoxBEST GLOBAL PRACTICE

Tanita

Tanita, a top Japanese manufacturer of premium bathroom scales, unexpectedly stumbled on the idea to diversify the scope of its offerings. It was Tanita’s canteen (cafeteria) that inspired a series of new business ventures. Historically, canteens were perceived as sources of convenient meals in an environ- ment that encouraged people to eat quickly. The cost of food was low but came at the expense of little to no flavor. Tanita decided to challenge this trend by rebranding its canteen into more of an “eatery” that offered cost conscious, healthy, and good-tasting meals. Given the company’s mission of helping people live healthy lives, management knew it was important to also emphasize these values among employees.

The changes Tanita made to its cafeteria attracted the attention of the media, and it soon became the subject of a television documentary. This helped spread demand for healthy but flavorful eating, and Tanita realized that it had an opportunity to bring its cafeteria meals to consumers. In 2010, the company published a cookbook entitled “The Staff Canteen at Body Fat Scale Maker Tanita: 500-kcal Meals That Will Make You Full.” This book and its sequel sold almost 5 million copies and are now in approximately 10 percent of Japanese households.

The success of these cookbooks led to another idea: an upscale cafeteria-style restaurant situated in the business district of Marunouchi in Central Tokyo. The restaurant, featuring healthy items under 500-kcal, is so popular that access has to be controlled by two different seating times and a lottery system that issues tickets for entrance.

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By leveraging the focus on healthy living that had made its scale business so successful, Tanita was able to extend the brand’s relationship with customers. The recipe book was the first step in Tanita earning credibility as a comprehensive wellness brand. Tanita’s opportunistic attitude also helped it take advantage of other expansion growth options, such as the restaurant.

Questions:

1. Describe which assets and competencies were effectively leveraged by Tanita for growth.

2. Evaluate the quality of its brand extensions using the criteria in the case. Using these criteria, what health products would not make sense for Tanita to introduce?

Source: Tomoko Otake, “Canteens Put Employees’ Health on the Menu,” The Japan Times, May 22, 2012, http://www.japantimes.co.jp/life/2012/05/22/lifestyle/canteens-put-employees-health-on-the-menu/

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C H A P T E R T H I R T E E N

Creating New Businesses

The most effective way to cope with change is to help create it. —I. W. Lynett

When I arise in the morning torn between a desire to improve the world and a desire to enjoy the world. This makes it hard to plan the day. —E. B. White

The unexpected is the best source of inspiration. —Peter Drucker

Enterprise Rent-A-Car, which passed Hertz in sales during the 1990s, had sales of $20.9 billion in 2016 compared with incumbent Hertz’s $1.68 billion and was much more profitable. Enterprise, formedin1957inSt.Louis,focusedontheoff-airportmarket,cateringtoleisuretravelersand(more important) to insurance companies that needed to supply a car to customers whose car was being repaired, a market that Enterprise created and nurtured. With a signature “We’ll pick you up” offer, its inexpensive off-airport sites were run by entrepreneur managers motivated in part by a bonus system tied to customer satisfaction. Not until the late 1980s when it was already nipping at the heels ofHertzdidEnterprisebeginnationaladvertisingandgetontheradarscreenofitscompetitors,who were all after the prime market of business travelers who wanted a car at the airport.

Cirque du Soleil started in 1984 with a few street performers. A traditional circus with animals, trapeze artists, clowns, three-ring entertainment, and tents was oriented to families with children. Competitors were always tweaking the acts and setting. Cirque du Soleil (“We reinvented the circus”) was qualitatively different, appealing to a different customer group—adults and corporate clients, who would pay a significantly higher price. The performers were talented acrobats, the clowns were more sophisticated, and there was a motivating story line somewhat like a theater production. Further, much of the expense was eliminated: There was only one “ring,” no animals, no star performers, and no aisle concessions. It was so different that it made the traditional circus irrelevant and changed what the customer was buying.

Yamaha revitalized a declining piano market by developing the Disklavier, which functioned and played like other pianos except that it also included an electronic control system, thus creating a modern version of the old player piano. The system allowed a performance to be recorded and

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stored in memory. It provided a professional piano experience (with an artist who did not charge or get tired) for the home, hotel lobby, restaurant, or wherever entertainment would be welcome.

During the past century, the automobile industry experienced a dozen or more innovations that have created new business arenas—the Model T, the enclosed car, the GM spectrum of cars from Chevrolet to Cadillac, installment buying, the automatic transmission, the original Ford Thunderbird, the VW bug, the inexpensive and reliable Japanese cars of the 1970s, minivans, SUVs, and hybrids. In each case, the innovators achieved above-average profits that extended for years. In particular, the Chrysler minivan, introduced in 1983 with first year sales over 200,000, maintained leadership in the category for at least a decade and was a critical contributor to the very survival of the firm.

CREATE “MUST HAVES,” RENDERING COMPETITORS IRRELEVANT The brand home run is an innovative offering containing a “must have” that defines a new category or subcategory for which competitors are not relevant. A substantial group of customers will not consider any brand lacking the “must have.”

As the book Brand Relevance: Making Competitors Irrelevant details, such an innovation will not happen frequently, but when it does, brand strategists need to seize that opportunity, recognizing that something bigger than a point of differentiation is present and manage it accordingly. The firm needs to not only develop a “must have,” but also bring it to market and then build barriers to competitors so the luxury of having a monopoly or near monopoly market position will not be short lived. It is not easy, but the upside is enormous.1

To generate a “must have,” there needs to be an offering innovation that is so substantial or transformational that some customers will not do without it. Transformational innovation, as described in Chapter 5, is a game changer such as salesforce.com championing cloud computing or Cirque du Soleil reinventing the circus. Substantial innovation, also described in Chapter 5 (unlike transformational), innovation will not change the basic characteristics of the offering but will significantly enhance it either through the addition of a new “must have” or an improvement of one of its characteristics that is so significant that customers will now reject any option without it. A new category or subcategory will then be formed. The branded ingredient Kevlar provided a substantial innovation, defining a subcategory in the body armor market. Sometimes the distinction between the two is blurred, but the innovation should clearly not be incremental, one that will improve or strengthen brand preference with a “like to have” in the context of the existing categories or subcategories.

The “must have” can improve or enhance the offering such as:

A feature such as the fast delivery from Amazon

A benefit such as that provided by Nike Plus’ running shoe with a built-in chip that allows user to track and share their training data

An appealing design such as Apple products

A systems offering that integrates Siebel’s CMR suite of customer contact programs

A new technology such as cloud computing that salesforce.com pioneered

A product designed for a segment such as Luna, the energy bar for women

A dramatically low price point such as JetBlue airlines

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A “must have” can also involve the basis for a customer relationship that is not involved with a functional benefit of the offering, but is important symbolically to the customer such as:

A shared interest such as Pampers Village, a go-to site for baby care

A personality that connects such as the energy of Red Bull, the competence of Charles Schwab, the irreverence of Virgin, the humor of Southwest, or the exotic service of Singapore Airlines A passion such as that shown by Whole Foods Market for healthy foods

Organizational values such as being customer centered (Zappos.com), innovative (3M), global (Citibank), involved in community or social issues (Avon), or being concerned about the environment (Patagonia)

In any case, the “must have” is a characteristic or element of the brand relationship that is regarded as necessary for a brand to be considered and thus relevant.

The “Must Have” Pay-Off

Creating “must haves” through substantial or transformational innovation and making com- petitors irrelevant or less relevant, is not only desirable but, in fact, is with rare exceptions the only way to grow. With rare exceptions, the only way! By far the more common strategy is to engage in brand preference competition—focusing on making a brand preferred among the choices considered by customers in a defined subcategory. The goal is to beat the competition through the use of incremental innovation to make the brand ever more attractive or reliable or the offering less costly. “Faster, cheaper, better” is the mantra. Resources are expended on communicating more effectively with cleverer advertising, more impactful promotions, more visible sponsorships, and more involving social media programs. You win by making your brand preferred as opposed to making your brand the only relevant brand, the only brand considered.

The problem is that “my brand is better than your brand” marketing rarely changes the marketplace no matter how much marketing budget is available or how clever the incremental innovation. The stability of brand positions in nearly all markets is simply astonishing. There is just too much customer and market momentum. Brand preference competition is also just so not fun.

With few exceptions, the only time that a market structure experiences any meaningful change is when a new “must have” was introduced with major innovation. For example, the market share trajectory within the Japanese beer industry changed only four times during five decades, three when a brand created or got traction for new subcategories (Asahi Dry Beer in 1986, Kirin Ichiban in 1990, and Kirin’s Happoshu brand in the late 1990s) and once in 1995 when two subcategories were both repositioned. All of the marketing in other years simply did not move the needle.

Look at any category and the result is the same. Only when new “must haves” are introduced, with rare exceptions, does a brand achieve real growth. In automobiles, for example, market dynamics are driven by innovations represented by brands such as Ford’s Mustang and Taurus, the VW bug, Mazda’s Miata, Chrysler’s minivans, Toyota’s Prius and Lexus, and BMW’s MINI Cooper. In computers, the market was altered by new subcategories such as DEC’s minicomputer,

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Silicon Graphic’s workstations, Sun’s network servers, Dell’s build-to-order PCs, and Apple’s interface. In services, there is Westin’s Heavenly Bed, which defined the premium bed hotel. In packaged goods, there are Odwalla, SoBe, and Dreyer’s Slow Churned Ice Cream. In retailing, there are Whole Foods, Zara, Best Buy’s Geek Squad, IKEA, Zappos.com, and Muji (the no-brand store).

Creating a marketplace with weak or nonexistent competition has a huge potential payoff. It is Econ 101, the ticket to real growth in sales and profits. Consider the Chrysler minivan introduced in 1982 as the Plymouth Voyager and Dodge Caravan, which sold 200,000 during first year and 12.5 million since and enjoyed many years with no viable competitors. It literally carried Chrysler for nearly two decades. Likewise, Uber burst onto the market in 2009 with a transportation network that allows drivers to use their own vehicles for taxi-like services at less than half the price.

In addition to numerous case studies, empirical evidence shows that creating new categories or subcategories pays off. Perhaps the most robust law in marketing is that new product success is correlated with how differentiated products are, and a highly differentiated offering is likely to define a new category or subcategory. A McKinsey study showed that new entrants into a market that likely involve a high percentage of new categories or subcategories had a return premium of 13 percent the first year, sliding to 1 percent in the tenth year.2 A more telling study found that of 150 strategic moves, the 14 percent that were categorized as creating a new category or subcategory contributed 38 percent of the revenues and 61 percent of the profits of the group.3

Evaluating Potential “Must Haves”

The pay-off of a successful “must have” can be substantial real growth if not a game changer. A key aspect of the process is to evaluate innovations to determine if there is a “must have” or whether the innovation is in fact incremental. It turns out that the analysis is fraught with personal, professional, and organizational biases. Evaluation is based on two judgments.

Is the Concept Significant to the Marketplace?

Does the new concept represent a substantial, transformational, or incremental innovation? One error, which can be termed the “rosy picture bias,” is to assume that a substantial innovation exists when in fact the market regards it as incremental. Innovation champions tend to inflate the prospects because they become psychologically committed and because, professionally, the concept’s success might be pivotal in a career path. There is also organizational momentum; an offering that has been funded and part of the plan is sometimes hard to terminate. So there needs to be a hard-headed, research-based judgment made on the market response to the innovation.

Another often more serious mistake is the “gloomy picture bias” leading to an erroneous judgment that an innovation will not succeed when, in fact, it represents an opportunity to own a major category or subcategory. The judgment could rely on market size estimates based on existing flawed products. The wrong application or market might be targeted and the potential thus missed. Joint Juice, a product designed to reduce joint pain by making glucosamine in liquid form, found life when it went after an older demographic instead of young to middle- aged athletes. There could be a flawed assumption that a niche market could not be scaled and

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the resulting market is too small. For that reason, Coca-Cola avoided the water market for decades, a decision that, in retrospect, was a strategic disaster. Estimates can be colored by the fact that people and organizations tend to be risk adverse because the cost of failure is too evident.

Can the Offering be Created?

Is the concept even feasible, especially if a technological breakthrough is needed? And even if the offering is feasible, does the organization have, or can it create, the needed people, systems, culture, and assets? And does the organization have the will to commit to the idea even with barriers and difficulties in development or in the marketplace? There will be times when the risks seem great and the rewards uncertain, and alternative uses of the resources are appealing and have political support. Without commitment, the new innovation may well become underfunded and potentially doomed. Creating a new category or subcategory is difficult enough. A solid vision with commitment in key parts of the organization is often needed and not easy to obtain and retain.

Is the timing right? Being first into the market is not necessary or even always desirable. In fact, the pioneering brand is often premature because the market, the technology, or the firm was not ready. Apple was not the pioneer for the iPod (Sony beat Apple by two years), the iPhone (the technology was up and running in Europe years before), or the iPad (Bill Gates of Microsoft introduced the “Tablet PC” some 10 years earlier), but in each case, Apple had the timing right. The technology was in place or around the corner, the firm had the assets and experience, and the value proposition had been market tested albeit with inferior technology. For all the talents of Steve Jobs, his genius at timing is underappreciated.

The ability of an organization to develop “must have” opportunities depends on its being able to generate and nurture substantial and transformational innovation even when the large organizational units are favoring incremental innovation. Further, the ability to capitalize on a successful creation of “must haves” and the new subcategory they define will depend on building barriers to competitor entry or success.

THE INNOVATOR’S ADVANTAGE Innovation can create what is often termed a first-mover advantage based on several factors. First, competitors will often be inhibited from responding in a timely manner or they may believe that the new business will cannibalize their existing business. Chyrsler’s competitors held back in responding to the minivan because they wanted to protect their station wagon business. Chrysler was fortunate to have a weak position in station wagons and thus had less to lose. Further, competitors may be worried about the impact on their brand. For example, Xerox did not want to be associated with the low-end desktop copiers that were being offered by Canon even though Xerox had access to one from its Japanese affiliate Fuji-Xerox. Because of these concerns, competitors are tempted to minimize the long-term impact of an innovation and make themselves believe that it is a passing fad.

Second, competitors often are simply not able to respond. They may be playing catch-up technologically, especially if the technology is evolving or if patents are involved. Sometimes there might be natural monopolies (an area might be able to support only one muliplex cinema,

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for example). More common are organizational constraints. Responding to an innovation might require changes in organizational culture, people, and systems, which can be all but impossible. Many retailers unsuccessfully attempted to duplicate Nordstrom’s customer service because although they could copy what Nordstrom did, they could not duplicate what Nordstrom was as an organization—its reward system, culture, heritage, in-store organization, and more.

Third, the innovator can create customer loyalty based on the exposure and experience with its product or service. If the concept and experience are satisfactory, there may be no incentive for a customer to risk trying something different. The innovator can also earn the valuable “authentic” label. This was a factor facing competitors such as Kirin when they tried to duplicate Asahi Dry Beer’s success in Japan. Customer-switching costs can create a distinct disadvantage for a follower. Or there could be network externalities. If a large community begins to use a service such as eBay, it may be difficult for a competitor to create a competing community.

To capture a first-mover advantage, it is important to hit the market first and invest to build position. While high initial prices may be an attractive way to capture margin and recover development costs, a low-price strategy may serve to build share and increase the barriers to followers. Followers will have the benefit of seeing the innovation, but will often need to be significantly better to have a chance of dislodging the first mover among the user base. So it is helpful to make that user base as large as possible.

It turns out that true market pioneers often do not survive, perhaps because they entered before the technology was in place or because they got blown away by larger competitors.4

Pioneers such as Dreft in laundry detergent, daguerreotypes in photography, Star in safety razors, and Harvard Graphics in presentation software did not or could not capitalize on their first-mover status. In contrast, Golder and Tellis found that early market leaders, firms that assume market leadership during the early product growth phase, had a minimal failure rate and an average market share almost three times that of market pioneers and a high rate of continuing market leadership.5 They noted that successful early market leaders tended to share certain traits:

Envisioning the mass market. While pioneers such as Ampex in video recorders and Chux in disposable diapers charged high prices, the early market leaders (such as Sony and Matsushita in video recorders and P&G in diapers) priced the product at a mass market level. Timex in watches, Kodak in film, Gillette in safety razors, Ford in automobiles, and L’eggs in women’s hosiery all used a vision of a mass market to fuel their success. Managerial persistence. The technological advances of early market leaders often took years of investment. It took 10 years of research for P&G to create the successful Pampers entry and two decades for Japanese firms to develop the video recorder.

Financial commitment. The willingness and ability to invest are nontrivial when the payoff is years into the future. For example, when Rheingold Brewery introduced Gablinger’s light beer, it had a promising start, but financial downturns in other sectors caused it to withdraw resources from the brand. In contrast, Philip Morris invested substantially in Miller Lite for five years in order to achieve and retain a dominant position.

Relentless innovation. It is clear that long-term leadership requires continuous innovation. Gillette learned its lesson in the early 1960s when the U.K. firm Wilkinson

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Sword introduced a stainless steel razor blade that lasted three times longer than Gillette’s carbon steel blade. After experiencing a sharp share drop, Gillette returned to its innovative heritage and developed a new series of products, from the Trac II to the Altra, Sensor, Mach 3, and now the Fusion.

Asset leverage. Early market leaders often also hold dominant positions in a related category, allowing them to exploit distribution clout and a powerful brand name to achieve shared economies. Diet Pepsi and Coke’s Tab, for example, were able to use their distribution power and brand names to take over the diet cola market from the pioneer, Royal Crown Cola.

Being a first mover and owning an emerging market or submarket does more than provide a competitive edge in that market. It also leads to a perception of being innovative. Gaining perceptions of innovativeness is a priority for nearly all businesses because it provides energy and credibility for new products. But few brands break out and reach that goal. Figure 13.1 examines the top 20 brands on an innovativeness scale according to the 2016–2017 BAV (Brand Asset Valuator from Y&R) database covering over 3,000 brands.6 Nearly all had created and/or owned a new submarket using transformational innovation.

MANAGING CATEGORY PERCEPTIONS When a new product category or subcategory such as iPods, smartphones, Pringles, or hybrid cars emerges, the innovators need to be aware that their challenge is not only to create an offering and a brand, but also to manage the perception of the new category or subcategory. A new business will change what people are buying. Instead of buying any car, some customers will be looking specifically for a hybrid. As new entrants come in, there will be different types of hybrids. So Toyota, the early hybrid leader, has an opportunity to manage the perceptions of the category while simultaneously linking itself to the category as the leading brand, one with authenticity and ability to deliver. For a business innovator, the focus is no longer just on what brand to buy (the preference question), but rather what product category or subcategory to buy (the relevance question).

The best way to define and manage perceptions of a new category or subcategory is to become its exemplar, the brand that represents it in the minds of the customers. An exemplar will not manage perceptions, but will provide credibility and authenticity for the brand. It will often be perceived to be an innovator and the brand that sets the quality standard. Others will usually be perceived to be imitators and inferior. Competitors will be in the awkward position of defining their relevance in a way that only reaffirms the authenticity of the exemplar.

To become an exemplar, a brand needs to advance the category or subcategory rather than the brand. It needs to focus on the category or subcategory characteristics, point out its

1. Google Glass 6. Tesla 11. iPad 16. FitBit 2. Pixar 7. SpaceX 12. Skype 17. Microsoft Windows 3. Apple Watch 8. SodaStream 13. iPhone 18. Samsung 4. Google 9. NASA 14. iOS 19. Intel 5. Apple 10. Microsoft 15. Android 20. Dyson

Figure 13.1 Perceived Innovativeness—2016–2017

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advantages, and promote loyalty to the category or subcategory over other categories or subcategories. Second, the brand’s organization needs to be a thought leader and innovator. Improvement and change will make the category or subcategory dynamic, the brand more interesting, and the role of the exemplar more valued. Disneyland is the exemplar of theme parks, and it is always innovating. Third, the brand should be willing to invest in capacity and marketing to be the early market leader in terms of sales and market share. It is hard to be an exemplar and to leverage that role without market share leadership and the large voice that goes with it.

In managing perceptions of a category, there are some guidelines. First, there may be a need to focus on attributes and functional benefits at the outset to make sure that the category and its value proposition are communicated. The emotional and self-expressive benefits can have secondary status at the beginning. Second, labels such as minivan, camcorder, SUV, etc. help unless the first-mover brand such as TiVo or Xerox becomes the de facto subcategory label. Incidentally, these guidelines apply whenever the category is new to the market even if it is established elsewhere. For example, many categories of products (such as vans) are new to China long after they have been established in the Western world.

CREATING NEW BUSINESS ARENAS The first step to the creation of a new business arena is to get ideas on the table and refine the best ones to obtain potential business concepts. Good ideas are more likely to happen if they are valued by the organization and if there is a process to stimulate them. GE has set a goal that each business should generate technology breakthrough ideas; concepts that could lead to a $50–100 million business in the foreseeable future. As a result, time and resources are given to idea generation.

In Chapter 12, the starting point was the assets and competencies of the firm and how they could be leveraged. Here, the starting point is the customer in relation to offerings. In what way are the offerings disappointing? What are the unmet needs? What activities are the existing product or service a part of, and what are the goals?

Box PETER DRUCKER’S DO’S AND DON’TS OF INNOVATION7

Do: Analyze the opportunities. Go out and look, ask, and listen. Keep it simple and keep it focused. Start small—try to do one specific thing. Aim at market leadership.

Don’t: Try to be clever. Diversify, splinter, or do too many things at once. Try to innovate for the future.

Chapter 13 Creating New Businesses 237

New business ideas can come from anywhere. However, the history of blue-ocean ventures contains patterns and can suggest possibilities. Among them are technological innovation, going from components to systems, unmet needs, niche submarkets, customer trends, and creating a dramatically lower price point.

Technological Innovation

A new technology—such as disposable razors, notebook computers, a new fabric, or hybrid cars— can drive the perception of a submarket. By creating a subcategory of dry beer, Asahi Super Dry Beer made Kirin, the leading lager beer brand, irrelevant for a significant and growing segment in Japan. A minor player with less than 10 percent of the market in 1986, Asahi grew to gain market share leadership in the late 1990s, in large part by taking share from Kirin. Kirin finally mounted a comeback by introducing Kirin Ichiban, a different beer formulation, and taking leadership of the low-malt subcategory, happoshu, a beer brewed with ingredients that warranted a sharply lower tax, and another no-malt beer with an even lower tax, termed the third beer. Amazingly, considering an average of three new product introductions per month and the marketing dollars spent in the Japanese beer market each year for 30 years, three of the four changes in marketing share momentum were due to these innovations: dry beer, Kirin Ichiban, and low-malt beer. The fourth change was due to Asahi’s repositioning of the dry beer subcategory. The market share dynamic was explained entirely by the emergence or evolution of subcategories.

Technological innovation can take many forms. Packaging innovation led to Yoplait’s Go-Gurt, the yogurt in a tube that kids slurp up, which created a new business with a different target market, value proposition, and competitors than conventional yogurt makers. Software innovation created eBay’s online auction category where a host of imitators had difficulty matching both the operational performance and the critical mass of users established by eBay.

From Components to Systems

A classic way to change the market is to move from components to systems. The idea is to look at the system in which the product or service is embedded and expand perceptions horizontally. Siebel, for example, changed what people bought by creating customer relationship management (CRM). CRM combined a host of software programs (such as call center management, loyalty programs, direct mail, customer acquisition, customer service, sales force automation, and much more) into a single umbrella package. It no longer was enough to provide the best direct mail program. Firms could now buy something much broader and simply were not interested in stand-alone programs that require idiosyncratic training and could not be linked to other complementary programs.

KLM Cargo’s offering was providing space on its airplanes, a commodity that was becoming a low-margin business.8 After studying the total system needs for customers who were shipping perishables, KLM determined that significant value could be added by providing not just cargo space, but a transportation solution that included end-to-end responsibility for the product. These customers, importers and retailers, were experiencing spoilage, and it was never clear who in the logistics chain was responsible. Under its Fresh Partners initiative, KLM provided an unbroken “cool chain” from the producer to the point of delivery, with three levels of service—fresh regular, fresh cool, and fresh supercool (where products are guaranteed to have a specific temperature from truck to warehouse to plane to warehouse to truck to the retailer). Firms importing orchids

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from Thailand and salmon from Norway were among those using the service. This initiative allowed KLM to move from a commodity business to one that could capture attractive margins based on the value delivered to customers.

Unmet Needs

Unmet needs provide insight that when translated into products or services will be highly likely to be relevant to the customer and can lead to new business. When Saturn and Lexus, for example, changed the way customers interacted with car dealers, they were addressing a significant unmet need. The result made some other brands less relevant for an important segment. Betty Crocker’s Hamburger Helper addressed the need to have a shelf-stable meal preparation tool.

Cemex, a concrete company, realized that its customers had a lot of money riding on predictable delivery because concrete is highly perishable.9 As a result, Cemex created capabilities using digital systems that allowed drivers to adjust in real time to traffic patterns and changing customer timetables. It can now deliver products within minutes and process change orders on the fly. It addressed an unmet need and the totally new business model that resulted has led to Cemex going from a regional player to the third largest concrete company in the world, serving 30 countries.

Customers are not always a good source for some kinds of unmet needs, especially those involving emotional and self-expressive benefits, and so insight from creative and knowledgeable people might be required. The attractiveness of an SUV, for example, did not really result from its functional benefits. Further, customers have a difficult time getting around the boundaries of the current offering and may not have been much help in going from a horse to a car to an airplane. When analyzing the customer, it is important for the analysis to have both breadth and depth, and that is where ethnographic research excels.

Ethnographic (or anthropological) research, introduced in Chapter 2, is a good way to uncover and analyze unmet needs. Simply observing customers in their “native habitat” can provide a fresh and insightful look at the problems customers are facing.

Niche Markets

The market can be broken into niches with each niche having its own dominant brand. The energy bar market created by PowerBar ultimately fragmented into a variety of submarkets, including bars designed for women (Luna), high protein (Balance), low calories (Pria), and candy bar taste (Balance Gold).

A niche can be defined by an application. Bayer helped define a new subcategory—taking baby aspirin regularly to ward off heart attacks—with its Bayer 81 mg. It attempted to further define the subcategory by introducing Enteric Safety Coating to reassure those concerned about the effects of regular aspirin use on the stomach.

A niche can be also defined by a unique position that appeals to a distinct submarket. In the United Kingdom, the Ford Galaxy minivan was positioned away from the functional soccer moms or family outing slot. It was instead introduced as being roomy and comfortable, like first-class air travel, and therefore suitable for busy executives. Starbucks similarly created a different retail coffee experience that made other competitors irrelevant.

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Customer Trends

A customer trend can be a driver of a submarket. The expression “Find a parade and get in front of it” has some applicability. That was part of the strategy of Whole Foods with organic foods and Apple’s iPod with music sharing.

It is even better if multiple trends can be accessed because the competitors will be more diffused. The dual trends toward wellness and the use of herbs and natural supplements have supported a new category, healthy refreshment beverages (HRBs). This arena now contains a host of subcategories, such as enhanced teas, fruit drinks, soy-based drinks, and waters. The pioneer and submarket leader is SoBe, which started in 1996 (with SoBe Black Tea 3G, containing ginseng, ginkgo, and guarana) and now has an extensive line of teas, juices, and energy drinks. The large beverage companies ignored this trend for too long and have been playing a frustrating and expensive game of catch-up. Annie Chun developed a line of packaged Asian food that capitalized on a host of trends, including the rise of Asian foods, healthy eating, convenience, and quality meals.

Creating a Dramatically Lower Price Point

Many blue-ocean businesses occur when an offering appears that is simpler and cheaper than that of established firms. Clayton Christensen, a noted Harvard strategy researcher, has studied a wide variety of industries with a series of colleagues and developed two theories about disruptive innovations. His research is reported in three books: The Innovator’s Dilemma, The Innovator’s Solution (with Michael Raynor), and Seeing What’s Next (with Scott Anthony and Erik Roth).10

The first theory is termed low-end disruptive innovation, where industries are altered by emerging products whose price appears dramatically low. In these industries, established firms target the best customers and attempt to sell them better products for more money. More features, services, and reliability are all aimed at capturing a higher level of loyalty and margin. The firms that are successful develop structures, staffs, incentives, and skills designed to generate and implement a continuous flow of “sustaining innovations” to improve the offering. They invest in building deeper relationships with their best customers, wealthy clients in the case of financial institutions. Packaged goods firms offer line extensions to provide variety and interest to loyal customers. Retailers and others invest in loyalty programs.

This drive to service the most profitable customers provides an opening in the form of the low-end customer. These customers, often ignored or considered a nuisance by the established firms, are typically “overserved” and would be happy with a simpler, cheaper product that delivers satisfactory performance. Capitalizing on this opportunity, firms (often new to the industry) engage in “low-end disruptive innovation.” They introduce an entry that is easier to use and much less expensive. Typically, the entrant’s product is so inferior that its appeal is to a limited number of applications and customers, which incumbent firms consider marginal anyway. But often these firms then improve their offering over time and become competitors in a broad section of the market. A study of stall points, where steady sales growth abruptly changes to prolonged decline, of some 500 firms over 50 years showed that the leading cause, occurring in 23 percent of the cases, was low-end disruption innovation.11

The steel minimills in the 1960s initially made low-quality steel, serving a market for rebar (reinforcing concrete) that did not require high quality and was a low-margin, unattractive business. Over the decades, they improved their technology and products, however, and began

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to challenge the incumbents on a broad front. There are many similar examples. The Japanese car companies entered the market in the late 1960s and provided an option for buyers who did not need the features and self-expressive benefits of the large American firms. The copier market in the 1970s was changed by Canon’s low-end disruptive innovation strategy, which met the needs of small businesses that did not need the power of Xerox products.

The Christensen team also advances a second theory, that of new-market disruptive innova- tions aimed at noncustomers. In many markets, large groups of noncustomers either do not buy becausetheproductsorservices areconsideredtooexpensiveorcomplexorbuymuchlessthan they would like because the process is inconvenient. A more accessible offering that is priced right can open up the market. Apple’s Macintosh attracted new users into the computer market and online retail stockbrokers enabled day traders to thrive. The single-use camera provided a new market just as the Kodak Brownie did a century earlier. Vanguard’s low-cost index funds attracted new buyers intothe industry.Thenoncustomers have typically been ignoredby theestablishedfirmswho,again, tend to focus their efforts on the current “heavy users,” the most profitable customers.

An attractively priced option can appeal to both the low-end and noncustomer segments simultaneously. Southwest Airlines targeted customers looking for a value airline and also people who could be lured from their automobiles, a segment that was ignored by the established airlines of the day. Dell Computer also succeeded both serving the low end and attracting new users.

Evaluation—Real, Win, Worth It

The evaluation of a major or transformational innovation is difficult because it will stray from the comfort zone and knowledge base of a business. A structured, disciplined evaluation approach is helpful not only to provide a termination decision but also to identify the roadblocks to success so that they can be addressed. The “real, win, worth it” structure suggested by Wharton’s George Day involves the following sets of questions:12

Is the market real? Is there a need or desire for the product? Can and will the customer buy it? Is the market size adequate? Segway’s personal transporter was an ingenious technical innovation but did not solve transportation problems for any target market.

Is the product real? Is there a clear concept that will satisfy the market? Can the product be made? Putting nuclear energy plants in the ocean presented construction barriers.

Can the product be competitive? Does it have a sustainable competitive advantage? If a competitor can copy or neutralize the new product, it may have only a short window to establish a loyal customer base. Can our company be competitive? Do we have superior assets and competencies? Appropriate management? The success of the digital animation company Pixar depended on a unique blend of culture and people that would not have worked in most film organizations.

Will the product be profitable at an acceptable risk? Is the forecast ROI acceptable? Overoptimistic sales forecasts and unrealistic pricing expectations need to be considered.

Does launching the product make strategy sense? Does it fit our overall strategy? Will top management support it? 3 M launched a privacy computer screen that opened up markets for anti-glare filters.

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Keeping the Edge

The goal is to maintain dominance in the new submarket and the returns that go along with dominance. This is not so easy when success breeds competitors. Those that have kept dominance have one or more characteristics. Some, like Apple, keep innovating so that they are a moving target. Others, like Snuggles and Asahi Dry, are the “authentic” choice. Still others like Cirque du Soleil have created significant entry barriers in terms of competencies and scale. And those like Southwest Airlines surround their innovation with a personality. The list goes on, but there needs to be an edge to avoid a transformational innovation becoming only a short- term win.

FROM IDEAS TO MARKET The payoff for creating a successful new business is huge. Historically, most financially successful firms are based on the creation of a new business. Yet few firms can have a history of creating multiple new businesses. It turns out that it is not easy for an organization to be successful with an established business and still provide an environment that will foster new business ideas and allow them to flourish. That is exactly what is required, though, when markets get dynamic. The challenge is to create an organization that can excel at existing businesses and still allow a new business, especially a transformational business, to survive if not thrive.

Most organizations lack a healthy mix of transformational and incremental innovation. One study concluded that the percentage of major innovation in development portfolios dropped from 20.2 to 11.5 from 1990 to 2004.13 And from the mid-1990s to 2004, the percent of total sales due to major innovations fell from 32.6 percent to 28 percent. Why should there be such a bias toward incremental “little i” innovations? To answer that question, we turn to a discussion of the several reasons why organizations fail to support transformational innovations at an optimal level.

Biases Inhibiting New Business Creation

Understanding the several biases that inhibit firms from innovating new business areas is a first step to dealing with them. These biases can be expressed in terms of six related “curses”—short-term pressures, silo, success, incumbency, commitment, and size.

The Short-term Financial Pressure Curse

When the organization is doing well, there is pressure to create short-term growth and margins, in part driven by the desire for stock return and in part driven by managers with short job tenures. Firms cut R&D and marketing investments to meet these short-term expectations, which research has shown hurts long-term performance.14

The Silo Curse

The power of product silos within organizations often leads to a delegation of innovation and development from the corporation to the silo unit in part to gain accountability and funding ability. Silos by their nature have limited resources and are focused on a particular product line with its associated customer base, operations, assets, and competencies. The natural goal is to respond to

242 Part Two Creating, Adapting, and Implementing Strategy

opportunities to improve the offering or to leverage the existing business. A transformational innovation will require more resources, will often need to operate between existing silos, and can be a threat to the existing profit stream.

The Curse of Success

When times are good and the business is doing well, resources should be available to take risks and create new business areas. Curiously, however, complacency usually wins the day. Why change if the current business is generating growth and profits? Why not instead invest in a sure thing, to make the costs even lower and the profits even higher? It is much easier to change when there is a crisis than when things are going well, although in a crisis, both resources and time may be in short supply.

The Incumbent Curse

When a transformational innovation is aimed at the marginal customer or the noncustomer, there is a tendency to ignore the threat to the basic business. The natural strategy is to focus on the good, high-margin customers. If the new concepts steal marginal customers, so what? Those customers were more of a nuisance anyway. Further, it does not seem wise to invest in an offering that will kill the golden goose. Why invest in an offering that may cannibalize your business?

The Commitment Curse

Successful incumbent firms often have a tunnel focus on their strategic vision. They invest vigorously in incremental innovation to reduce costs, improve the offering, and satisfy their loyal customers. The people hired, the culture created, the systems developed, and the organizational structure employed all are tailored to the task of making the existing business better. In that context, it is difficult for any new business concepts to get resources or serious traction within the firm.

The Size Curse

A new business by definition will start small. If a firm has been successful and grown to a meaningful size, it will look to business concepts that can make a difference to shareholders. McDonald’s, for example, is inhibited from trying new restaurant concepts because even a successful concept aggressively expanded will have no impact on its financials; the core business is simply too huge. As a result, it became stuck in a model that was not supported by customer trends. Coke resisted marketing waters and other beverages in part because it was so unlikely for such business ventures to materially affect its shareholder value. A related problem is that a huge business like McDonald’s or GE has built assets, processes, and organizations that are not adapted to run smaller businesses. One snack company once proclaimed that it was not capable of handling a business that was under $250 million. That inhibited it from participating in potential growth areas.

Making New Business Viable in Established Organizations

The basic problem is that a new business, particularly a transformational one, will require an organization that is very different from that of the core business. It will require people, systems, a culture, and a structure that must adapt quickly to an emerging market area, one that is almost by definition going to be very different from the core business.

Chapter 13 Creating New Businesses 243

One approach is to create a separate organization, either by acquiring the industry innovator and retaining its autonomy or by creating a stand-alone entity within the corporate framework. In either case, the separate organization will be free—indeed, encouraged—to create its own people, systems, culture, and structure. Of course, it can borrow elements of the core business, such as its accounting systems or perhaps marketing skills, but it needs to be committed to the strategic vision of the new organization while still being entrepreneurial and flexible. As the business matures, the link with the core business can become greater.

The other approach is to create a dual organization within the same firm. People who excel at “start-up” adaptability and change, as well as those who have proven to be good at incremental innovation, will need to be developed side by side. A more diverse set of people will likely be the result. Entrepreneurial cultural values will need to be tolerated within the organization. Exper- imentation and trial and error will need to be accepted if not encouraged. Different cost control systems and performance metrics will be needed. The new ventures will probably require a flatter organization.

Developing a dual organization is difficult and requires active management. However, it is possible and can result in providing new ventures with access to significant assets and competen- cies while also breathing energy into the core businesses.

In any case, an innovative new business cannot be starved for resources. The reason that most new businesses succeed as start-ups is because they have access to money from the stock market and from venture capitalists. Internally funded ventures are often at a disadvantage in obtaining needed resources. Too often, executives in large firms are said to have deep pockets but short arms.

To overcome resource shortfalls, top management has to make a commitment to grow through internal innovation and allocate resources toward that goal. Then a new venture will be able to compete for these resources with other new ventures and not from the existing business units. GE, with its program of encouraging and supporting breakthrough initiatives, does just that. Another key to resource availability is the disciplined process to disinvest in businesses that are not going to be the future of the firm, so that they do not exert their priority over future resources. Chapter 15 discusses the divestment decision process.

KEY LEARNINGS

Over time, businesses that are new and different enough to have reduced or no competition will earn much more than average profits.

The innovator has the potential to create a marketing position because competitors are reluctant to damage their own businesses, cannot match the technology, or believe it too costly to compete against a firm with an established customer base. Often it is not the innovator but the early market leader that captures these advantages. In creating a new business, managing the perceptions of the category is important.

A new business can be based on technological innovation, moving from components to systems, by satisfying unmet needs, by creating niche marketing, by responding to customer trends, or by having a dramatically lower price point.

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There are organizational biases that inhibit the development of a new business. These can be described as the short-term financial pressure curse, the silo curse, the curse of success, the incumbent curse, the commitment curse, and the size curse.

FOR DISCUSSION 1. Why didn’t Hertz or Avis start an off-airport business directed at insurance companies

and vacationers? What advantages would they have had over Enterprise? Why didn’t Steinway come up with the electronic organ? Why didn’t Barnum and Bailey create Cirque du Soleil?

2. In order to revitalize its brand with women, Reebok, the company that rode the aerobics craze over two decades ago, introduced Jukari Fit to Fly, an exercise program designed with Cirque du Soleil. A piece of equipment, the Fly Set, allows a person to fly through the air hanging on to a low trapeze. The goal is to invent a new fitness fad in exercise establishments with a program that is supported by a line of Reebok clothing.

a. Is this a transformational or substantial innovation that defines a new category or subcategory?

b. Evaluate its pros and cons for Reebok. 3. Think of some transformational new businesses such as Starbucks, Blue Apron, or

Amazon.

a. How was each different from what came before? What was similar? Scale them in terms of “newness” from truly transformational to substantial (some elements common to what came before but enough new to create a new subcategory).

b. Was there an innovator advantage? How long did it last, and why? c. Did the business originate from an established business? If not, why not? d. Where did the idea for the business come from? If you don’t know, try to speculate.

4. Consider some new businesses that have managed category perceptions well. Consider others that have not.

5. Pick a firm such as Bank of America, Patagonia, or L.L. Bean. Develop some potential innovations that would generate a “must have.” How would you evaluate them?

Box BEST DIGITAL PRACTICE

Adobe’s Subscription Model

Adobe’s Creative Suite software is a compilation of graphic design, video editing, and web development applications. Traditionally, Adobe’s B2B clients would purchase physical software and a license to use the product for approximately two years. However beginning in 2010, Adobe began to transform its

(continued)

Chapter 13 Creating New Businesses 245

Creative Suite into a 100 percent subscription-based cloud delivery model. Now clients subscribe to a cloud-based product that could be managed through a monthly subscription.

Such a transformation is rare for companies of Adobe’s size. However, there were numerous customer trends and market factors that drove Adobe’s migration to the cloud. From a customer perspective, the rapid speed of innovation within the technology industry meant customer’s software needs were changing quickly. The cloud model allows Adobe to regularly deliver software updates to its subscribers, instead of releasing new editions every 18–24 months. Additionally, an increase in the number of small businesses with digital design needs (such as mobile application developers) had opened up new market opportunities for Adobe. Under the company’s old way of working, the product would have been too expensive for this group of users. Finally, Adobe understood the transformation was necessary to maintain its competitive edge.

To make the new cloud subscription model viable, the company had to dramatically change how it managed its business both internally and externally. Internally, Adobe had to train and compensate the sales force to sell subscription-based software. The accounting organization had to shift from recognizing revenue up front for a few large contracts to billing millions of individuals and enterprise customers on a monthly basis. Operations and supply chain management functions were affected as well, as there was no longer a need to ship physical units. Externally, Wall Street’s expectations had to be set and managed throughout the change. Initially, the transformation was anticipated to result in a significant drop in revenue and earnings, and Adobe knew it was crucial to help analysts understand how they were measuring success during the transition.

As a result of Adobe’s efforts in managing the change, the company has been able to deliver a better customer experience and tap into new markets. The subscription model has paid off financially. For the third quarter of 2016 alone, Adobe earned over $1.46 billion in revenue, up year-on-year from $1.22 billion, and reported $272 million in net income. Revenue from the company’s digital media business rose 28.6 percent year-on-year to $990 million. Most importantly, Adobe’s willingness to adapt and create new businesses has given it the agility and capabilities to continue to be a market leader for years to come.

Questions:

1. Why is Adobe’s subscription model a win-win for the customer and the company?

2. Which part of the market is unlikely to prefer this approach? Should Adobe compete for this market?

Sources: Stuart Lauchlan, “Adobe Turns in Record Revenues, Uses Subscription Model to Take on Pirates,” Diginomica, September 21, 2016, http://diginomica.com/2016/09/21/adobe-turns-in-record-revenues- uses-subscription-model-to-take-on-the-pirates/

Kara Sprague, “Reborn in the Cloud,” McKinsey & Company, July 15, 2015, http://www.mckinsey. com/business-functions/business-technology/our-insights/reborn-in-the-cloud

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Box BEST GLOBAL PRACTICE

Wanglaoji Tea

JDB Group, a Hong Kong soft-drink manufacturer, repositioned an almost 200-year-old Chinese herbal tea, Wanglaoji, into a top-selling canned beverage. Key to their success? Honing in on serving a large consumer groups’ unmet needs.

Until 1995, Wanglaoji was owned by state-governed Guangzhou Pharmaceuticals and thought of primarily as an herbal elixir. However, upon JDB’s acquisition of the trademark, it saw an opportunity to instead position the product as a healthy and refreshing companion to China’s spicy hot-pot dishes. To execute this strategy, JDB relied on a series of intensive promotional strategies. The company partnered with restaurants specializing in Sichuan hot pot cuisine to try and establish an immediate connection between consumers and the brand. JDB also forged relationships with “Wanglaoji-trusted” retailers, offering them product discounts and free advertising materials. Additionally, the company established itself as a title sponsor in sports, high-end business events, and national competitions. For example, Wanglaoji had a notable presence at the Asia Pacific Economic Cooperation summit as well as the musical talent contest “The Voice of China.”

JDB has also been thoughtful about how they package the product, manufacturing the beverage in a red can with colorful lettering. This has helped solidify the perception of the herbal tea as a modern and everyday beverage.

Within five years, Wanglaoji tea climbed from $30 million to $1.5 billion in sales. By 2012, Wanglaoji had surpassed Coca-Cola’s China sales with over $3 billion in revenue. Now the company is looking to expand into peripheral markets in Southeast Asia and even stretch its footprint into South America.

Questions:

1. Why did Wanglaoji succeed as a healthy refreshing tea? What asset was central to its success?

2. Who are Wanglaoji’s competitors? What factors are critical to the brand’s long-term competitive advantage?

Sources: Kwong Man-ki, “China’s JDB Plans Global Push for its Popular Herbal Tea Drink,” South China Morning Post, December 24, 2014, http://www.mckinsey.com/industries/retail/our-insights/from- oxcart-to-wal-mart-four-keys-to-reaching-emerging-market-consumers

Alejandro Diaz, Max Magni, and Felix Poh, “From Oxcart to Wal-Mart: Four Keys to Reaching Emerging-Market Consumers,” McKinsey Quarterly, October 2012, http://www.scmp.com/business/ companies/article/1668547/chinas-jdb-plans-global-push-its-popular-herbal-tea-drink

Chapter 13 Creating New Businesses 247

C H A P T E R F O U R T E E N

Global Strategies

Most managers are nearsighted. Even though today’s competitive landscape often stretches to a global horizon, they see best what they know best: the customers geographically closest to home. —Kenichi Ohmae

A powerful force drives the world toward a converging commonality, and that force is technology. . . . The result is a new commercial reality—the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude. —Theodore Levitt

My ventures are not in one bottom trusted, nor to one place. —William Shakespeare, The Merchant of Venice

The global reality. Few businesses can escape the reality that customers, competition, and markets have a global face. To compete successfully, firms need global strategies. Global strategies need to create competitive advantage, be opportunistic, and remain flexible in the face of incredible complexity.

A global strategy represents a worldwide perspective in which the interrelationships among country markets are drawn on to create synergies, economies of scale, strategic flexibility, and opportunities to leverage insights, programs, and production economies. A global strategy is different from a multidomestic or multinational strategy, in which separate strategies are developed for different countries, implemented autonomously, and managed as a portfolio of independent businesses.

A global strategy can result in strategic advantage or neutralization of a competitor’s advantage. For example, products or marketing programs developed in one market might be used in another. Or a cost advantage may result from scale economies generated by the global market or from access to low-cost labor or materials. Operating in various countries can lead to enhanced flexibility as well as meaningful sustainable competitive advantages (SCAs). Investment and operations can be shifted to respond to trends and developments emerging throughout the world or to counter competitors that are similarly structured. Plants can be located to gain access to markets by bypassing trade barriers.

248

Even if a global strategy is not appropriate for a business, making the external analysis global may still be useful. A knowledge of competitors, markets, and trends from other countries may help a business identify important opportunities, threats, and strategic uncertainties. A global external analysis is more difficult than a domestic analysis, of course, because of the different cultures, political risks, and economic systems involved.

A global strategy requires addressing issues that include the following:

1. What are the motivations (objectives) for a global strategy? 2. To what extent should products and service offerings be standardized across

countries?

3. To what extent should the brand name and marketing activities (such as brand position, advertising, and pricing) be standardized across countries?

4. How can the global footprint be expanded successfully? 5. To what extent should strategic alliances be used to enter new countries? 6. How should the brand be managed globally?

Each of these issues will be explored in turn. The next section, in which the motivations for global strategies are presented, will be followed by discussions of standardization versus custom- ization, how to select which countries to enter, the use of alliances in developing global strategies, and global marketing management.

MOTIVATIONS UNDERLYING GLOBAL STRATEGIES A global strategy can result from several motivations in addition to simply wanting to invest in attractive foreign markets. The diagram of these motivations shown in Figure 14.1 provides a summary of the scope and character of global strategies. Understanding what motivations have priority will inform how global strategies should be developed and how success should be measured.

Obtaining Scale Economies

Scale economies can occur from product standardization. The Ford global footprint, for example, allows product design, manufacturing tooling, parts production, and product testing to best spread over a large base of similar products. A firm similarly benefits when fixed costs involving IT and production technologies can be distributed across countries.

Scale economies can also occur from standardization of marketing, operations, and manu- facturing programs. Brands that share advertising (even when it is adjusted for local markets) spread the production and creative effort over multiple countries and thus a larger sales base. Consider Coca-Cola, which since the 1950s has employed a marketing strategy—the brand name, concentrate formula, positioning, and advertising theme—that has been virtually the same throughout the world. Only the artificial sweetener and packaging differ across countries.

Chapter 14 Global Strategies 249

Global Brand Associations

Being global generates the image of being global, which turns out to be a significant advantage. A study of associations made of global brands involved qualitative interviews with 1,500 consumers over 41 countries, followed up with a quantitative study that included a preference scale of three leading brands in six product categories.1 The result showed that associations with being global impacted preference. In fact, 44 percent of the variance in preference is caused by the fact that consumers believe that global brands have higher quality in part because they tend to have the latest innovations. Two other associations, the prestige of being global and social responsibility, also influence preference but much less so (12 percent and 8 percent, respectively) than the quality dimensions.

Global Innovation

Being global means that innovation around brand building, new product, and product improvements can be sourced anywhere. At P&G, for example, the successful Pantene positioning (“For hair that shines”) came from P&G Taiwan and the feminine protection brand Naturella featuring the herbal ingredient chamomile came from P&G Mexico. The black Coke Zero package came from Australia and the U.K. And collaboration from other firms is becoming important for most global companies. P&G has people all over the world coordinat- ing the development efforts of firms that have a collaborative relationship with P&G. As a result, P&G’s R&D budget and capability is highly leveraged. IBM and others are creating major R&D centers in India to access talent, but also to participate in the intellectual vitality of the region.

Create Global

Associations

GLOBAL STRATEGIES

Access Low-Cost

Labor/Materials

Access National

Incentives

Obtain Scale

Economies

Access

Strategic

Markets

Cross-

Subsidize Dodge

Trade

Barriers

Obtain Global

Innovation

Figure 14.1 Global Strategy Motivations

250 Part Two Creating, Adapting, and Implementing Strategy

The classic global trickle down innovation model no longer works.2 The products of the developed countries, even with some features omitted, are often too high priced for the emerging country world. Local innovation is needed. For example, GE Healthcare, leaders in ultrasound machines, sold very few devices in China and India in the 1990s. However, by 2007, a local business unit developed an ultrasound machine that could be sold for $15,000 as opposed the U.S. price range of $100,000–350,000. The sales took off. Significantly, such innovations can be introduced to the markets of developed countries. GE’s inexpensive ultrasound machine became a major business in the U.S. used by ambulance units and rural hospitals and others. As a result, GE launched an initiative to generate 100 other similar innovations that would service the local market and also create new markets at home.

Access to Low-Cost Labor or Materials

Another motivation for a global strategy is the cost reduction that results from access to the resources of many countries. Substantial cost differences can arise with respect to raw materials, R&D talent, assembly labor, and component supply. Thus, a computer manufacturer may purchase components from South Korea and China, obtain raw materials from South America, and assemble in Mexico and five other countries throughout the world in order to reduce labor and transportation costs. Access to low-cost labor and materials can be an SCA, especially when it is accompanied by the skill and flexibility to change when one supply is threatened or a more attractive alternative emerges.

Access to National Investment Incentives

Another way to obtain a cost advantage is to access national investment incentives that countries use to achieve economic objectives for target industries or depressed areas. Unlike other means to

Box INDICATORS THAT STRATEGIES SHOULD BE GLOBAL

Major competitors in important markets are not domestic and have a presence in several countries. Standardization of some elements of the product or marketing strategy provides opportunities for scale economies. Costs can be reduced and effectiveness increased by locating value-added activities in different countries. There is a potential to use the volume and profits from one market to subsidize gaining a position in another. Trade barriers inhibit access to worthwhile markets. A global name can be an advantage and the name is available worldwide. A brand position and its supporting advertising will work across countries and has not been preempted. Local markets do not require products or service for which a local operation would have an advantage.

Chapter 14 Global Strategies 251

achieve changes in trade, such as tariffs and quotas, incentives are much less visible and objectionable to trading partners. Thus, the British government has offered Japanese car manu- facturers a cash bonus to locate a plant in the United Kingdom. The governments of Ireland, Brazil, and many other countries offer cash, tax breaks, land, and buildings to entice companies to locate factories there.

Cross-Subsidization

A global presence allows a firm to cross-subsidize—to use the resources accumulated in one part of the world to fight a competitive battle in another.3 Consider the following: One firm uses the cash flow generated in its home market to attack a domestically-oriented competitor in a foreign market. For example, in the early 1970s, Michelin used its European home profit base to attack Goodyear’s U.S. market. The defensive competitor (in this case, Goodyear) can reduce prices or increase advertising in the United States to counter, but by doing so, it will sacrifice margins in its largest markets. An alternative is to attack the aggressor in its home market, where it has the most to lose. Thus, Goodyear carried the fight to Europe to put a dent in Michelin’s profit base.

The cross-subsidization concept implies that it is useful to maintain a presence in the country of a competitor. The presence should be large enough to make the threat of retaliation meaningful. If the share is only 2 percent or so, the competitor may be willing to ignore it.

Dodge Trade Barriers

Strategic location of component and assembly plants can help gain access to markets by penetrating trade barriers and fostering goodwill. Peugeot, for example, has plants in 26 countries from Argentina to Zimbabwe. Locating final-assembly plants in a host country is a good way to achieve favorable trade treatment and goodwill because it provides a visible presence and generates savings in transportation and storage of the final product. Thus, Caterpillar operates assembly plants in each of its major markets, including Europe, Japan, Brazil, and Australia, in part to bypass trade barriers. An important element of the Toyota strategy is to source a significant portion of its car cost in the United States and Europe to deflect sentiment against foreign domination.

Access to Strategically Important Markets

Markets can be strategically important because of their size and growth. It is hard to be successful avoiding the large growth global markets. There is good reason that firms are looking to the emerging markets of China, India, and others for growth opportunities when home markets are often stagnant. For example, the 2010 growth in the beauty market was only 1.1 percent in the U.S. and nearly zero in Japan, but over 10 percent in the major South American countries.4 Firms in the industry recognize that leaders need to be relevant in these markets.

Other markets may be strategically important because of their role in the industry’s value chains. It could be because of a raw material supply, labor cost structure, or technology. An electronics firm, for example, may need to have a presence in Mumbai and Silicon Valley because both are sources of engineering innovation. A firm in the fashion industry may benefit from a presence in countries that have historically led the way in fashion.

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STANDARDIZATION VS. CUSTOMIZATION Standardized products and brands gained widespread credence as a strategy because of Ted Levitt’s classic 1983 Harvard Business Review article, “The Globalization of Markets,” which gave three reasons why standardization would be a winning strategy.5 First, the forces of communica- tion, transport, and travel were breaking down the insulation of markets, leading to a homogeneity of consumer tastes and wants. Second, the economics of simplicity and standardization—especially with respect to products and communication—represented compelling competitive advantages against those who held on to localized strategies. Third, customers would sacrifice preferences in order to obtain high quality at lower prices. The article provided an academic underpinning to the logical premise that standardization should be the goal of a global business.

Pringles, Visa, MTV, Starbucks, Sony, Dove, Vodafone, BP, DeBeers, Heineken, Nike, McDonald’s, Pantene, Disney, and IBM are the envy of many because they seem to have generated global businesses with a high degree of similarity in terms of product, brand, position, advertising strategy, personality, packaging, and look and feel. Pringles, for example, stands for “fun,” a social setting, freshness, less greasiness, resealability, and the whole-chip product everywhere in the world. Further, the Pringles package, symbols, and advertising are almost the same globally. Disney’s brand of magical family entertainment is implemented by theme parks, movies, and characters that are remarkably consistent across countries.

These “standardized” products and brands are often not as identical worldwide as one might assume. McDonald’s, once the model of standardization, now has rice burgers in Taiwan, vegetarian entrees in India, tortillas in Mexico, rice cakes in the Philippines, and wine with meals in many European cities. Pringles uses different flavors in different countries and advertising executions are tailored to local culture. Heineken is the premium beer to enjoy with friends everywhere—except at home in the Netherlands, where it is more of a mainstream beer. Even Coke has a sweeter product in areas such as southern Europe. Regardless of these variations, however, brands that have moved toward the standardized end of the spectrum demonstrate some real advantages.

A standardized offering can achieve significant economies of scale. For example, when IBM decided to exchange some three dozen advertising agencies for one in order to create a single global campaign (even if it needed some adapting from market to market), one motivation was to achieve efficiencies. The task of developing packaging, a website, a promotion, or a sponsorship will also be more cost-effective when spread over multiple countries. Economies of scale across countries can be critical for sponsorships with global relevance, such as the World Cup or the Olympics.

Perhaps more important, though, is the enhanced effectiveness that results from better resources. When IBM replaced its roster of agencies with Ogilvy & Mather (O&M), it immediately became the proverbial elephant that can sit wherever it wants. As the most important O&M client, it gets the best agency talent from top to bottom. As a result, the chances of a well-executed breakout campaign are markedly improved.

Cross-market exposure produces further efficiencies. Media spillover, where it exists, allows the standardized brand to buy advertising more efficiently. Customers who travel can get exposed to the brand in different countries, again making the campaign work harder. Such exposure is particularly important for travel-related products such as credit cards, airlines, and hotels.

A standardized brand is also inherently easier to manage. The fundamental challenge of brand management is to develop a clear, well-articulated brand identity (what you want your brand to

Chapter 14 Global Strategies 253

stand for) and to find ways to make that identity a driver of all brand-building activities. The absence of multiple strategies makes this task less formidable with a global brand. In addition, simpler organizational systems and structures can be employed. Visa’s “worldwide acceptance” position is much easier to manage than dozens of country-specific strategies.

The key to a standardized brand is to find a position that will work in all markets. Sprite, for example, has the same position globally—honest, no hype, refreshing taste. It is based on the observation that kids everywhere are fed up with hype and empty promises and ready to trust their own instincts. The Sprite advertising tagline (“Image is nothing. Thirst is everything. Obey your thirst.”) resonates around the world. In one scene from a Sprite ad, kids are discussing why their basketball hero would drink Sprite.

Several generic positions seem to travel well. One is being the “best,” the upscale choice. High- end premium brands such as Mercedes, Montblanc, Heineken, and Tiffany’s can cross geographic boundaries because the self-expressive benefits involved apply in most cultures. Another is the country position. For example, the “American” position of brands such as Coke, Levi’s, Baskin- Robbins, KFC, and Harley-Davidson will work everywhere (with the possible exception of the United States). A purely functional benefit such as Pampers’ dry, happy baby can also be used in multiple markets. Not all brands that are high-end or American or have a strong functional benefit, however, can have a common position globally.

Standardization can come from a centralized decision to create a global product. Canon, for example, developed a copier that had a common design throughout the world in order to maximize production economies. Unfortunately, the copier could not use the standard paper size in Japan, resulting in substantial customer inconvenience. The risk inherent in a truly global standardization objective is that the result will be a compromise. A product and marketing program that almost fits most markets may not be exactly right anywhere; such a result is a recipe for mediocrity or failure.

Another strategy is to identify a lead country, a country whose market is attractive because it is large or growing or because the brand has a natural advantage there. A product is tailored to maximize its chances of success in that country, then exported to other markets (perhaps with minor modification or refinements). A firm may have several lead countries, each with its own product. The result is a stable of global brands, with each brand based in its own home country. Nissan has long taken this approach, developing a corporate fleet car for the United Kingdom, for example, and then offering it to other countries. Lycra, a 35-year-old ingredient brand from DuPont, has lead countries for each of the product’s several applications all under the global tagline “Nothing moves like Lycra.” Thus, the Brazilian brand manager is also the global lead for swimsuits, the French brand manager does the same for fashion, and so on.

Global Leadership, Not Standardized Brands6

The fact is that a standardized global brand is not always optimal or even feasible. Yet, attracted by the apparent success of other brands, many firms are tempted to globalize their own brand. Too often the underlying reason is really executive ego and a perception that a standardized brand is the choice of successful business leaders.

Such decisions are often implemented by a simple edict—that only standardized global programs are to be used. The consolidation of all advertising into one agency and the development of a global advertising theme are typically cornerstones of the effort. Even when having a

254 Part Two Creating, Adapting, and Implementing Strategy

standardized brand is desirable, though, a blind stampede toward that goal can be the wrong course and even result in significant brand damage. There are three reasons.

First, economies of scale and scope may not actually exist. The promise of media spillover has long been exaggerated, and creating localized communication can sometimes be less costly and more effective than adapting “imported” executions. Further, even an excellent global agency or other communication partner may not be able to execute exceptionally well in all countries.

Second, the brand team may not be able to find a strategy to support a global brand, even assuming one exists. It might lack the people, the information, the creativity, or the executional skills and therefore end up settling for a mediocre approach. Finding a superior strategy in one country is challenging enough without imposing a constraint that the strategy be used throughout the world.

Third, a standardized brand simply may not be optimal or feasible when there are fundamental differences across markets. Consider the following contexts where a standardized global brand would make little sense:

Different market share positions. Ford’s European introduction of a new van, the Galaxy, into the United Kingdom and Germany was affected by its market share position in each country. In the United Kingdom, as the number-one car brand with a superior quality image, Ford sought to expand the Galaxy’s appeal beyond soccer moms to the corporate market. The U.K. Galaxy became the “nonvan,” and its roominess was compared to first-class airline travel. In Germany, however, where Volkswagen held the dominant position, the Galaxy became the “clever alternative.” Different government contexts. The Galaxy also faced in the United Kingdom (and not in Germany) the fact that because of the tax structure, corporations supplied cars to their employees as a way to provide compensation with less onerous taxes. As a result, a model with the price range of the Galaxy needed to appeal to corporate buyers or it would not be relevant to a major segment of buyers of vehicles in the Galaxy price range. A soccer moms position would not work, but the “first-class” travel provided a rationale for the inclusion of a van among the acceptable vehicles to buy. Different brand images. Honda means quality and reliability in the United States, where it has a legacy of achievement based on the J.D. Powers ratings. In Japan, however, where quality is much less of a differentiator, Honda is a car-race participant with a youthful, energetic personality. Different customer motivations. P&G’s Olay found that in India, people wanted lighter-looking skin rather than younger-looking skin, as was the case in the United States and Europe. Campbell Soups found little demand for ready-to-eat soups in soup-loving Russia and China but did better when they introduced “starter soups” and broths. According to a 2008 study, 78 percent of consumers in China cited health benefits are important in food buying compared with 55 percent in the United States. In the United Kingdom and Argentina, the number was less than 50 percent, and in Germany, it was only 34 percent.7

Different distribution channels. The distribution channel can affect the offering and the marketing strategy. In China, reaching rural areas can involve many levels of

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distribution, so that it is hard to control the brand using methods that would work in the United States, where the distribution channel tends to be shorter and clearer. In the United States, ice cream is sold in bulk for people to use at home, but in many countries, it is mainly sold on a stick for snacks through bodegas, kiosks, or vending machines. Different stages in customer trends. A brand may not be at the same stage in all countries even though a common customer trend exists in each. The appreciation of wine varies from country to country. In China, it exists, but is embryonic and affects the go-to- market strategy of a company such as the E. & J. Gallo Winery—it does not use its premium offerings in the Chinese market. Trends toward health and healthier eating are further along in the United States than in many other countries. Different social economic stage. For some markets, such as in rural India or some parts of China and Africa, most products and brands sold in the West are simply irrelevant. When an area lacks electricity or when it is unreliable, the product profile and attribute preferences change dramatically. Or when the household budget is a small fraction of that in developed countries, constraints dictate buying habits. Strong local heritage. Nestle and Unilever often retain an acquired local brand simply because there is significant customer loyalty based on the brand’s heritage and connection to the local community that could not be transferred to a global brand. Relationships with local brands can be powerful, especially in contexts in which the incidence of advertising is low and the historical relationships therefore take on more weight. Preempted positions. A superior position for a chocolate bar is to own the associations with milk and the image of a glass of milk being poured into a bar. The problem is that different brands have preempted this position in different markets—for example, Cadbury in the United Kingdom and Milka in Germany.

Different customer responses to executions and symbols. There are tactical concerns as well. A Johnnie Walker ad in which the hero attends the running of the bulls in Pamplona was effective in some markets, including Spain, but seemed reckless in Germany and too Spanish in other countries. The attitude toward diet drinks and food outside the United States is very different and is one reason that light instead of diet is seen on food products.

A global business strategy is often misdirected. The priority should not be to develop standardized brands (although such brands might result) but global brand leadership, strong brands in all markets. Effective, proactive global brand management should be directed at enhancing brands everywhere by allocating brand-building resources globally, creating global synergies, generating common marketing planning processes, enhancing cross-country commu- nication, stimulating common performance measures, and coordinating and leveraging the strategies in individual countries. Chapter 16 elaborates.

A key to a successful global strategy is to understand the local marketplace and customers. Panasonic’s experience in China is informative. Starting in the late 1970s, Panasonic entered China to source manufacturing. However, as China became an important market, Panasonic created offerings based on Japanese products sometimes stripped down. But by 2000, it became clear that

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Panasonic needed products more responsive to Chinese consumers. In 2003, the Shanghai-based China Lifestyle Research Center was launched, the first serious attempt to develop a deep understanding of the Chinese customer. The center was close to the technology and R&D staffs in Japan and worked together to create China-oriented products.

The resulting products made Panasonic a player against tough local competition. In studying some 3,000 households throughout China, researchers at the center noticed that in Chinese kitchens, the space of a refrigerator is usually 10 centimeters less than the standard width of the Panasonic product. This simple finding that had eluded Panasonic allowed changes that resulted in a 10-fold increase in the sales of Panasonic’s refrigerators. Another study uncovered the fact that in more than 90 percent of Chinese homes with washers, consumers were still washing by hand underwear fearing that bacteria from outerwear would be transferred to underwear. The solution was a means to sterilize clothes in the wash using silver ions. Refining and publicizing the new technology in 2007, Panasonic increased its share of the washer market from 3 to 15 percent in China. The technology was imported back to Japan, where it was employed in refrigerators as a way to sterilize food.8

The key takeaway is that Panasonic got serious about understanding the Chinese households and provided the Chinese Panasonic operation to have at least an equal role in charting strategy and precipitating innovation.

EXPANDING THE GLOBAL FOOTPRINT Motivation to be global naturally leads to global initiatives to expand a firm’s market footprint, a task that can be messy and difficult. Strategy development gets much harder when the context is a different language, an unfamiliar culture, new competitors and channels, and very different sets of market trends and forces. There are many routes to failure. A study of some 150 international expansion initiatives during a five-year period showed that less than half avoided failure. However, the examination of those that survived suggested that success was usually accompanied by four conditions.9

A strong core. A strong home market provides resources and experience that can be leveraged in geographic expansion. It is a rare firm that finds success abroad without a successful home market. A repeatable formula for expansion. When the same model works in country after country, the risk of entry is reduced. Avon, for example, uses its direct model everywhere and has refined the execution to a science.

Customer differentiation that travels. When the same segments are targeted and the same product and position work across countries, there is no need to research the market and reinvent the offering every time a new country is entered. Nike, Pampers, and Airbnb, for example, have been able to differentiate their respective brands the same way everywhere.

Industry economics. It is important to recognize whether global share or local share will drive success. Some industries like razors or computers, for example, provide cost advantages for global scale. Others, like beer, cement, and software, reward high local share. A mistake is to expect global scale in a local scale industry.

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What Country to Enter?

Once a firm has decided to become global, deciding what country or countries to enter—and in what sequence—is a key challenge. Entering any new market can be risky and take away resources that could be used to make strategic investments elsewhere. A frequently unforeseen consequence of global expansion is that healthy markets, especially the home market, are put at risk by this diversion of resources. It is thus important to select markets for which the likelihood of success will be high and the resource drain minimized.

Market selection starts with several basic dimensions:

Is the market attractive in terms of size and growth? Are there favorable market trends? For many companies, China and India often appear attractive because of their sheer size and growth potential. Can the firm add value to the market? Will the products and business model provide a point of differentiation that represents a relevant customer benefit? Tesco has developed an Internet-based home delivery system for grocery retailers that adds value in many markets.10

How intense is the competition? Are other firms well entrenched with a loyal following, and are they committed to defending their position? Tesco, a major retailer in the United Kingdom, found that expansion to France was unattractive because of the established competition, whereas eastern European countries had much less formidable competition. As a result, Hungary was the first country in continental Europe that Tesco entered.11

Can the firm implement its business model in the country, or do operational or cultural barriers exist? How feasible is any adaptation that is required? Marks & Spencer, a U.K. retailer spanning food, clothing, and general merchandise, attempted to export its products and the look and feel of its stores to the Continent only to find that these offerings had little appeal to Europeans.

Are there political uncertainties that will add risk? In addition to the obvious risks of political instability, there are more subtle issues. Coke and Pepsi got blindsided in India when a nongovernmental entity claimed to have found residue of pesticides in their products. Despite the firms’ protestations and evidence that the claims were unfounded, their businesses took a 12 percent dive and their images suffered. A false claim of contamination similarly hurt P&G’s cosmetics effort in China. Can a critical mass be achieved? It is usually fatal to enter countries lacking the sales potential needed to support the marketing and distribution effort needed for success.

Walmart’s surprising failure in Germany shows the power of the last three dimensions.12

In 2006, the firm gave up a 10-year effort to get a successful presence in Germany in the wake of several mistakes and misjudgments. For example, the first CEO spoke only English and insisted that his managers do the same. The next CEO tried to manage from the United Kingdom. The short shopping hours in Germany and the fact that Germans did not want assistance in the store were just a few of the conditions to which Walmart had trouble adjusting. Walmart also seemed to underestimate the major German competitors, which did not provide much of an opening for a value offering. Finally, Walmart failed to achieve the economies of scale needed to justify its infrastructure. Walmart failure in Germany and the fact that it is

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weak elsewhere in the world makes visible the difficulty of exporting even successful business models, especially those based on scale.

A strategy of entering countries sequentially has several advantages. It reduces the initial commitment, allows the product and marketing program to be improved based on experience in preceding countries, and provides for the gradual creation of a regional presence. Other factors, however, argue that global expansion should be done on as wide a front as possible. First, economies of scale, a key element of successful global strategies, will be more quickly realized and will be a more significant factor. Second, the ability of competitors to copy products and brand positions—a very real threat in most industries—will be inhibited because a first-mover advantage will occur in more markets. Third, standardization is more feasible because it can be planned before local decisions fragment the marketing and branding program.

STRATEGIC ALLIANCES Strategic alliances play an important role in global strategies because it is common for a firm to lack a key success factor for a market. It may be distribution, a brand name, a sales organization, technology, R&D capability, or manufacturing capability. To remedy this deficiency internally might require excessive time and money. When the uncertainties of operating in other countries are considered, a strategic alliance is a natural alternative for reducing investment and the accompanying inflexibility and risk.

Box MARKETING IN CHINA

An Advertising Age study by Normandy Madden, a student of developing markets, provided some warnings to those Western firms that enter China:13

China is not a single country. Rather, it is more like dozens of countries each with its own points of difference in spending power, motivations, and channels. Looking at China as a single market is like believing Europe is a homogeneous entity. Western goods are popular and provide self-expressive benefits, but that does not mean that the Chinese people are not grounded in their Confucian traditions and culture. The Chinese consumer is price conscious, demanding, and knowledgeable in part because of the rise of the Internet. Beware of talking down to them. Don’t underestimate local brands. In many categories, local brands were bystanders at first but rose to be market contenders if not leaders. Mass media in China has limitations: the audience will include many who are unable to buy some brands and the programming is not compelling. The more effective route is often more focused marketing using events, sampling, promotions, or digital marketing. In large retail outlets, there are often up to 100 “push girls” in action. They provide energy to the store and influence the ability of a brand to get attention and trial with often loud and aggressive sampling efforts.14 Shopping in China is, in part because of the push girls, likely to be a considered entertainment to be enjoyed rather than drudgery to be endured.

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A strategic alliance is a collaboration leveraging the strengths of two or more organizations to achieve strategic goals. There is a long-term commitment involved. It is not simply a tactical device to provide a short-term fix for a problem—to outsource a component for which a temporary manufacturing problem has surfaced, for example. Furthermore, it implies that the participating organizations will contribute and adapt needed assets or competencies to the collaboration and that these assets or competencies will be maintained over time. The results of the collaboration should have strategic value and contribute to a viable venture that can withstand competitive attack and environmental change.

A strategic alliance provides the potential for accomplishing a strategic objective or task—such as obtaining distribution in Italy—quickly, inexpensively, and with a relatively high prospect for success. This is possible because the involved firms can combine existing assets and competencies instead of having to create new assets and competencies internally.

A strategic alliance can take many forms, from a loose informal agreement to a formal joint venture. The most informal arrangement might be simply trying to work together (selling our products through your channel, for example) and allowing systems and organizational forms to emerge as the alliance develops. The more informal the arrangement, the faster it can be implemented and the more flexible it will be. As conditions and people change, the alliance can be adjusted. The problem is usually commitment. With low exit barriers and commitment, there may be a low level of strategic importance and a temptation to back away or to disengage when difficulties arise.

Motivations for Strategic Alliances

Strategic alliances can be motivated by a desire to achieve some of the benefits of a global strategy, as outlined in Figure 14.1. For example, a strategic alliance can:

Generate scale economies. The fixed investment that Toyota made in designing a car and its production systems was spread over more units because of a joint venture with GM in California, which lasted for some 25 years.

Gain access to strategic markets. The Italian auto maker Fiat combined with Chrysler to access the U.S. market.

Overcome trade barriers. Inland Steel and Nippon Steel jointly built an advanced cold- steel mill in Indiana. Nippon supplied the technology, capital, and access to Japanese auto plants in the United States. In return, it gained local knowledge and, more important, the ability to get around import quotas.

Perhaps more commonly, a strategic alliance may be needed to compensate for the absence of or weakness in a needed asset or competency. Thus, a strategic alliance can:

Fill out a product line to serve market niches. Ford, General Motors, and Chrysler have, for example, relied on alliances to provide key components of their product lines. Ford’s longtime relationship with Mazda has resulted in many Ford models, as well as access to some Far East markets. When Mazda decided not to build a minivan, Ford turned to Nissan for help. One firm may not be able provide the breadth needed in a major market such as the United States.

Gain access to a needed technology. While Fiat gained access to the U.S. market, Chrysler gained economy car designs.

260 Part Two Creating, Adapting, and Implementing Strategy

Use excess capacity. The GM/Toyota joint venture used an idle GM plant in California.

Gain access to low-cost manufacturing capabilities. Companies from Walmart to Dell have alliances in China to source products.

Access a name or customer relationship. NGK bought an interest in a GE subsidiary whose product line had become obsolete in order to access the GE name and reputation in the U.S. electrical equipment market. A U.S. injection molder joined with Mitsui in order to help access Japanese manufacturing operations in the United States that preferred to do business with Japanese suppliers. Reduce the investment required. In some cases, a firm’s contribution to a joint venture can be technology, with no financial resources required.

The Key: Maintaining Strategic Value for Collaborators

A major problem with strategic alliances occurs when the relative contribution of the partners becomes unbalanced over time and one partner no longer has any proprietary assets and competencies to contribute. This has happened in many of the early partnerships involving U.S. and Japanese firms in consumer electronics, heavy machinery, power-generation equipment, factory equipment, and office equipment.

The result, when the U.S. company has become de-skilled or hollowed out and no longer participates fully in the venture, can be traced in part to the motivation of the partners. Offshore firms are motivated to learn skills; they find it embarrassing to lack a technology and they work to correct deficiencies. U.S. firms are motivated to outsource elements of the value chain in order to reduce costs. They start by outsourcing assembly and move on to components, to value-added components, to product design, and finally to core technologies. The U.S. partner is then left with just the distribution function, whereas the offshore firm retains the key business elements, such as product refinement, design, and production.

One approach to protecting assets and competencies is to structure the situation so that operating management is shared. Compare, for example, the joint Toyota/GM manufac- turing facility, where GM was involved in the manufacturing process and its refinements, with Chrysler’s effort to sell a Mitsubishi car designed and manufactured in Japan. In the latter case, Mitsubishi eventually developed its own name and dealer network and sold its cars directly. When the motivation for an alliance is to avoid investment and achieve attractive short-term returns instead of to develop assets and competencies, the alliance will break down.

Another approach is to protect assets from a partner by controlling access. Many Japanese firms have a coordinated information transfer. Such a position avoids uncoordinated, inappropriate information flow. Other firms put clear conditions on access to a part of the product line or a part of the design. Motorola, for example, released its microchip technology to its partner, Toshiba, only as Toshiba delivered on its promise to increase Motorola’s penetration in the Japanese market. Still others keep improving the assets involved so that the partner’s dependence continues. Of course, the problem of protecting assets is most difficult when the asset can be communicated by a drawing or it has been codified in writing. It is somewhat easier when a complex system is involved—when, for example, when it involves a competency in manufacturing, that involves a complex combination of knowledge and skills manufacturing excellence.

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A second set of problems involves execution of the alliance. With strategic alliances, at least two sets of business systems, people, cultures, and structures need to be reconciled. In addition, the culture and environment of each country must be considered. The Japanese, for example, tend to use a consensus-building decision process that relies on small group activity for much of its energy; this approach is very different from that of managers in the United States and Europe. Furthermore, the interests of each partner may not always seem to be in step. Many otherwise well-conceived alliances have failed because the partners simply had styles and objectives that were fundamentally incompatible.

When a joint venture is established as a separate organization, research has shown that the chances of success will be enhanced if:

The joint venture is allowed to evolve with its own culture and values—the existing cultures of the partners will probably not work even if they are compatible with each other. The management and power structure from the two partners is balanced.

Venture champions are on board to carry the ball during difficult times. Without people committed to making the venture happen, it will not happen.

Methods are developed to resolve problems and to allow change over time. It is unrealistic to expect any strategy, organization, or implementation to exist without evolving and changing. Partners and the organization thus need to be flexible enough to allow change to occur.

Alliances are a widespread part of business strategy (the top 500 global businesses have an average of 60 major alliances each), but need to be actively managed. One study of some 200 corporations found that the most successful at adding value through alliances employed staff who coordinated all alliance-related activity within the organization.15 This function would draw on prior experiences to provide guidance to those creating and managing new alliances. One firm, for example, has “thirty-five rules of thumb” to manage alliances from creation to termination. The dedicated alliance staff would also increase external visibility (an alliance announcement has been found to influence stock price), coordinate internal staffing and management of alliances, and help identify the need to change or terminate an alliance.

GLOBAL MARKETING MANAGEMENT Managing a global marketing program is difficult. The country or regions are often highly autonomous. Each manager tends to think that he or she is different and others, particularly those in “central marketing,” cannot understand the culture, customers, distribution, competitors, etc. of their country. As a result there tends to be little leveraging of successful programs from country to country and even little communication about common problems and programs that are successful. Further, the expertise around such areas as Internet communication, sponsorships, market research, etc. tends to be limited because of scale.

The challenge for global marketing teams is to change that—to create cooperation and communication where there have been competition and isolation. In Chapter 16, the problems that silo organizations often present in marketing teams are further outlined and practical ways to make marketing more effective in a silo world are discussed.

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KEY LEARNINGS

A global strategy considers and exploits interdependencies among operations in different countries.

Among the motivations driving globalization are obtaining scale economies, accessing low-cost labor or materials, taking advantage of national incentives to cross-subsidize, dodging trade barriers, accessing strategic markets, enhancing firm innovation, and creating global associations.

A standardized brand is not always optimal. Economies of scale may not exist, the discovery of a global strategy (even assuming it exists) may be difficult, or the context (e.g., different market share positions or brand images) may make such a brand impractical. However, the management of the business should be common across countries—all using the same planning processes and performance measures.

Companies successful at expanding their global footprint usually had a strong core market, a repeatable expansion formula, customer differentiation that travels, and an understanding of local versus global scale. The selection of a country to enter should involve an analysis of the attractiveness of the market and the ability of the firm to succeed in that market.

Strategic alliances (long-term collaboration leveraging the strengths of two or more organizations to achieve strategic goals) can enable an organization to overcome a lack of a key success factor, such as a brand or distribution. A key to the long-term success of strategic alliances is that each partner contributes assets and competencies over time and obtains strategic advantages.

Global brand management needs to include moving the silo country business units from competition and isolation to cooperation and communication.

FOR DISCUSSION 1. Assess the motivations for going global. What would be the most important for a bank? 2. What products are likely to be more standardized across countries? Why? What

products are least likely?

3. Pick a product like Applegate Deli Meats or a service such as Nationwide Insurance. Assess the advantages of expanding to a more global presence.

4. For a particular product or service, such as Crest toothpaste or the Toyota Scion, how would you evaluate the countries that would represent the best prospects? Be specific. What information would you need, and how would you obtain it? Prioritize the criteria that would be useful in deciding which countries to enter.

5. For a brand such as Bank of America, Pantene, or Ford, how would you go about creating blockbuster global brand-building programs—for example, sponsorships, promotions, or advertising? How would you leverage those programs?

6. Select a company. How would you advise it to find an alliance partner to gain distribution into China? What advice would you give regarding the management of that alliance?

7. What is the advantage of a global brand team? What are the problems of using a team to devise and run the global strategy?

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BoxBEST DIGITAL PRACTICE

Mars + Alibaba

Food and beverage has been one of the fastest growing categories in China, driven in part by changing consumer taste preferences in favor of foreign brands. Mars Inc., parent company of sweet treats such as Snickers, M&M’s, and Dove, decided to capitalize on this trend in order to expand its business.

The company formed a strategic partnership with Alibaba, the world’s largest online retailer. Under the agreement, Mars will sell 17 brands on Tmall.com, Alibaba’s business-to-consumer (B2C) platform, as well as Ruraltaobao.com, Alibaba’s new platform targeting China’s 600 million rural citizens. The partnership benefits Mars by helping improve the brand’s reach and distribution, particularly to the China’s more geographically dispersed, harder-to-serve rural population. It also enables Mars to leverage Alibaba’s local marketing expertise, extensive media properties, and big data insights. For example, in a Snickers test campaign earlier in the year, the brand partnered with a Chinese pop group and used Alibaba’s targeting and big data analysis capabilities to maximize the campaign’s ROI. In only three days, the campaign generated almost a year’s worth of sales!

For strategic partnerships to endure though, they need to benefit both parties. A major advantage for Alibaba is that the deal includes an “e-commerce food safety initiative” that will be managed by Mars’ Global Food Safety Center in China. The Center has built a reputation for world-class scientific research and effective global food safety education. This knowledge and skill will be important for Alibaba as they continue to grow their B2C consumer goods business, as food safety is a top concern for Chinese consumers.

Mars’ financial gains from the partnership are yet to be determined, but look promising given the size of the market and other foreign brands’ performance in China to date. China’s e-commerce market is made up of 550 million consumers who made $589 billion in purchases last year alone. Should these buying patterns continue among Chinese consumers, Mars will likely be well positioned to grow its footprint in the region.

Questions:

1. Strategic partners often seek exclusive deals—in this case, Alibaba would only sell Mars products and/or Mars will only sell its product on Alibaba e-commerce sites (other brick and mortar stores would not be included in the deal). Why would these partners strike such a deal?

2. Chocolate consumption decreased in China during the recent recessionary period in a country that is starting to opt for healthier treats and with lower chocolate consumption compared to Western Europe, United States, and Brazil to begin with. Develop one other strategy for improving adoption in the Chinese market?

Sources: “Mars and Alibaba Group Launch Global Strategic Business Partnership - Elevating the Online Shopping Experience and Enhancing E-Commerce Food Safety,” June 29, 2016, http://www.mars .com/china/en/press-center/press-list/news-releases.aspx?SiteId 203&Id 7244

Jeff Daniels, “China’s Sweet Tooth for Chocolate Melts with Economic Slowdown,” CNBC, October 7, 2016, http://www.cnbc.com/2016/10/07/chinas-sweet-tooth-for-chocolate-melts-with-economic-slow down.html

Michael Zakkour, “Alibaba & Mars Partner On Sweet Deal To Bring Products Online In China,” Forbes, June 29, 2016, http://www.forbes.com/sites/michaelzakkour/2016/06/29/alibaba-mars-partner- on-sweet-deal-to-bring-products-online-in-china/#75191dd33d28

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Box BEST GLOBAL PRACTICE

Gillette India

In 2009, Procter and Gamble’s Gillette brand controlled 20 percent of the shaving market in India—a far cry from its 70 percent market share in the U.S. Furthermore, sales had recently plateaued, raising further concerns about the company’s strategy in capturing the Indian market. After considering what factors might be causing the market share disappointment, the Indian brand management team realized there was an opportunity to better customize the marketing of Gillette to the Indian context.

The primary need for customized marketing was that Indian consumers had different motivations for shaving. Indian men have a poor image of razors that were historically double-edge blades, which caused cuts, nicks, and rashes. Cultural norms related to the virility of facial hair along with famous bearded Bollywood actors meant that Indian men were less motivated to shave than men in other Gillette markets. To educate men about the benefits of shaving, Gillette launched an innovative campaign, known as “Shave India Movement.”

The overall campaign was anchored on the research insight that 77 percent of Indian women prefer clean-shaven men. Gillette used a number of creative tactics to bring that statistic to life:

Women Against Lazy Stubble: Opinion poll results were published and female celebrities were recorded promoting the appeal of clean-shaven men. To shave or not? An urban campaign asked India’s women to vote on whether men should shave or not. Attention to the issue was amplified on Facebook as Indian consumers debated the question. Bringing more attention to this seemingly mundane task helped Gillette bolster energy for the movement. Shave-a-thons: Grassroots stunts that increased word of mouth and brought the Gillette brand into everyday conversation. These events took place in crowded urban centers with crowds of women cheering the men on as they shaved their facial hair. One location even broke the world shaving record!

It was also important simplify the product to its essential features so the price could be dropped. Gillette was able to reduce the price from $7.00 to $2.30. As a result of the campaign, Gillette increased sales 500 percent and grew its market share to 80 percent. Additionally, the campaign influenced a U.S. campaign called “Kiss and Tell,” which reported that U.S. women also prefer clean-shaven men. Similar campaigns have been found to be effective around the world.

Questions:

1. What is the downside to customizing Gillette’s products and marketing in India?

2. Perform a brief analysis of the Brazilian market. Do you think Gillette’s approach will work there?

Source: Srinivas Reddy and Christopher Dula, “Gillette’s ‘Shave India Movement’,” The Financial Times, November 4, 2013, http://www.ft.com/cms/s/0/8da786b8-37e7-11e3-8668-00144feab7de.html# axzz4Eg78O6aV

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C H A P T E R F I F T E E N

Setting Priorities for Businesses and Brands

There is nothing so useless as doing efficiently that which should not be done at all. —Peter Drucker

If you want to succeed, double your failure rate. —Thomas Watson, founder, IBM

Anyone can hold the helm when the sea is calm. —Publilius Syrus

All firms, from Mercedes to GE to Nestle to Marriott to Intel, should view their business units as a portfolio. Some should receive investment because they are cash-generating stars in the present and will be into the future. The investment is needed to keep them healthy and to exploit growth opportunities. Others need investment because they are the future stars of the company even though they now have more potential than sales and profits. Identifying the priority business units is a key to a successful strategy.

Equally important, perhaps more important, is to identify those business units that are not priorities. Some of them should assume the role of generating cash through a milking or harvesting strategy. These units, termed cash cows, should no longer absorb investments aimed at growing the business. Still other units should be divested or closed or merged because they lack the potential to become either stars or cash cows—their profit prospects may be unsatisfactory, or they may lack a fit with the strategic thrust going forward. These decisions, which are strategically and organizationally difficult, are crucial to organizational success and even survival.

A related issue is dealing with too many brands by eliminating or merging them. Brand strategy and business strategy are closely related because a brand will often represent a business. As a result, brand strategy is often a good vehicle to develop and clarify the business strategy. Too many brands, like too many business units, result in confusion and inefficiency. The firm can support only so many brands, and brand proliferation has often grown to the point of paralyzing the organization. In the automobile field there are now over 300 brands, which have resulted in

266

confusion, overlap, inefficiency, and, worse, an inability to fund promising brands. Certainly, one reason behind the restructuring of GM in 2009, which resulted in the dropping of Oldsmobile and Saturn, was that there were too many brands with the result that some were underfunded and potential scale economies were unrealized.

We start with an overview of portfolio strategy and then discuss the divest and milk strategy options. We then turn to the problem from the perspective of brand strategy and explore how brand portfolios can be reduced so that more brand focus becomes possible and clarity can be enhanced in both the brand strategy and the accompanying business strategy.

THE BUSINESS PORTFOLIO Portfolio analysis of business units dates from the mid-1960s with the growth-share matrix, which was pioneered and used extensively by the Boston Consulting Group (BCG). The concept was to position each business within a firm on the two-dimensional matrix shown in Figure 15.1. The market-share dimension (actually the ratio of share to that of the largest competitor) was a summary measure of firm strength and cost advantages resulting from scale economies and manufacturing experience. The growth dimension was defended as the best single indicator of market attractiveness.

The BCG growth-share matrix is associated with a colorful cast of characters representing strategy recommendations. According to the BCG logic, the stars, important to the business and deserving of any needed investment, reside in the high-share, high-growth quadrant. Stars should receive investments to maximize ROI until market growth slows and they are retired to Cash cows (the high-share, low-growth quadrant). These products provide a great deal of the cash for the rest of the portfolio and they should be milked for as long as possible. The dogs, which are cash traps and candidates for liquidation, are in the low-growth, low-share quadrant. They should be removed as soon as possible if there are no other strategic reasons for retaining. Problem

Stars Problem children

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R a te

10 High 1.0 Low 0.1

Competitive Position (Ratios of Firm Share to Share of Largest Competitor)

Figure 15.1 The Growth-Share Matrix

Chapter 15 Setting Priorities for Businesses and Brands 267

children with heavy cash needs but the potential to eventually convert into stars, are in the low- share, high-growth quadrant. Companies should work to identify the potential stars while divesting of the rest of these offerings.

The BCG growth-share model, although naive and simplistic in its analysis and recommen- dations, was very influential in its day. Its lasting contribution was to make visible the issue of allocation across business units; that some businesses should generate cash that supports others. It also introduced the experience curve (discussed in Chapter 11) into strategy and showed that, under some conditions, market share could lead to experience-curve-based advantage.

A more realistic, richer portfolio model associated with GE and McKinsey also evaluates the business on two dimensions—market attractiveness and the business position. Each of these dimensions, as suggested by Figure 15.2, is richer and more robust than those used in the BCG model. The investment decision is again suggested by the position on a matrix. A business that is favorable on both dimensions should usually be a candidate to grow using the tools of the last four chapters.

When both market attractiveness and business position evaluations are unfavorable, the harvest or divest options should be raised. Of course, even in a hostile environment, routes to profitability can be found. Perhaps the business can turn to new markets, growth submarkets, superpremium offerings, new products, new applications, new technologies, or revitalized market- ing. When the matrix position is neither unambiguously positive or negative, the investment decision will require more detailed study.

Business Position: Its Ability to Compete

1. Invest/grow 2. Selective investment 3. Harvest/divest

Market Attractiveness

1 1 2

1 2 3

2 3 3

High

Medium

Low

LowMediumHigh

Evaluating the Ability to Compete

• Organization • Growth • Share by segment • Customer loyalty • Margins • Distribution • Technology skills • Patents • Marketing • Flexibility

Evaluating Market Attractiveness

• Size • Growth • Customer satisfaction levels • Competition: quantity, types, effectiveness, commitment • Price levels • Profitability • Technology • Governmental regulations • Sensitivity to economic trends

Figure 15.2 The Market Attractiveness/Business Position Matrix

268 Part Two Creating, Adapting, and Implementing Strategy

DIVESTMENT OR LIQUIDATION There are usually three drivers of a divestment decision besides the current and expected profit drain. The first is market demand. Perhaps demand estimates were overly optimistic in the first place or perhaps the demand was there but deteriorated as the market matured. The second is competitive intensity. New competitors could have emerged or the existing competitors may have been underestimated or could have enhanced their offerings. The third is a change in strategic thrust of the organization, a change that affects the fit of the business. The firm may no longer be a synergistic asset or the business may no longer be a link to the future. In fact, the business may be not only a resource drain, but a distraction to the internal culture and the external brand image.

These factors all came into play in 2011 when Home Depot made the painful decision after a 17-year effort to close its Expo Design Centers, stores that carried high-end products embedded in an upscale design service and elaborate aspirational displays.1 Introduced in the early 1990s as a way to provide a high margin, growth platform, the idea was to introduce chain economies into what is a mom and pop industry buttressed by the buying clout and logistic assets of Home Depot. Even during the housing boom, the concept struggled perhaps because Home Depot’s image of functionality and value got in the way of delivering the self-expressive benefits that were the heart of Expo; perhaps because the design culture just did not fit organizationally; and perhaps because the design community turned out to be tougher competitors than envisioned. When new housing construction declined sharply, demand dried up. In addition, Home Depot, in the midst of a recession, needed to sharpen its strategy to focus on its core business and Expo needed to go.

Being able to make and implement an exit decision can be healthy and invigorating. The opportunity cost of overinvesting in a business and of hanging on to business ventures that are not performing and never will perform can be damaging and even disastrous. Further, this cost is often hidden from view because it is shielded by a nondecision. When a business that is not contributing to future profitability and growth absorbs resources in the firm—not only financial capital but also talent, thefirm’smost importantcurrency—those businessesthatdorepresentthe future ofthefirm will suffer. Perhaps worse, some businesses with the potential to be important platforms for growth will be left on the sidelines, starved victims of false hopes and stubborn, misplaced loyalty.

Jack Welch, the legendary GE CEO, believed that identifying the talent of the future was his most important job. The flip side was identifying those who did not fit the future plans and letting them seek careers elsewhere. He believed the firm would be stronger and the people involved would benefit in the long run as well. He felt the same about business units. Welch, during his first four years as GE’s CEO, divested 117 business units, accounting for 20 percent of the corporation’s assets. Such an active divestiture program can generate cash at a fair (as opposed to a forced-sale) price, liberate management talent, help reposition the firm to match its strategic vision, and add vitality. The divested businesses often benefit as well, as many will move into environments that are more supportive in terms of not only assets and competencies but also the commitment to succeed. It is healthy all around to trim businesses and there will always be business units to trim. One study by Bain & Company estimated that of 181 growth initiatives that involved moving into a business adjacent to a core business (having much in common with the core business such as customers, technology, distribution, etc.), only 27 percent were deemed successful and about the same number were clear failures.2 In packaged goods, a Procter & Gamble study showed that the number of new products tested that were still on the shelf two years later was only 10–15 percent.3

Chapter 15 Setting Priorities for Businesses and Brands 269

Achieving sustained growth is rare, and when it appears, it is often fueled by new businesses. One theory advanced by James Brian Quin, a strategy theorist, and others about how to find and develop successful new businesses is to “let a thousand flowers bloom,” tend those that thrive, and let the rest wither. The venture capital industry lives by the mantra that if you fund 10 ventures, two will be home runs, and they will represent overall success. Getting home runs requires funding many ventures. The key to the prescription that it takes many tries to find success is to have a process and the will to terminate business units that are not going to fuel growth in the future. Without that process, a thousand flowers will result in an overgrown garden where none are healthy.

Many firms avoid divestiture decisions until they become obvious or are forced by external forces. In addition to wasted resources, delayed divestiture decisions result in lower prices being obtained for the business. As painful divest decisions are delayed, the forces that create the decline of the business continue to exert pressure and often increase. The result is a declining value often accompanied with more losses. One study showed that organizations are more profitable when they systematically evaluate the strategic fit and future prospects of each business and then regularly make divestiture decisions or place business units on a probationary status.4

When any of the following conditions are present, an exit strategy should be considered:

Business Position

The business position is weak—the assets and competencies are inadequate, the value proposition is losing relevance, or the market share is in third or fourth place and declining in the face of strong competition. The business is now losing money and future prospects are dim.

Market Attractiveness

Demand within the category is declining at an accelerating rate and no pockets of enduring demand are accessible to the business. It is unlikely that a resurgence of the category or a subcategory will occur. Price pressures are expected to be extreme, caused by determined competitors with high exit barriers and by a lack of brand loyalty and product differentiation.

Strategic Fit

The firm’s strategic direction has changed so that the business has become superfluous or even unwanted. The firm’s financial and management resources are being absorbed when they could be employed more effectively elsewhere.

Exit Barriers

Even when the decision seems clear, there may be exit barriers that need to be considered. Some involve termination costs. A business may support other businesses within the firm by providing part of a system, by supporting a distribution channel, or by using excess plant capacity. Long-term

270 Part Two Creating, Adapting, and Implementing Strategy

contracts with suppliers and labor groups may be expensive to break. The business may have commitments to provide spare parts and service backup to retailers and customers, and it may be difficult to arrange alternative acceptable suppliers.

An exit decision may affect the reputation and operation of other company businesses, especially if that business is visibly tied to the firm. Thus, GE was concerned about the impact its decision to discontinue small appliances would have on its lamp and large-appliance business retailers and consumers. At the extreme, closing a business could affect access to financial markets and influence the opinion of dealers, suppliers, and customers about the firm’s other operations.

If there is any reason to believe the market may change to make the business more attractive, the exit decision could be delayed. Remaining in the business may be a contingency play.

Biases Inhibiting the Exit Decision

There are well-documented psychological biases in analyzing a business. One such bias is reluctance to give up. There may be an emotional attachment to a business that has been in the “family” for many years, or that may even be the original business on which the rest of the firm was based. It is difficult to turn your back on such a valued friend, especially if it means laying off good people. Managerial pride also enters in. Professional managers often view themselves as problem solvers and are reluctant to admit defeat.

Another obstacle is due to the confirmation bias.5 People naturally seek out information that supports their position and discount disconfirming information, whatever the context. Confirma- tion bias can be rampant in evaluating a business to which some have emotional and professional ties. Information that confirms that the business can be saved is more likely to be uncovered and valued than disconfirming information. Questions asked in market research may be slanted, perhaps inadvertently, toward providing an optimistic future for the business. When there is uncertainty, the bias can get large. When predicting future sales or costs, for example, extreme numbers may be put forth as plausible. Such a tendency is seen in major governmental decisions, such as funding a fighter plane or building a bridge.

Another bias to deal with is the escalation of commitment. Instead of regarding prior investments as sunk costs, there is a bias toward linking them to the future decisions. Thus, a decision to invest $10 million more is framed as salvaging the prior $100 million investment.

All three biases were in view when Tenneco Oil Company made decisions that helped lead to its demise.6 Tenneco Oil was a healthy company, a top 20 in the Fortune 500, but stole defeat from the jaws of victory, so to speak. It had a division, J. I. Case, a manufacturer of agricultural and construction equipment, which was doing badly. Case had weak products, weak distribution, high costs, and a 10 percent market share facing a declining, low-profit industry with excess capacity that was dominated by John Deere. Instead of facing reality, Tenneco doubled down by buying International Harvester, a competitor of Case, that had 20 percent share, but was on the verge of bankruptcy. The market did not improve, synergies did not materialize in a timely fashion, and the losses of the combined equipment company were substantial. Meanwhile, the profit flow of the energy operations faltered as the price of oil fell. These events coupled with high leverage meant the end of Tenneco Oil; the company was sold off in pieces. A series of bad decisions was driven not by an objective analysis but rather by

Chapter 15 Setting Priorities for Businesses and Brands 271

these biases coupled with the illusion that success and cash flow largely dependent on external events will continue.

Injecting Objectivity into Disinvest Decisions

To deal with these biases, the decision needs to be more objective in terms of both process and people. The process should be transparent and persuasive, thereby encouraging the discussion to be professional, centered on key issues and discouraging emotional gut reactions. It helps if it is applied to a spectrum of business units instead of just the marginal ones. For example, it is well known that the only way to close down a military plant is to evaluate all of them and let the process identify which ones are no longer needed. When politicians are faced with such objective evidence and required to make an up or down vote, it becomes harder to fight for their “base.”

It is also helpful to have people interjected into the analysis who do not have histories that prevent them from being objective. Such people can be from within the firm, but sometimes an outside party from a consulting company or a new hire can be more objective. This can be done vicariously as well. There is the often-repeated story of how Intel made the painful decision to turn its back on the memory business, which represented not only its heritage but also the bulk of its sales. Intel’s president, Andy Grove, at one point looked at CEO Gordon Moore and asked what a new outside CEO would do. The answer was clear—get out of memory. So the two men symbolically walked out the door and walked back in and then made the fateful decision to exit a business that had been destroyed by Asian competitors. Even after making the decision, it was difficult to cut out all R&D and close it down. Two people sent to close the business dragged their heels and continued to invest. Finally, Grove himself had to step in. It turns out that the implementation of an exit decision is also difficult.

Peter Drucker recounted a story about a leading firm in a specialized industry that organized a group of people every three months to look critically at one segment of the company’s offerings. This group was a cross-section of young managers and changed every quarter. They addressed the Andy Grove question—if we were not in this business now, would we go into it? If the answer was no, an exit strategy would be considered. If the answer was yes, then the next question was whether the existing business strategy would be used. A negative judgment would lead to proposed changes. One key to the firm’s success was that this process led to the exit or modification of every single one of its businesses over a five-year period.

THE MILK STRATEGY A milk or harvest strategy aims to generate cash flow by reducing investment and operating expenses to a minimum even if that causes a reduction in sales and market share. The underlying assumptions are that the firm has better uses for the funds, that the involved business is not crucial to the firm either financially or synergistically, and that milking is feasible because sales will stabilize or decline in an orderly way. The milking strategy creates and supports a cash cow business.

There are variants of milking strategies. A fast milking strategy would be disciplined about minimizing the expenditures toward the brand and maximizing the short-term cash flow, accepting the risk of a fast exit. A slow milking strategy would sharply reduce long-term investment, but continue to support operating areas such as marketing and service. A hold strategy would provide enough product development investment to hold a market position, as opposed to investing to grow or strengthen the position.

272 Part Two Creating, Adapting, and Implementing Strategy

Conditions Favoring a Milking Strategy

A milking strategy would be selected over a growth strategy when the current market conditions make investments unlikely to improve a negative environment caused by competitor aggressive- ness, consumer tastes, or other factors. Sometimes it is precipitated by a new entrant that turns a market hostile. Chase & Sanborn was once a leading coffee; the “Chase & Sanborn Hour,” starring Edgar Bergen, was one of the most popular radio shows of its time. After World War II, though, Chase & Sanborn decided to retreat to a milking strategy rather than fight an expensive customer retention battle that was occurring in the instant coffee market and the introduction of General Foods’ heavily advertised Maxwell House brand.

Several conditions support a milking strategy rather than an exit strategy:

The business position is weak, but there is enough customer loyalty, perhaps in a limited part of the market, to generate sales and profits in a milking mode. The risk of losing relative position with a milking strategy is low.

The business is not central to the current strategic direction of the firm, but still has relevance and leverages assets and competencies.

The demand is stable or the decline rate is not excessively steep, and pockets of enduring demand ensure that the decline rate will not suddenly become precipitous.

The price structure is stable at a level that is profitable for efficient firms.

A milking strategy can be successfully managed.

One advantage of milking rather than divesting is that a milking strategy can often be reversed if it turns out to be based on incorrect premises regarding market prospects, competitor moves, cost projections, or other relevant factors. Oatmeal, for example, has experienced a sharp increase in sales because of its low cost and associations with nutrition and health. In men’s apparel, suspenders have shown signs of growth. Fountain pens, invented in 1884, were virtually killed by the appearance in 1939 of the ballpoint. However, the combination of nostalgia and a desire for prestige has provided a major comeback for the luxury fountain pen. As a result, the industry has recently seen years in which sales doubled.

Implementation Problems

It can be organizationally difficult to assign business units to a cash cow role because in a decentralized organization (and most firms pride themselves on their decentralized structure), it is natural for the managers of cash-generating businesses to control the available cash that funds investment opportunities. The culture is for each business to be required or encouraged to fund its own growth, and of course all business units have investment options with accompanying rationales. As a result, a fast-growing business with enormous potential but relatively low sales volume will often be starved of needed cash. It requires a sometimes disruptive centralized decision to assign a large business unit a cash cow role. The irony is that the largest businesses involving mature products may have inferior investment alternatives, but because cash flow is plentiful, their investments will still be funded. The net effect is that available cash is channeled to areas of low potential and withheld from the most attractive areas.

Chapter 15 Setting Priorities for Businesses and Brands 273

A business portfolio analysis helps force the issue of which businesses should receive the available cash.

Another serious problem is the difficulty of placing and motivating a manager in a milking situation. Most SBU managers do not have the orientation, background, or skills to engage in a successful milking strategy. Adjusting performance measures and rewards appropriately can be difficult for both the organization and the managers involved. It might seem reasonable to use a manager who specializes in milking strategies, but that is often not feasible simply because such specialization is rare. Most firms rotate managers through different types of situations, and career paths simply are not geared to creating milking specialists.

There are also market risks associated with a milking strategy. If employees and customers suspect that a milking strategy is being employed, the resulting lack of trust may upset the whole strategy. As the line between a milking strategy and abandonment is sometimes very thin, customers may lose confidence in the firm’s product and employee morale may suffer. Competitors may attack more vigorously. All these possibilities can create a sharper-than-anticipated decline. To minimize such effects, it is helpful to keep a milking strategy as inconspicuous as possible.

The Hold Strategy

A variant of the milking strategy is the hold strategy, in which growth-motivated investment is avoided, but an adequate level of investment is employed to maintain product quality, production facilities, and customer loyalty. A hold strategy will be superior to a milk strategy when the market prospects and/or the business position is not as grim. There may be more substantial and protected pockets of demand, better margins, a superior market position, a closer link to other business units in the firm, or the possibility of improved market prospects. A hold strategy would be preferable to an invest strategy when an industry lacks growth opportunities and a strategy of increasing share would risk triggering competitive retaliation. The hold strategy can be a long-term strategy to manage a cash cow or an interim strategy employed until the uncertainties of an industry are resolved.

Sometimes a hold strategy can result in a profitable “last survivor” of a market that is declining slower than most assume. A survivor may be profitable, in part because there may be little competition and in part because the investment to maintain a leadership position might be relatively low. The cornerstone of this strategy is to encourage competitors to exit. Toward that end, a firm can be visible about its commitment to be the surviving leader in the industry by engaging in increased promotion or even introducing product improvements. It can encourage competitors to leave by pricing aggressively and by reducing their exit barriers by purchasing their assets, by assuming their long-term obligations, or even by buying their business. Kunz, which made passbooks for financial institutions, was able to buy competitor assets so far under book value that the payback period was measured in months. As a result, Kunz had record years in a business area others had written off as all but dead decades earlier. A hold strategy is particularly problematic if a disruptive innovation appears and the strategy prevents a firm from making necessary investments to remain relevant. As a result, firms may be slow to convert from film to digital, to reduce trans fats from packaged goods, or to adapt hybrid technology. The result could be a premature demise of a cash cow business.

A problem with the hold strategy is that if conditions change, reluctance or slowness to reinvest may result in lost market share. The two largest can manufacturers, American and

274 Part Two Creating, Adapting, and Implementing Strategy

Continental, failed to invest in the two-piece can process when it was developed because they were engaged in diversification efforts and were attempting to avoid investments in their cash cow. As a result, they lost substantial market share.

PRIORITIZING AND TRIMMING THE BRAND PORTFOLIO Brands are the face of a business strategy, and getting the brand strategy right is often a route to making the right business strategy decisions. One element of brand strategy is to set priorities within the brand portfolio, identifying the strong strategic brands, other brands playing worthwhile roles, brands that should receive no investment, and brands that should be deleted.7

One reason to prioritize brands and trim the brand portfolio is that the exercise provides a good way to prioritize the business portfolio because the brand will usually represent a business. When the brand perspective is used, the business prioritization analysis can sometimes be more objective and the resulting conclusion more transparent and obvious. The brand is usually a key asset of the business and represents its value proposition. Thus, a recognition that the brand has become weak can be a good signal that the business position is weak. Without prioritization of the brand portfolio, strategic brands will lose equity and market position because marginal brands are absorbing brand-building dollars and, worse, managerial talent. Managers simply follow an instinct to solve problems rather than exploiting opportunities, and too many marginal brands create a host of problems.

A second reason is that prioritizing and trimming the brand portfolio can correct the debilitating confusion associated with overbranding. Most firms simply have too many brands, subbrands, and endorsed brands, all part of complex structures. Some brands may reflect product types, others price value, and still others customer types or applications. The branded offerings may even overlap. The totality often simply reflects a mess. Customers have a hard time understanding what is being offered and what to purchase. Even employees may be confused. The business strategy therefore operates at a huge disadvantage.

A third reason is to address the strategic paralysis created by an overbranded, confused brand portfolio without priorities. It is all too common for a firm to be immobilized by an inability to commit to how a new offering or new business should be branded. To provide a brand to a new offering or business that will foster success, there needs to be a sense of what brands will be strategic going forward and what their role and image will be. Assigning a brand that lacks a strategic future or whose future is incompatible with that assignment can be a serious handicap to a business strategy.

One partial step to reduce overbranding is to be more disciplined about the introduction of new offerings and new brands; avoid ad hoc business expansion decisions made without a systematic justification process. In particular, any proposed new brand should represent a business that is substantial enough and has a long enough life to justify brand-building expenses. It should have a unique ability to represent a business—that is, no other existing brands would work.

Controlling the introduction of new brands is only half the battle. There needs to be an objective process to phase out or redeploy marginal or redundant brands after they have outlived their usefulness. The strategic brand consolidation process, summarized in Figure 15.3, addresses that challenge. It involves five distinct steps: identify the relevant brand set, assess

Chapter 15 Setting Priorities for Businesses and Brands 275

the brands, prioritize brands, create a revised brand portfolio strategy, and design a transition strategy.

1. Identify the Relevant Brand Set

The brand set will depend on the problem context. It can include all brands or subsets of the portfolio. For example, an analysis for GM might include the brands GMC, Chevrolet, Pontiac, Buick, and Cadillac. Or it might include the brand set within a narrow context such as the Chevrolet Silverado truck brands 1500, Hybrid, 2500HD, 3500HD, and Chassis. When brands are involved that share similar roles, it becomes easier to evaluate the relative strength.

2. Brand Assessment

If brand priorities are to be established, evaluation criteria need to be established. Further, these criteria need to have metrics so that brands can be scaled. A highly structured and quantified

• Strategic brands • Brands with specialized roles • Cash cow role • Eliminate • On-notice

Prioritize the Brands

Develop the Revised Brand Portfolio Strategy

Design and Implement the Migration Strategy

Determine the Relevant Brand Set

Brand Assessment

• Brand equity • Business strength • Strategic fit • Brand options

Figure 15.3 The Strategic Brand Consolidation Process

276 Part Two Creating, Adapting, and Implementing Strategy

assessment provides stimulation and guidance to the discussion and the decision process. There should be no illusion that the decision will default to picking the higher number. The criteria will depend on the context, but, in general, there are four areas or dimensions of evaluations:

Brand Equity

Awareness—Is the brand well known in the marketplace?

Reputation—Is the brand well regarded in the marketplace? Does it have high perceived quality?

Differentiation—Does the brand have a point of differentiation?

Relevance—Is it relevant for today’s customers and today’s applications?

Loyalty—How large a segment of loyal customers is there?

Business Prospects

Sales—Is this brand driving a significant business?

Share/market position—Does this brand hold a dominant or leading position in the market? What is the trajectory?

Profit margin—Is this brand a profit contributor and likely to remain so? Or are the market and competitive conditions such that the margin prospects are unfavorable?

Growth—Are the growth prospects for the brand positive within its existing markets? If the market is in decline, are there pockets of enduring demand that the brand can access?

Strategic Fit

Extendability—Does the brand have the potential to extend to other products as either a master brand or an endorser? Can it be a platform for growth?

Business fit—Does the brand drive a business that fits strategically with the direction of the firm? Does it support a product or market that is central to the future business strategy of the firm?

Branding Options

Brand equity transferability—Could the brand equity be transferred to another brand in the portfolio by reducing the brand to a subbrand or by developing a descriptor?

Merging with other brands—Could the brand be aggregated with other brands in the portfolio to form one brand?

Brands need to be evaluated with respect to the criteria. The resulting scores can be combined by averaging or by insisting on a minimal score on some key dimensions. For example, a low score on strategic fit may be enough to signal that the brand’s role needs to be assessed. Or, if the brand is a significant cash drain, then it might be a candidate for review even if it is otherwise apparently healthy. In any case, the profile will be important and judgment will be needed to make final assessments of the brand’s current strength.

Chapter 15 Setting Priorities for Businesses and Brands 277

3. Prioritize Brands

The brands that are to live, be supported, and be actively managed need to be prioritized or tiered in some way. The number of tiers will depend on the context, but the logic is to categorize brands so that precious brand-building budgets are allocated wisely. The top tier will include the strategic power brands—those with existing or potential equity that are supporting a significant business or have the potential to do so in the future. A second tier could be those brands involving a smaller business, perhaps a niche or local business, or brands with a specialized role such as a flanker brand (a price brand that deters competitors from penetrating the market from below). A third tier would be the cash cow brands, which should be dialed down with little or no investment of brand-building resources.

The remaining brands need to be eliminated, placed on notice, merged, or restructured.

Eliminate. If a brand is judged to be ill-suited for the portfolio because of weak or inappropriate brand equity, business prospects, strategic fit, or redundancy issues, a plan is needed to eliminate the brand from the portfolio. Selling it to another firm or simply killing it become options. On notice. A brand that is failing to meets its performance goals but has a plan to turn its prospects around might be put on an on-notice list. If the plan fails and prospects continue to look unfavorable, elimination should then be considered.

Merged. If a group of brands can be merged into a branded brand group, the goal of creating fewer, more focused brands will be advanced. Microsoft combined the products Word, PowerPoint, Excel, and Outlook into a single product called Office. The original product brands are now reduced to descriptive subbrands.

Restructure. Firms can attempt to transfer brand equity and customers from a de-prioritized brand to another. This is what Unilever did when it moved from a focus on Rave hair products to Suave and from Surf detergent products to All.

Nestle has long had a system of brand portfolio prioritization. Twelve global brands are the tier one brands on which the company focuses. Each of the global brands has a top executive who is designated as its brand champion. These executives make sure that all activities enhance the brand. They have final approval over any brand extensions and major brand-building efforts. Peter Brabeck, who became CEO, has elevated six of these brands— Nescafe for coffee, Nestea for tea, Buitoni for pasta and sauces, Maggi for bouillon cubes, Purina for pet food, and Nestle for ice cream and candy—as having priority within Nestle. Nestle has also identified 83 regional brands that receive management attention from the Swiss headquarters. In addition, there are hundreds of local brands that are either considered strategic, in which the headquarters is involved, or tactical, in which case they are managed by local teams.

4. Develop the Revised Brand Portfolio Strategy

With brand priorities set, the brand portfolio strategy will need to be revised. Toward that end, several brand portfolio structures should be created. They could include a lean structure with a single master brand, such as Sony or HP, or a “house of brands” strategy like P&G, which has over 80 major product brands. The most promising options are likely to be in between. The idea is to

278 Part Two Creating, Adapting, and Implementing Strategy

create structures around two or three viable options, with perhaps two or three suboptions under each.

The major brand portfolio structure options, together with suboptions, need to be evaluated with respect to whether they:

Support the business strategy going forward

Provide suitable roles for the strong brands

Leverage the strong brands

Generate clarity both to customers and to the brand team

5. Implement the Strategy

The final step is to implement the portfolio strategy, which usually means a transition for the existing strategy to a target strategy. That transition can be made abruptly or gradually.

Box THE CASE OF CENTURION

A large manufacturing firm, which is here labeled as Centurion Industries, went through a strategic brand consolidation process before selecting its portfolio strategy going forward. The process started when the CEO observed that the brand portfolio in a major division was too diffuse and that future growth and market position were dependent on creating a simpler, more focused portfolio of powerful brands. The division had grown in part by acquisition and now had nine product brands, only three of which were endorsed by the corporate brand, Centurion. The nine brands served a variety of product markets that could be roughly clustered into two logical groupings. One, the green business group, included five brands. The other, the blue business group, involved four brands. Competitors with less brand fragmentation and more natural brand synergy had developed stronger brands and were enjoying share growth.

In the green business group, a brand assessment supported by customer research was conducted on all five brands. One of these brands, Larson, represented the largest business, had substantial credibility in that business, and had high awareness levels. Further, it could be stretched to cover the other four parts of the market even though it had no current presence in any of those areas. It did have a visible quality problem, however, that was being addressed. The decision was made to migrate all of the green business brands to Larson and to make the quality issue at Larson a corporate priority. The first migration stage was to endorse three of the brands with Larson and replace the fourth brand, which drove a small business, with the Larson brand. The second stage, to occur within two years, was to convert all of the brands in the green business group to the Larson name and add an endorsement by the corporate brand.

In the blue business group, the brand Pacer emerged from the brand assessment stage as the strongest, especially in terms of awareness, image, and sales. Because Pacer was in a business area closely related to that of the other three brands, using the Pacer brand for the entire blue business group was feasible. However, one of the four brands in the blue group, Cruiser, was an extremely strong niche brand with a dominant position in a relatively small market and delivered significant self- expressive benefits to a hard-core customer base. Thus, it was decided that migrating the Cruiser brand to Pacer would be too risky, but that the balance of the blue group would operate under the Pacer brand. Again, both Pacer and Cruiser going forward would be endorsed by the corporate brand.

(continued)

Chapter 15 Setting Priorities for Businesses and Brands 279

An abrupt transition can signal a change in the overall business and brand strategy; it becomes a one-time chance to provide visibility and credibility to a change affecting customers. So when Norwest Bank acquired Wells Fargo and changed the name of Norwest to Wells Fargo, it had the opportunity to communicate new capabilities that would enhance the offering for customers. In particular, Norwest customers could be assured that the personal relationships they expected would not change, but they could also expect upgraded electronic banking services because of the competence of Wells Fargo in that area. The name change reinforced the changed organization and the repositioning message. An abrupt transition assumes that the business strategy is in place; if not, the effort will backfire. If, for example, the Wells Fargo technology could not be delivered, the best course would have been to delay the name change until the substance behind the new position could be delivered.

The other option is to migrate customers from one brand to another gradually perhaps with intervening steps where the brand becomes an endorsed brand and then a subbrand before disappearing. Each stage may involve years. This will be preferred when:

There is no newsworthy reposition that will accompany the change.

Customers who may not have high involvement in the product class may need time to learn about and understand the change.

There is a risk of alienating existing customers by disrupting their brand relationship.

KEY LEARNINGS

The exit decision, even though it is psychologically and professionally painful, can be healthy both for the firm because it releases resources to be used elsewhere but even for the divested business, which might thrive in a different context.

A milking or harvest strategy (generating cash flow by reducing investment and operation expenses) works when the involved business is not crucial to the firm financially or synergistically. For milking to be feasible, though, sales must decline in an orderly way. Prioritizing and trimming the brand portfolio provides another perspective on prioritizing businesses, can clarify brand offerings, and can remove the paralysis of not being able to brand new offerings. A five-step prioritization process involves

The end result was a brand architecture involving three brands rather than nine, with all three consistently endorsed by the corporate brand. The critical decision was making the tough call that in the long run, the brand architecture would be stronger if niche brands were migrated into one of two broader brands. There were emotional, political, economic, and strategic forces and arguments against each move. The fact that one exception was allowed made the case more difficult to make and to implement. Critical to organizational acceptance was the use of an objective assessment template, which clearly identified the dimensions of the decision and facilitated the evaluation. It helped that much of each assessment was quantified from hard sales and market research data. Also critical was the strategic vision of the top management because at the end of the day, owners of some of the niche brands were not on board, and without a commitment from the top, it would not have happened.

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identifying the relevant brand set, assessing the brands, prioritizing brands, creating a revised brand portfolio strategy, and designing a transition strategy.

FOR DISCUSSION 1. In 2008, Ford sold Jaguar to Tata Motors for $2.3 billion, about half of what it

cost Ford in 1989. Based on chapter tools, what analyses should have been conducted to determine whether Jaguar should be sold?

2. Why is it hard to divest a business? Jack Welch divested hundreds of businesses during his tenure. What are some of the motivations that led to these divestitures?

3. Identify brands that are employing a milking strategy. What are the risks? 4. How would you determine if a firm has too many brands? 5. What, in your judgment, are the key problems or issues in the brand consolidation

process?

Box BEST DIGITAL PRACTICE

Microsoft Acquires Skype

In 2011, Microsoft purchased the online telecom company, Skype, to improve the video and voice communication capabilities of its Office products. In addition to gaining access to Skype’s 107 million users, who were, on average, connected for over 100 minutes per month, the deal kept the platform away from rivals Google and Facebook.

Microsoft knew that its business clients would benefit from Skype’s friendly user-interface and sophisticated tools and features. However, the company currently had the homegrown Lync product in its portfolio, which was designed to integrate with Outlook and serve as clients’ primary communi- cations platform.

Because of the redundancy of the two brands, Microsoft ultimately decided to eliminate the Lync brand and rebrand the tool’s properties as Skype for Business. This allowed them to take advantage of the Skype brand’s familiarity among consumers. Lync users could enjoy the same features they were used to but with the sleeker Skype interface and additional Skype features. Since many Lync users were already users of Skype’s consumer product, the transition was fairly seamless.

Microsoft initially managed the transition by giving IT companies two different Skype for Business options, with varying levels of departure from the Lync interface. Also, by maintaining core Lync features with which its customers were familiar, the transition did not interfere with one of Microsoft’s core brand attributes—productivity. Overall, eliminating the Lync brand helped Microsoft make the most out of its Skype acquisition.

Questions:

1. Make an argument for Microsoft to retain both Skype and Lync.

2. Consider how Microsoft’s decision might have been affected if they had owned Skype and acquired Lync.

(continued)

Chapter 15 Setting Priorities for Businesses and Brands 281

Sources: “See what’s New in Skype for Business,” https://support.office.com/en-us/article/Lync-is-now-Skype- for-Business—see-what-s-new-aba02d7e-c801-4a82-bccd-e7207240f612

Andrew Ross Sorkin and Steve Lohr, “Microsoft to Buy Skype for $8.5 Billion,” The New York Times, May 10, 2011, http://dealbook.nytimes.com/2011/05/10/microsoft-to-buy-skype-for-8-5-billion/?_r=0

BoxBEST GLOBAL PRACTICE

Target Canada

In 2012, Target expanded its business into Canada. The proximity to the U.S. and Canadian’s familiarity with the brand made expansion across the border seem like a natural step for the retail powerhouse. However, after only two years, Target faced $2 billion is losses and announced plans to close all of its Canadian stores. Here are some of the reasons the global expansion led to an exit decision:

1. Target was able to initially to minimize its capital costs by purchasing obsolete stores from a former Canadian discount chain. While this gave Target quick and affordable access to a high number of locations, the stores were not designed for Target’s big box format. Also, the association created by locating the new Targets in outdated spaces damaged its “Expect More, Pay Less” brand reputation.

2. Target compromised quality for speed-to-market. The company opened 124 stores in only two years, and essential parts of the business, such as inventory planning, could not keep up with that pace. As a result, empty shelves and stock outs were an issue. This was especially disappointing for Canadian consumers, who were accustomed to seeing abundant merchandise in U.S. stores.

3. Target faced stiff competition from Walmart, which had been present in Canada since 1994. Historically, Target’s trendy and more fashionable merchandise had helped the brand distinguish itself. However its Canadian assortment lacked these qualities, which put Target in the position of having to compete on price, which is Walmart’s sustainable competitive advantage. Walmart responded with a price war that they appear to have won.

Each of these factors put Target’s brand equity, one of its most precious assets, at risk and ultimately it was left with little choice but to pull out of the market. While opportunity may still exist in the future for Target to re-enter Canada, its failed first attempt is a good lesson for companies considering expanding operations into new global regions.

Questions:

1. Evaluate the three criteria for divestment for Target Canada.

2. Imagine you were assigned President of Target Canada at the time when Walmart started the price war. How would you respond?

Source: Phil Wahba, “Why Target Failed in Canada,” Forbes, January 16, 2016, http://fortune.com/2015/01/15/ target-canada-fail/

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C H A P T E R S I X T E E N

Harnessing the Organization

When given the choice of obsessing over customers or obsessing over competitors, we always obsess over customers. We pay attention to what our competitors do, but it’s not where we put our energy . . . it’s not where we get our motivation from. —Jeff Bezos, Amazon1

Your culture is your brand. —Tony Hsieh, Zappos2

A strategy must be effectively implemented for the company to benefit. The firm’s product- market decisions and value proposition will drive exactly what activities are important to perform for any given strategy. For example, General Motors will likely emphasize design and advertising, Amazon will focus on distribution and pricing, and Medtronic is likely to stress innovation.

One organizing approach that underlies all these strategic directions is customer centricity.3

Customer centricity occurs when a company places the customer at the forefront of all its decisions and actions. When an organization is customer centric, it has the best opportunity to create exceptional value for customers and to capture value for itself in the form of profits. Peter Drucker first pointed to the importance of customer centricity when he noted, “. . . it is the prospect of providing a customer with value that gives the corporation purpose, and it is the satisfaction of the customer’s requirements that gives it results.”4 Importantly, these results may take the form of profits or social impact depending on the organization’s mission. Over 25 years of research demonstrates that a customer-centric approach to managing has a positive effect on firm performance.5

To be clear, customer centricity does not mean giving customers everything they want or even relying on direct customer requests for insight about unmet needs and opportunities. Instead, it requires the business to generate deep insight from engaging with their customers to guide the development and delivery of offerings and their go-to-market strategies.

In order to do so, companies need to focus on developing and strengthening key strategic levers to infuse the philosophy and practice of customer centricity across the organization.

283

Customer centricity requires the business to focus on five organizational elements—culture, competencies, structure, metrics and incentives, and human capital.

CUSTOMER-CENTRIC ORGANIZATIONAL CULTURES Organizational culture is often viewed as the shared values, beliefs, norms, behaviors, and artifacts that carry deeply held meanings and create patterns of activities within a company.6 The challenge of organizational culture is that is it pervasive but often operates in the background and drives company actions in almost invisible ways. A customer-centric culture emphasizes customer interests as the best way to drive long-term profits. It puts the customer ahead of responding to competitors or short-term profits. Cultures that have these priorities reversed can get into trouble fast.

For decades Toyota set the standard for automotive quality and reliability. With close attention to detail and an unrelenting expectation of continuous improvement, the company could credibly promise a car that was close to trouble-free. This image was badly tarnished in 2010 by a storm of quality complaints and a dozen recalls. As Chairman Aiko Toyoda confessed before a Congressional hearing, the pursuit of growth meant the firm lost sight of the priority of putting customer satisfaction above all else. The origin of Toyota’s problems has been traced to a decision in 2002 to overtake GM as the world’s largest car maker. This objective altered priorities and performance metrics. For example, to meet the accelerated growth target, Toyota chose to work with a large number of new component suppliers that didn’t have a deep understanding of the Toyota culture, quality standards, or just-in-time manufacturing system. Toyota completely missed how these choices would affect its value proposition.7

Traits of Customer-Centric Cultures

What are the most important cultural elements in a customer-centric culture?

Make the Customer is the Company’s Raison d’etre

Peter Drucker said “The purpose of a company is to make and keep a customer at a profit.” To be effective, this must be the anchoring mindset for everything the company does. It requires that all employees know who the customer is and what is most important to the customer’s experience with the company. Without this shared understanding, employees’ efforts to serve the customer will not be effective.

Create a Customer-defined Business

When A.G. Lafley, the former CEO of P&G, said, “The customer is boss,”8 employees knew the customer was the firm’s key priority. Similarly, the Mayo Clinic’s mission to be “. . . the most trusted partner for health care” and eBay’s mission to “. . . help people trade practically anything, enabling economic opportunity around the world” are vivid illustrations of defining the business from the customer’s point of view. Theodore Levitt’s insight that “The organization must learn to think of itself not as producing goods or services but as buying customers, as doing the things that will make people want to do business with it”9 is exactly the point. Here’s a good test: Ask leaders what business they are in. If they talk about products and services and not the customer need they are fulfilling or customer problem they are solving, you know this cultural foundation needs adjustment.

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Direct Contact with Customers

A defining feature of customer-centric cultures is the insistence that everyone spend time with customers. Medtronic, a medical device maker, requires all engineers and designers to attend at least one surgical procedure a year to get face-to-face customer feedback from surgeons using Medtronic’s products.10 This mindset makes it difficult for the company to stray too far from what customers’ value. Likewise, when IBM was undergoing its legendary transformation from a hardware company to a software/solutions/consulting company, Lou Gerstner created IBM’s Operation Bear Hug, which required the top fifty officers to visit a minimum of five of the firm’s biggest customers within three months. The officers were to listen and take immediate action as needed.11 Direct contact also increases the opportunity for companies to observe unmet needs or pain points that open the door for innovation. Finally, customer visits can produce actual or photographic evidence of artifacts (physical objects from the customer’s home, business, or environment), which can inspire company solutions and innovations.

Evaluate Competitors Through Customers’ Eyes

Customer centricity does not mean the company ignores competitors. Instead, it means that companies work to see competitors through the eyes of their customers. This frame of reference helps companies uncover true weaknesses that need to be shored up or opportunities that might be exploited. It is dangerous for companies to become obsessed with beating the competition, as can occur in market share races. This approach causes marketers to take short-term actions such as price promotions to drive up market share. However, these same actions can erode customer equity and brand equity over the long run as customers are taught to focus on price and not value. It is also important that managers not feel compelled to mimic competitors’ strategies which may be a bad fit for the company and its value proposition.

Be Vigilant About Customer Value

Increasing sales can lull companies into complacency—a state that is quickly disrupted when competitors arrive with better solutions. Johnson & Johnson (J&J) fell prey to overlooking customer needs after it pioneered the stent, a device inserted to support failed arteries or veins of the heart. Within two years of creating the market, it had a 91 percent market share. Three years later it only had an 8 percent share. What happened? The initial product was only offered in one size and couldn’t be seen in an X-ray machine—both problems for heart surgeons. J&J was so busy meeting the strong demand for the current stents that they were too slow responding with improved versions that resolved these concerns.12 Competitors more receptive to customers’ needs stepped in and dominated the market.

How Should Firms Build and Sustain a Customer-Centric Culture?

Studies addressing this question all point in one clear direction—the firm’s leaders are the critical factor in a customer-centric culture. Research has found that leaders direct revolution-like change processes to bring about the disruption necessary to shift companies to emphasize customers.13

Other research shows that these managers must model customer-centric behaviors to front-line employees interacting with customers for change to happen.14 When Denise Morrison, the CEO of Campbell’s Soup Company told her employees, “Consumers first” or Jeff Bezos, CEO of

Chapter 16 Harnessing the Organization 285

Amazon asked, “What do our customers need?,” they were modeling behaviors they expect all employees to mimic.

Figure 16.1 synthesizes other factors that have been found in studies on this topic. First, the firm needs to attract managers and employees with a sincere desire to serve the customer and whose curiosity and open-mindedness ensure the company stays close to customer needs. Second, aligning leaders’ talk and walk is critical, as a customer-centric culture can only be built upon consistent leadership that employees can trust. Third, firms need effective informal and formal systems to continuously learn about how customers are changing and to disseminate customer successes and lessons throughout the company. Fourth, resourcing and rewarding customer- centric actions both enable and motivate right actions. Finally, it is critical to demonstrate that customer centricity pays off over the long-run for company performance.

CUSTOMER-CENTRIC COMPETENCIES A focus on the customer requires the company develop competencies to ensure it can perform customer-facing activities better than the competition over time. The most important is the firm’s market orientation, defined as the organization-wide generation, dissemination, and responsive- ness to intelligence, including insight, about the market.15 Over 100 studies of these competencies finds very strong evidence that a firm’s market orientation influences the firm’s customer

Align leader walk and talk

Offer resources and rewards

Build effective informal and formal

learning mechanisms

Build through values, beliefs, norms, behavior,

and artifacts

Attract curious open- minded human capital

Core value: Prioritize

serving target customers

over the long- term

Demonstrate impact across financial and

nonfinancial outcomes

Figure 16.1 Creating a Customer-Centric Culture

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performance (customer loyalty, customer satisfaction), employee consequences (organizational commitment, team spirit, and job satisfaction), and organizational performance (profits, sales, and market share).16

The ability to generate customer insights goes beyond market research, although competen- cies in this area will be tapped. Add to this the use of marketing analytics competencies that offer a 360-degree view of customers, social media engagement activities, and deep engagement with customers like when Harley Davidson managers go on rides with their customers, and you have the ingredients for the type of customer insight that can drive practice in profitable ways.

It also requires cross-functional, cross-division, and cross-country information sharing to ensure that a complete understanding of customers is gained and that information is not lost in any single individual or unit in the company. Strong horizontal (between functions, units, and countries) and vertical (from employees to leaders or leaders to employees) information flows throughout the company serve to educate people. Both formal and informal types of information sharing are important to this effort because formal reports are costly to create and may take too long to reach decision makers. Regular sharing also obviates the problem that a customer insight is taken for granted and not shared by its owner.

A final challenge to sharing customer insight is that it may involve bits and pieces of intelligence that need to be assembled for a complete picture. Employees generally don’t want to share half-baked ideas or hunches with their superiors. A particularly stunning example of the power of market orientation occurred in Organon, then a division of AkzoNobel.17 Organon was conducting clinical trials for a new antihistamine, and the secretary in charge of registering the trial volunteers for periodic medical checkups noticed that some participants were unusually cheerful. She shared her observation with the doctors who followed up with an investigation. It turned out that although the drug failed as an allergy treatment, it proved to be an effective depression remedy. There are several remarkable features of this account. First, the secretary was a true listening post for the company in that she was attending carefully to all of the signals, even those that seemed peripheral, in her work environment. Second, she shared her account with doctors, who had far more experience and knowledge in the area than she did. Third, the doctors took her ideas seriously and launched an investigation.

Moving customer insight into new strategies and new offerings is the final step in the market orientation competency. Resistance to acting on insight occurs when managers are risk averse and value the security of the status quo. Likewise, incentives that put a premium on short-term performance can interfere with making changes to existing strategies. Finally, if there is conflict between different areas of business and centralized decision making, new initiatives can easily get stuck in bottlenecks as they move toward approval.

Customer-centric competencies of any type progress through several stages to contribute to a firm’s sustained competitive advantage (Figure 16.2). First, vet the knowledge and skills that form the basis of the competency to ensure they will contribute to customer value. Second, assemble the competency by training, hiring, partnering, or acquiring the knowledge and skills. Third, embed the competency in both formal and informal organizational processes to ensure its continued enact- ment. Fourth, integrate the new competency with other competencies to create a stronger contribution to the firm and to make it more difficult for competitors to imitate. For example, a customer insight competency could be leveraged in conjunction with a firm’s R&D activities to generate stronger new product innovations. Finally, practice! Experience with a competency makes it more effective, more efficient, and harder to imitate as company experience accumulates.

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CUSTOMER-CENTRIC ORGANIZATIONAL STRUCTURE The Problem of Silos18

A major challenge to customer centricity in companies is the presence of silos or divisions of specialized company activities. Silos can arise from the division of labor across different functions, such as marketing, finance, R&D, manufacturing, and operations. Silos can also emerge when companies develop country or regional divisions that empower leaders to make decisions for these markets. Finally, many companies use product or brand groups that have profit-and-loss responsibility. These types of divisions have many advantages. Managers are close to the market or the offering, which allows them to become true experts. The same is true of functions— specialized training and experiences allow challenging operations, accounting, and marketing activities to be resolved with deep knowledge and skills. Divisions are also accountable for decisions and results, which empowers and motivates members to perform.

Despite these advantages, silos present challenges to a firm’s customer centricity and performance. To begin, communicating and cooperating across silos is challenging. This means that information related to customer insights, strategies, and key competencies is locked in a geographic or product division or in one of the firm’s functional areas. When this happens, activities that require across-company cooperation are unlikely to emerge or are doomed to failure. Relatedly, silos often prevent successful and unsuccessful marketing programs being shared. This limits the degree to which companies can scale their successes and learn from their failures. Scaling is particularly important in building marketing competencies that require cross-functional,

Identify company knowledge and

skills that contribute to

customer value

Assemble knowledge and skills (train, hire, partner, or acquire)

Embed in formal and informal organizational processes

Build experience and climb the learning curve

Sustained Competitive Advantage

Ensures competencies create

superior value

Makes competencies difficult to imitate

Integrate with other competencies to create complementarities (e.g., R&D)

Figure 16.2 Building New Marketing Competencies

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cross-product, and often cross-market activities to succeed. Silos hurt the company’s ability to ensure that new marketing capabilities in digital, marketing analytics, and social media can effectively span multiple areas of the firm. This means that competencies are not helping as much as could because they are stuck in one part of the firm. Likewise, silos can interfere with effectively serving customers who want solutions that span individual products and require the use of cross- functional account teams to develop and implement.

Lastly, a silo structure nearly always leads to the misallocation of resources across product and country silo units, functional teams, brands, and marketing programs. Take the case of a master or corporate brand, which is shared by many, sometimes all, silo groups. Each silo is motivated to maximize the power of the brand without any concern for the brand’s role in other business units. Especially when there is overlap in markets, inconsistent product and positioning strategies can damage the brand and result in marketplace confusion.

Managing Structure to Span Silos

Organize Teams to Span Silos

Teams that formally link members of different functions, brands, markets, and regions solve some of the problems. Rohm and Haas, the specialty chemical giant purchased by Dow Chemical, organized functional managers in new product development, technical support, supply chain, marketing, and manufacturing into account teams that served customers. A senior manager was assigned to each team as well. In conjunction with this move, R&H segmented its customers into one of three tiers. The bottom tier was turned over to R&H’s national distributors so the new customer account teams could focus on customers in the top tiers. On top of these moves, the product line was optimized to focus on the products most relevant to these top-tier customers.

Teams can also be used to span brands and regions. Teams or councils, such as Chevron’s Global Brand Council, HP’s Customer Experience Council, Dow Corning’s Global Marketing Excellence Council, IBM’s Global Marketing Board, or P&G’s Global Marketing Officer’s Leadership Team, are powerful vehicles to create consistency and/or synergy in marketing. These formal teams create opportunities for formal communication and also tie team members to one another informally which also improves communication.

Build a Matrix Organization to Span Silos

A matrix organization allows a person to have two or more reporting links. Several business units could share a sales force by having the salespeople report to a business unit as well as to the central sales manager. Likewise, an advertising manager could report to a central advertising group as well as a business unit. An R&D group could have a research team that reports to both the business unit and the R&D manager. As a result, the salespeople, advertising managers, and research team are each supported by a critical mass of employees and infrastructure that allows them to excel while still being a part of a business unit they serve. The concept of dual reporting requires coordination and communication and often appears to be the ideal solution to a messy situation. However, matrix structures can be unstable because attention and loyalty is divided across leaders and activities. It requires strong leaders who can command this dual attention and employees who can coordinate in these more complex ways.

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Align Around Customer Segments to Span Silos

This approach forms divisions, departments, or teams around the customer segment that is being targeted—not the product that is being sold. A “new mom” segment might house brands, new product teams, and customer relationship teams that are focused on serving first-time mothers. The division is led by a customer segment manager. Brand managers, under the customer managers’ direction, then supply the products that fulfill customers’ needs. This requires shifting resources—principally people and budgets—and authority from product managers to customer managers. This structure is common in the B2B world. Unilever, for instance, has key account managers for major retailers like Walmart. They are incentivized to maximize the value of the total relationship over the long term rather than sell any particular product. Some B2C companies use this structure as well, foremost among them retail financial institutions that put managers in charge of segments—wealthy customers, college kids, retirees, and so forth—rather than products.

The benefit of this structure is that it keeps the customer at the forefront of all activities— meaning attention is focused on uncovering unmet needs that lie outside the current brand and moving customers to more profitable brands in the portfolio. This wouldn’t happen in the conventional system where brand and product managers call the shots. Brand A’s manager is unlikely to encourage customers to defect to Brand B—even if that would benefit the company— because he’s rewarded for brand performance, not improving customer lifetime value or some other long-term customer metric. This is no small change: It means that product managers must stop focusing on maximizing their products’ or brands’ profits and instead are responsible for helping customer and segment managers maximize theirs.

Shell International has developed and transformed its organizational structure to align with specific customer segments (e.g., sectors for Shell).19 Instead of individual sales people in charge of different petroleum products each visiting the customer, key account managers supported by R&D product specialists regularly visit business clients in a sector, for example, food, marine, aviation, power generation, and mining. Trained in an understanding of the customer’s business needs, the account manager can efficiently sell the entire portfolio of products to the customer. Whereas Shell used to allow competitors to own parts of its customer’s business in areas where it lacked product alternatives, this organizational approach stimulated the development of new products so that Shell could own all of the business. For example, Shell developed a food-grade lubricant for Unilever’s food manufacturing facilities. Shell also partners with its customers to co-develop products that meet localized needs and customer preferences, such as perfumed products in Thailand or red-colored products in China. By aligning the organization around customer segments, Shell’s revenue per customer expanded and profits increased due to lower selling costs and the introduction of higher-margin products developed to address customer pain points.

Tighten Marketing–Sales Alignment to Span Silos

The benefits of structural changes that infuse customer-centric thinking into every corner of the organization can be magnified further with supporting efforts that break down silo barriers. A key place to begin is with the sales–marketing interface. Both groups should be working together to bring market realities into the rest of the organization. More often their influence is diluted because they behave more like feuding family members, with scant respect for each other and conflicting views of customer needs and requirements. Workable ways to align sales and marketing include dedicated team liaisons, mechanisms for sharing problems and information such as common customer data bases, and the alignment of incentives to recognize collective behavior.20

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For example, marketing could be rewarded for the number of qualified leads that are converted into new customers. At the same time sales incentives should be shifted from revenue to the profitability of the account.

Develop a Marketing Doctrine to Span Silos

A marketing doctrine is a firm’s unique principles, distilled from its experiences, which provide firm-wide guidance on market-facing choices.21 These principles ensure consistency in firm actions. For example, at Apple, Inc., these principles include, “Have the courage to cannibalize; don’t hang on to ideas from the past even if they have been successful; if we don’t cannibalize ourselves, someone else will,” “Put products before profits—push for perfection in products,” and “Take end-to-end responsibility for the user experience.” At a consumer-packaged goods firm, principles include “Brand positioning must be consistent across regions and over time,” “Differ- entiation must be supported by ‘reasons to believe’ that are based on tangible attributes,” and “Allocate marketing budgets based on brand potential, not current sales.” Research finds that these principles, which are generally very few in number, offer firm-wide guidance on the firm’s most important market-facing choices. Able to traverse silos, these principles can guide many aspects of the firm’s strategy, including its diversification and international growth decisions.

Centralize Selectively

Decisions as to what should be centralized will be based on the following questions: What activities span markets and to what extent is coordination key to making them effective? What brands span markets? Does market adaptation compensate for a dilution of the central message? GE Money resisted the “imagination at work” theme at first, and then ultimately came to believe that the value of the corporate effort was worth embracing as a standardized message to customers around the world. What truly requires local knowledge and management? Are there positions and programs that work across products and markets? Pringles, for example, requires different flavors in different markets, but most of the other taste and social benefits of the product work everywhere around the world.

METRICS AND INCENTIVES FOR CUSTOMER CENTRICITY Whether a strategy is effectively implemented is dramatically influenced by the company’s choice of performance measures and whether they are linked to incentives and rewards. Metrics such as customer satisfaction, customer loyalty, and net promoter score put the emphasis on ensuring that customers have products and services they value. Therefore, a sale is likely to receive customer loyalty, positive word of mouth, and an expanding share of wallet.

On the other hand, metrics such as short-term sales or profits can produce strong income statements in the short run, but problems in the long run. Customers may buy once, but not return and they may give the company negative word-of-mouth. Such incentives can also lead to an increase in opportunistic behaviors by employees and intentional marketer misbehaviors. These behaviors can include salespeople encourage sales that are not right for a customer or encouraging buying more than is necessary—both to meet sales quota. Other problematic behaviors include gaming the system, inaccurate reporting, preferential treatments to select vendors and clients, compromising marketing research integrity, and breaching client confidentiality. Such misbe- haviors result in the breakdown of customer trust and erosion of the organization’s brand equity,

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which have devastating effects on short-term share prices as well as long-term profitability and growth. The Wells Fargo scandal that broke out in August 2016 over the creation of fake bank accounts and the subsequent firing of around 5,300 employees showcases the catastrophic effects of ignoring customer centricity in the design of performance metrics and incentives.22

Wells Fargo had spent decades nurturing a brand image as the “Bank for Main Street,” far removed from the excesses of Wall Street banks. But Wells Fargo’s brand name was tarnished when federal investigations revealed that Wells Fargo employees secretly created over two million phantom checking accounts and credit cards for unsuspecting customers, complete with forged signatures, bogus email addresses, and fake PIN numbers—all created under pressure from bank supervisors to meet unrealistic targets set to beat stock market expectations. While Wells Fargo’s stock doubled in value between 2011 and 2015 and employees earned millions in performance bonuses, unsuspecting customers were charged overdraft and maintenance fees and many of them took “significant hits” to their credit scores for not paying dues on accounts that they did not even know existed in their names! In the end, Wells Fargo was ordered to pay $185 million in fines for its gross misdemeanor, suffered significant damage to its brand equity, and its market capitaliza- tion was greatly eroded.23 Additionally, as part of the settlement, Wells Fargo was ordered to make significant changes to its internal sales practices and monitoring processes to reduce the likelihood of similar future incidents. The lesson of Wells Fargo is that people will respond to the incentives they are given and misbehavior will be rampant if these incentives prioritize short-term financial gains over customer centricity and long-term performance.

Take as a contrast, Caesars Entertainment Corporation (formerly known as Harrah’s Entertainment)—an organization that placed customer centricity at the core by managing its marketing performance metrics.24 In 2000, Caesars made vast investments in information technology and data management, which helped the company capture transactional data to understand its customers’ entertainment preferences, gaming interests, and other behavioral patterns. Using this intimate customer knowledge, Harrah’s differentiated itself in the highly commoditized gaming industry by providing a unique, personalized experience to each of its customers. Caesars placed customer loyalty at the core of its business strategy and aimed to do everything possible to secure the loyalty of its target customer segment. Focusing on speed of service and hospitable behavior from employees, Harrah’s hit the target’s sweet spot.

These performance metrics were published in clear graphics each period comparing the specific property to its past performance and the performance of other casinos. These reports were visible to all employees in the “back of house” so that everyone understand which part of the organization, whether it was the valets or the bartenders, was doing well or underperforming. Importantly, 25 percent of senior executives’ annual bonuses was tied to customer satisfaction scores, which encouraged managers to take active measures to help improve customer satisfaction. Additionally, matters that didn’t address the needs of the customers didn’t receive much attention from the leadership.

LEADING FOR CUSTOMER CENTRICITY Several traits of effective marketing leaders have been discussed, including being a strong role model for customer centricity. What other management approaches are important to the success of marketing leaders?25 To begin, marketing leaders should focus on the strategic role of marketing, including customer equity and brand equity as well as growth and innovation. Marketing is too often equated with advertising or tactical level actions such as social media

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and coupons. To defeat this view, marketing leaders should focus on strategic-level activities that have the potential to grow the top line and contribute to the bottom line.

Marketing leaders should adopt an investment mindset. In many firms a short-term, expense- oriented approach is used to evaluate customer expenditure decisions. The fallacy of this mindset is that it leads to a “pay as you go” requirement that confuses cause and effect. Budgets for the sales force or advertising are set according to what the company can afford according to next year’s sales forecast, rather than making heavier investments that would spur future sales. Customer-centric firms view initiatives to manage marketplace interactions as long-run investments that drive future revenue and may, in fact, drive down costs.

Marketing leaders must be innovators—active participants in bringing an offering to development and to market. At General Electric, for example, marketing was instrumental in championing an initiative around improving the operational efficiency of aircraft based on “myEngines”—software that provides customers with real-time updates as to when repairs are required and how long they will take. Beth Comstock, Executive Vice President of GE noted, “. . . we have made sure that marketing has been redefined as innovation. We expect our marketers to be the champions of ‘what’s next.’”26 She also noted “You don’t get to be a 130 year- old company without developing some kind of resilience and an ability to be nimble. You certainly have to focus on today, but also be prepared for tomorrow. We expect our marketing and innovation teams to be the champions for that.”

Innovating marketing leaders should also focus on leveraging customers to co-create. The Differential Value Proposition (DVP) System combines software, data, and processes to foster conversations between GE businesses and their clients. These exchanges start with questions such as “If you had $1M of GE’s money, how would you spend it to best impact your business?” These conversations produce an assessment of the monetary value that GE brings clients over GE’s closest competitor. From there, these GE-customer teams create plans to increase the mutual value of the relationship. This involves mapping out “promises” that GE will execute over a given time frame and a monetary value these promises will deliver to the customer.

Marketing leaders must also be effective integrators, reflected in the ability to bring together different functional areas, product areas, partners, and geographies to deliver marketplace success. This can involve being a translator able to speak the language of design engineers, production, and finance people as well as easily “go native” in engaging with customers on their problems. It involves getting disparate people together. When she was Chief Marketing Officer, Beth Comstock recognized the need to link GE’s technological genius with its emerging commercial competency to serve new markets, new segments, and new customers. To do so, she created the Imagination Breakthrough Process, which fosters cross-company talent and cross-disciplinary engagement on future-oriented projects.

Marketing leaders must be effective implementers. This involves building strong talent, nurturing effective competencies, and ensuring that the best marketing tools are available and used by the business units. At GE, this also involved creating a central source of information about best practices and introducing metrics and processes that encouraged them to be used.

Marketing leaders must be good listeners to inspire customer centricity. They must have their ears to the ground inside the company and externally as they interface with partners and customers. This stance not only motivates employees to share critical information that can lead to important offensive and defensive moves but also increases the likelihood that following employees will also be good listeners. Tom Peters says that a leader’s four most important words

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are “What do you think?” —the use of which maintains a listening stance in their interactions inside and outside the company.27

Finally, marketing leaders must engage in transformational leadership to inspire their employees to become brand champions who build and reinforce an organization’s brand image. Transformational leadership involves motivating followers by aligning their personal priorities and values with those of the organization by acting as a role model who authentically lives the brand’s values and increasing followers’ sense of personal connection to and pride in the corporate brand. Research shows that high levels of transformational leadership lead employees to engage in high levels of in-role brand-building behavior (i.e., meeting the standards prescribed by their role as brand representatives) and extra-role brand building behavior (i.e., going above and beyond their prescribed role, such as by personally advocating for the brand outside of work hours).28

Importantly, this research also shows that leaders can be trained to be effective transformational leaders.

CUSTOMER-CENTRIC TALENT Hire Customer-oriented Employees

Just as companies vary in their customer centricity, so do individual employees. Some employees will have a stronger predisposition to meet customer needs. Research shows that employee conscientiousness (a tendency toward organization and precision), agreeability, and need for activity all increase employee customer orientation while instability and introversion decrease it.29

Other research shows that higher employee customer orientation reduces turnover and increase job commitment.30

Satisfied Employees Lead to Satisfied Customers

Research shows that employee satisfaction and customer satisfaction are closely linked.31

If employees are unhappy with how the firm treats them, it is nearly impossible to get them to focus on serving customers. Managers must compete on talent if they are to have a chance at competing on customer value. A central part of Marriott Hotels’ value proposition is consistency of operations so that customers are not surprised. Marriott achieves this largely through its oft-stated goal to “treat its people right.”32 As founder Bill Marriott says, “If the employees are well taken care of, they’ll take care of the customer, and the customer will come back . . . That’s basically the core value of the company.”33

Everyone Is Responsible for the Customer

The firm will not be successful unless all functions and employees perceive the connection between their work and customer value. For example, at the American Girl division of Mattel, designers, buyers, and inspectors are asked to focus on the joyful reaction of each young customer opening a gift, versus criteria such as cost per yard or acceptable defect rate per thousand. David Packard, co-founder of Hewlett Packard, pointed out that “Marketing is too important to be left to the marketing department.” His statement is not a condemnation of marketing, but rather a reminder to all employees about the connection between their work and what the customer experiences. Southwest Airlines brings this mentality to life by teaching employees a “systems

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level” view of the business, which stresses how actions taken by every member of the airline across every aspect of the business impacts the customer.

Educate Employees on Key Customer Requirements

When Gary Lovemen was CEO of Harrah’s Entertainment, he made sure that all employees knew what the company’s target customers wanted from the company in their casino experiences—fast service and a genuinely hospitable type of engagement. Employees were trained to understand how to deliver these qualities to customers. Customers were asked to rate employees in each part of the casino experience on these dimensions.

In other situations, retraining may be important given how easy it is to lose sight of what customers need when there are pressures to grow. CEO Howard Shultz took an extraordinary action after he had diagnosed Starbucks’s problems—he shut all stores at 7,100 U.S. locations for three hours on February 26, 2008.34 This unprecedented step was taken to re-educate baristas in how to deliver to customers the “art of espresso”—the central element in the unique mix of service, ambience, and great coffee the company refers to as the “Starbucks Experience.”

Disseminate Knowledge Among Employees

A system that facilitates communication and stores knowledge forms the most basic building block of developing customer-centric talent. The system can help employees share marketing informa- tion regarding customer insights, trends, competitor actions, technology developments, and best internal practices about processes, methods, strategies, and new products and technologies. Information can be shared through communication platforms such as knowledge sharing sessions, knowledge hubs, and the creation of a marketing university. Knowledge sharing sessions during formal and informal meetings not only result in information exchange, but also create channels of personal communication. Personal links can create a comfort level allowing colleagues to have frank discussions about proposed programs or potential problems, which can stave off a disaster or encourage a potential initiative. Knowledge hubs serve as an organized repository of data, experience, case analyses, and insights that make handling and exchanging useful information easy, efficient, and seamless across the entire organization. Frito-Lay sponsors a marketing university three times a year where thirty-five or so marketing directors and general managers from around the world come to Dallas for a week. The purpose of this marketing university is to involve and educate different regions about the language and models of the central marketing group and to share and collect insights that might help the organization improve overall. During the week, case studies are presented on tests of packaging, advertising, or promotions that were successful in one country and can be successfully applied to another country.

Empower Employees

Problems arise when employees are not empowered to take responsibility for ensuring the customer is successful or for helping the customer solve problems. “I just work here” or “That’s another department’s problem” are common phrases heard in firms without a customer-centric culture. A culture that tolerates passing the buck on customer problems will not get very far in creating value for customers or making money for the company. This cultural trait is strongest when it is backed up by recognition and advancement for employees who step up and take

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responsibility and by resources to help employees solve customers’ problems. At Ritz-Carlton, for example, the manager on duty has a $2,000 expense account each day dedicated to resolving customer issues. This money might be spent to offer a gift, such as a bottle of wine, a free meal, or an upgraded room to customers who have experienced problems.

Align Internal and External Brand

A powerful strategy to develop, nurture, and sustain customer-centric talent is to link the customer and employee value propositions under a unifying brand position. Southwest Airlines exemplifies this strategy by unifying its internal and external branding under the brand promise of “freedom.”35

Southwest’s external positioning is that low fares allow its customers the freedom to fly and enrich their life experiences through travel. Southwest’s internal positioning to employees reinforces the external positioning of freedom by offering eight basic freedoms—the freedom to pursue good health, create financial security, continually learn and grow, make a positive difference, travel, work hard and have fun, create and innovate, and stay connected. Employees are encouraged to personalize their freedoms to reflect individual goals and preferences. Furthermore, employees are given the freedom to show their authentic (and often very funny) selves to customers in their interactions on and off the plane. This consistency in branding ensures that employees receive the same concern, respect, and caring attitude from the company that they are expected to share externally with every Southwest customer. And by aligning the internal and external branding, Southwest is able to create a virtuous self-reinforcing cycle that has helped the company carve a profitable and sustainable competitive advantage in the airline industry.

KEY LEARNINGS

A customer-centric firm is one in which the customer is at the forefront of all the firm’s decisions and actions. Firms should have a customer-centric attitude to create value for customers and to grow long-term profits.

Firms can become customer-centric by creating an organizational culture that has shared values, beliefs, norms, behaviors, and artifacts that reflect a focus on the customer. There are well-known traits of customer-centric cultures and companies can build and sustain a customer-centric culture.

Building customer-centric competencies ensure that the firm has the sustained ability to perform a range of activities to create value for the customer and for the company. A firm’s market orientation is a competency that ensures it can generate, disseminate, and respond to market information. Creating an organizational structure that limits silos and breaks down barriers between divisions of the company is essential to customer centricity. Cross-silo communication and cooperation and other structural devices can improve the value a company delivers to customers. Metrics and incentives need to be aligned for customer centricity. Customer-focused performance rewards and metrics (e.g., customer satisfaction, net promoter score) ensure the company is measuring the customer’s experience and satisfaction and not firm outcomes (which should follow from satisfied customers).

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Customer centricity requires marketing leaders who understand the strategic role of marketing, have an investment mindset, are innovators, can integrate different parts of the company to serve customers, are good listeners, and are good implementers. It is important to hire employees who are customer oriented and feel responsible and empowered to fulfill this role.

FOR DISCUSSION 1. Subscription-based delivery companies, such as Blue Apron and Birchbox, are growing

rapidly, but competition in the area is growing as well. Using the ideas from this chapter, how should they respond to these competitive threats?

2. Identify the different groups within a major U.S. airline that could be operating in silos, then design one approach for how the company could be structured to cut across silos and stay close to the customer.

3. Design a customer-centric incentive program for retail employees at a sporting goods store.

4. Imagine you are the new marketing manager for a chain of hospitals that views its clients as patients rather than customers. How, if at all, would you lead your team and persuade your bosses to encourage a more customer-centric perspective?

5. A hotel is implementing a new training program for employees to increase customer satisfaction rates. How would you design the training program to be as effective as possible?

BEST DIGITAL PRACTICE

Itau Unibanco

Itau was founded as a family business in 1945 as Banco Central de Credito S.A. In 2008, Itau merged with Unibanco (founded in 1924, also as a family business) with the goal “to be the leading bank in sustainable performance and customer satisfaction.” By 2016, Itau Unibanco reached US $65.2 billion in market cap, with stocks on the NYSE. Itau Unibanco is the largest privately owned financial conglomerate in Latin America and is among the largest banks by market cap in the world after acquiring a series of local and international banks over the years. Interbrand recognized Itau Unibanco as the most valuable brand in Brazil 13 consecutive times between 2004 and 2016.

How did Itau Unibanco achieve this status? One foundational reason is a strong focus on customer satisfaction and how to achieve it. Beginning in 2003, Itau recognized that customers wanted secure, fast, and convenient banking and that technology was needed to deliver it. The bank introduced usability methods to get closer to the customer and to understand how to improve the banking experience. This involved observing customers actually using banking technologies and gathering customer feedback during the process. Although development cycle times were long, the strategy worked and by 2009 the company secured its leadership position in Internet banking as evidenced in customer satisfaction scores.

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However, Itau Unibanco foresaw the online space becoming even more important—digital transactions grew from 26 percent in 2008 to 38 percent in 2010 while traditional physical transactions decreased from 74 to 62 percent in the same period. Aware of the demands from digital customers, Ricardo Guerra, head of Digital Channels, convinced the Board to invest in 200+ new employees who would understand the entire design cycle—from customer experience to technology design. These included anthropologists and sociologists who go into the field to generate customer insights and segment customers based on their behaviors, designers who come up with solutions focused on known and unknown customer needs, and technologists who were willing to participate in building solutions and improving them over time.

Progress was made, but as Ricardo Guerra shared, “We were still working for the bank and its stockholders. We needed to do what was best for customers, which is, in the end, best for the bank.” The bank made even bigger commitments to the digital transformation. First, it defined six areas the company should emphasize—technology, user experience, innovation, communication, CRM, and business financial performance. Ricardo Guerra noted that the company had to focus on “reading customer behavior to drive solutions.” Second, it focused on three key methods—design thinking, customer-centric design, and agile development. Third, it defined shared goals for IT and the banking lines of business (involving products and services), to ensure these groups were not working in silos but collaborating in selecting and managing technologies to enable new business opportunities and advance performance metrics. Although top-notch programmers might leave the company because they wanted to be insulated from business pressures, leaders knew the risk was worth taking to set appropriate culture and behavior in the company.

Fourth, the bank made several structural changes. It moved from a product-based structure to one that focused on the customer segments’ experiences, such as the one dedicated to high-income customers, Itau Personnalite. This change re-directed employees’ attention to the customer (not on the products and services). Finally, leaders did not dictate how goals should be achieved. Instead, they empowered people to make more decisions. They flattened the organization, effectively putting business and technology leaders in direct contact with teams on a weekly basis. Using an approach that mimics meetings between startup owners and venture capitalists, teams update leaders on project results, share challenges and propose next steps to test solution hypotheses with customers. This approach allows the company to cut through layers of bureaucracy, get to customer solutions faster, foster cohesive teams, and generate trust among people across different levels and divisions.

By the third-quarter of 2016, 72 percent of customers’ transactions occurred through digital channels, such as Internet and mobile banking. To support this trend, Itau created the digital branch concept, in which account managers and product specialists are available from 7AM to midnight through email, SMS, chat, and videoconference for more than 2.2M mid- and high-income consumer segments. Two years after its launch, this operation accounts for 40 percent of these segments’ financial results. By October 2016, all small and medium enterprise (SME) account managers were equipped with videoconference-capable smartphones and tablets, enabling them to deliver all products to $300K + SME clients with no or minimum back-office involvement. This improved the speed and effectiveness of service, while also reducing its costs.

Mobile has become a ubiquitous experience among Itau Unibanco customers over the last few years. Between 2013 and 2016, the number of customers using mobile phones to access their bank accounts more than doubled, mainly among low-income customers. To act on this opportunity, Itau tested a remote way of opening accounts through mobile phones by launching the Itau AbreConta app. In less than two months, more than 36,000 accounts were opened, exceeding all expectations. According to Ricardo Guerra, Itau Unibanco worked to change Brazilian Central Bank regulations to allow people to open up accounts online.

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Itau has also expanded its collaborative, cross-functional digital operations to accommodate the startup ecosystem by creating a co-working space named Cubo that hosts 55 startups. This venture nurtures the Brazilian entrepreneurial space, promotes inspiring and networking events, and gives the bank access to top-notch talent in the digital space.

Itau Unibanco’s culture was an important part of the success of these strategic and structural changes. Nosso Jeito (Our Way) consists of seven attitudes that reflect expectations. These include “It’s only good for us if it’s good for our client,” “We’re passionate about performance,” and “Simple. Always.” Acting on these cultural values, leaders pushed teams to implement solutions that could disrupt and expand current experiences. This approach was risky, so leaders also had to allow failure in the short term. Moreover, leaders sent a message to the whole organization through the annual Walther Moreira Salles Award, which recognizes best practices and results in categories such as customer satisfaction and innovation. In 2015, 803 projects were registered to compete for the award.

Itau Unibanco’s digital retail financial results increased by 43 percent between 2014 and 2016 and secured its leadership position in digital satisfaction, scoring 9 and 8.5 points out of a 10 point-scale for consumer (noncommercial) and SME segments, respectively. In addition, Itau was recognized as the most reputable bank among retail banks in the 2014 Brazilian Consumer Satisfaction Index (BCSI).

Ricardo Guerra summed up Itau Unibanco’s successful journey by noting: “Over the years, we have thought about and revised our solutions, our branches, our customer service model, and the way we work. We progressed by bringing the client into the core of our operation, working to strengthen the bank’s availability and the client’s experience.”

Questions:

1. What organizational factors were important to Itau’ Unibanco’s digital transformation?

2. What growth opportunities do you envision for Itau Unibanco and what is the best organizational approach to develop and implement these growth strategies?

Sources: Interview with Ricardo Guerra, Itau Systems and Architecture Executive Director.

Itau Unibanco Consolidated Annual Report 2015, https://www.itau.com.br/_arquivosestaticos/RI/pdf/ en/Itau_RAC_2015_ing.pdf?title=Consolidated%20Annual%20Report%20-%202015.

Itau Unibanco Institutional Presentation (3Q16), http://www.itau.com.br/_arquivosestaticos/RI/pdf/ en/ITUB_Institutional_Presentation_3Q16.pdf.

Transforming Experiences: Banking in the Digital Age, Itau Unibanco, November 17, 2016, https:// apimec.mediagroup.com.br/eng.asp.

BEST GLOBAL PRACTICE

The Phillips Journey to Customer Centricity

In early 2000, Philips Electronics, the multinational company based in the Netherlands, was widely seen as a trusted but dull global company. With a history of technology leadership, it had a well- entrenched culture with a “factory mind-set” that focused on reducing costs while improving current product performance. The company was under-performing relative to its potential—sales had flat-lined

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and net income was negative. One analyst criticized, “Philips is a company that consistently destroys shareholder value.” This occurred for several key reasons.

First, the company was organized into six loosely related product divisions (including lighting, consumer electronics, appliances, and medical systems) with a legacy of entrepreneurial country operations that impeded global coordination. Second, there was a costly muddle of hundreds of different brand names that lacked both ties to Philips and a meaningful umbrella positioning theme. Third, there was no unifying thrust to what strategic marketing should or should not do. Fourth, the marketing capabilities at the corporate and business levels were weak—even though each product division had its own CMO.

The transformation to a customer-centric organization was orchestrated by the CEO, Gerald Kleisterlee. A key first step was to establish a corporate CMO function. Following a worldwide search, the position of group-wide CMO was awarded to Andrea Ragnetti, a former P&G manager who was heading Telecom Italia’s efforts to become more market-driven. Kleisterlee charged Ragnetti with turning Philips into the “P&G of its space,” which meant new growth driven by customer insights.

Ragnetti’s first move was to constitute a strong and committed marketing board made up of the CMOs from each product division to share best practices and coordinate activities. The second move was to start a Philips Marketing Academy to enhance marketing capabilities throughout the organiza- tion. These two moves were designed to work in tandem to help nurture common projects, showcase best practices, and facilitate networking across divisions. A third move was to form the “Simplicity Advisory Board” comprised of health care, fashion, design, and architecture specialists from outside Philips that would ensure the company was focused on the customer and also innovative.

Meanwhile, the existing Global Brand Management group that reported to Ragnetti was investing heavily in gathering customer insights. The research program engaged over 1,650 consumers and 180 customers in 120 in-depth interviews, 24 focus groups, and 1,439 quantitative interviews. That work revealed deep customer frustration with the difficulty of using technology and with the complexity of buying from Phillips. Instead, customers wanted simplicity in their lives and technology that got the job done. They also wanted an easier way of doing business with Philips. Phillips’ current umbrella positioning of “Let’s Make Things Better” lacked coherence and clearly did not signal a focus on the customer.

After much debate, a new umbrella positioning called “Sense and Simplicity” was chosen. It was based on three brand pillars:

■ Designed around you: “This means all our activities must be driven by insights into how our customers experience technology.”

■ Easy to use: “People should be able to enjoy the benefits of technology without any hassle or frustrations.”

■ Advanced: “The central idea is progress . . . something is only truly advanced when it improves the lives of people.”

The adoption and implementation of the new positioning theme was not smooth, however. Some opponents were worried about the fate of products that contradicted the brand promise, while others did not want to bear the €80 million cost of the initial campaign. At this point, the CEO stepped in and forcefully decided to proceed.

The implementation of the new value proportion had a huge impact on the traditionally technology-driven company. All new product development projects had to go through a rigorous process called the “Value Proposition House and Marketing Funnel” that demonstrated how well the

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offering fit the three brand pillars. The process also ensured a clear connection between customer insights, what Phillips was offering in the value proposition, and how this was unique relative to the competition.

The new customer-focused initiatives influenced hiring decisions and annual review criteria used by HR. This meant that employee criteria and the customer value proposition were now aligned. The brand pillars were also used to introduce improvements to the sales organizations within each of the product divisions. New, more collaborative sales models that focused on bringing simplicity to customers were piloted and rolled out. Results indicated that the new systems were working as Philips began to rack up awards in this area.

One of Ragnetti’s key hires during this time was Geert van Kuyck as senior vice president of global marketing management in fall 2005. Van Kuyck, also a former P&Ger, was the vice president of marketing for Starbucks when hired. He was charged with, in his words, “bolting the brand promise to the company.” In 2006, van Kuyck began piloting a program that used the Net Promoter Score (NPS) measure to evaluate Philips’ performance with the customer in three product units: oral care, MRI, and TVs. NPS was chosen because it connected the customer and the product or service offerings, and it was simple enough to be used across all the units. The pilot study showed that it predicted customer behavior well. Specifically, a high NPS predicted Philips’ ability to drive revenue, retain margin, and improve share of wallet. Based on this success, the program was then rolled out to other units, using a variety of approaches such as digital strategies, warranty cards, and a survey of business partners. The company evaluated Philips’ NPS performance relative to competitors and relative to its goals. This singular focus helped drive attention toward the customer inside the board room. The CFO began thinking about investing in customers for whom high NPS could be achieved, and the chief strategy officer began thinking about product portfolio decisions from the customers’ point of view. Even R&D adopted a “beta NPS” in which it used NPS to evaluate customers’ response to early products. These types of changes inside the boardroom and throughout the company made it clear that managers understood, in van Kuyck’s words, that “Profits don’t get made in the factory anymore.”

With a single-minded focus on the customer, Philips has seen improvement in the company’s consumer and professional businesses, from its power base in Europe to highly competitive emerging markets such as China and India. By 2007, revenue from new products introduced within the previous two years had increased from 25 percent to 53 percent of the company’s total. Interbrand estimated that the value of the Philips brand had risen from $4.4 billion in 2004 to $7.7 billion in 2008, mainly because of improved earnings.

Apropos of Philips’ deep commitment to customer focus, in January 2008 Philips implemented a new organizational structure focused on market sectors—Philips Healthcare, Philips Lighting, and Philips Consumer Lifestyle. The product divisions disappeared. At that time, Ragnetti was appointed CEO of Consumer Lifestyle and Geert Van Kuyck was appointed CMO.

Philips proved remarkably resilient throughout the recession. Brand value grew, NPS scores were the highest the company has ever seen, with 60 percent of revenue coming from markets where Philips is the NPS leader. Even in markets such as construction in Spain, where competitors have seen a 40 percent drop in business, Philips has held its performance levels for the year.

Fast-forward to 2013 when Philips unveiled a new brand logo “Innovation and You,” which was cited by Philips to signify the company’s continued emphasis on ensuring that innovation is only meaningful if it is based on an understanding of people’s needs and desires. As noted by current Philips Chief Executive Officer Frans van Houten, “We believe that the new brand positioning much better reflects Philips’ mission to improve people’s lives through meaningful innovation.”

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Questions:

1. How did the new brand positioning guide the firm’s customer centricity?

2. Why was the Net Promoter Score an effective metric for Philips to adopt during its journey to customer centricity?

Source: This case is adapted from George S. Day and Christine Moorman, Strategy from the Outside In, New York: McGraw Hill, 2010 and Sean Meehan, The Philips Marketing Journey (A), (B), and (C), Lausanne, Switzerland: IMD, 2007. http://www.newscenter.philips.com/gb_en/standard/news/ press/2013/20131113-Philips-unveils-new-brand-direction-centered-around-innovation-and-people. wpd#.UvpZn2J5PnF

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C H A P T E R S E V E N T E E N

How Marketing Activities Create Value for Companies

“As a marketing leader, I must accept the burden of proof that our activities create value for the company.” —Benjamin Karsch, CMO, Revlon

“Traditionally, marketing activities focus on success in the product marketplace. Increasingly, however, top management requires that marketing view its ultimate purpose as contributing to the enhancement of shareholder returns.” —Rajendra Srivastava, Tasadduq Shervani, and Liam Fahey, Journal of Marketing

At its best, marketing creates value for customers and for companies. Previous chapters have identified some of the ways, including smart growth strategies and management of customers and brands, that effective marketing produces firm value. This chapter formalizes these ideas beginning with a review of how marketing impacts revenues, such as those found on an income statement, and then moves to how marketing impacts more finance-based measures associated with firm cash flows.

To begin, it is important to adopt a mindset that should seem natural at this point in the book, but that is uncommon in businesses—that customer equity, brand equity, and the associated competencies important to their creation are among the company’s most important strategic assets. These resources are difficult to create, are even more challenging to imitate and substitutes for their roles are not easily identified or purchased. As a result, these resources can be critical generators of sustainable competitive advantage for the firm.

These resources are what accountants call “intangible” assets and, in general, they do not appear in a firm’s balance sheet where other tangible assets such as plant and equipment, raw materials, and finished products appear. Although the “goodwill” category on the balance sheet may include some of the value of a firm’s brand equity, the full value of the firm’s customer equity and its powerful marketing competencies are noticeably absent. This general status has over time made many companies less clear about the value of these intangible marketing assets and the investments made to develop them. It also creates other managerial challenges that will be discussed at the end of the chapter.

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There is a strong case to be made for placing marketing assets alongside other tangible assets. As shown in Figure 17.1, tangible assets, such as plant and equipment, compare well with intangible marketing assets, such as customer and brand equity, on important company outcomes.1

THE IMPACT OF CUSTOMER AND BRAND EQUITY ON FIRM REVENUES How Strong Customer Relationships Increase Firm Revenues

Recall that customer equity is the sum of a firm’s lifetime value of its customers. This intangible marketing asset is built on the firm’s ability to maintain relationships with customers. Beginning with this retention payoff, loyal customers exhibit several behaviors that contribute to higher firm revenues.2

Lower Defection Rates

The fiscal rewards of customer retention are on display at USAA. In auto insurance, USAA has a customer retention rate of 96 percent, compared with 80 percent retention for the average competitor such as Geico or Esurance.3 This means USAA must replace only 12 percent of its customer base every three years versus 49 percent for the average firm. Profits are higher due to lower costs because new customers do not need to be recruited and current customers need fewer incentives to stay.

Tangible Assets (e.g., Plant and Equipment)

Intangible Marketing Assets (e.g., Customer and Brand

Equity)

Lower costs Enhance productivity Strong customer relationships and related knowledge lower sales and service costs

Attain price premiums

Leverage plant and equipment to create superior product functionality, features, and durability, which allow company to charge higher prices

Strong brands improve perceived value of offering

Generate barriers to competitors

Expensive for competitors to compete on plant and equipment

Customer loyalty increases switching costs for customers to purchase from competitors

Improves value of other firm resources

Modern plants and equipment can increase employee productivity

Satisfied customers are more responsive to marketing expenditures and new products

Create growth options for managers

Plant and equipment can be shared across products the firm might sell

Strong brands can be leveraged to introduce extensions in current and new categories

Figure 17.1 How Intangible Marketing Assets Compare to Tangible Assets

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Greater Share of Wallet

Of the 64 ounces of liquid consumed in a day, how much does the average person give to The Coca-Cola Company? How much of its logistics budget does Amazon give to UPS versus Federal Express? The answer to each question provides the company’s “share of wallet”—in short, the percentage that the company gets of the customer’s total expenditure in a category. Loyal customers are more likely to give greater shares to companies they value.

Cross into New Categories and Buy New Offerings

When customers cross over from Disney films to Disney theme parks to Disney stores, it’s a big win for the company. Compared to a new or casual customer, those with multiple connections to the firm are less expensive to reach and are more likely to make purchases across categories. This fact has been established in both business-to-business markets and business-to-consumer markets.

Endorse the Firm

Customers provide value to companies when they spread positive word-of-mouth. Three types of advocates can help the firm—early adopters, opinion leaders, and mavens. Early adopters are valued for their expertise in the category. These aficionados have deep knowledge about products in a category and are among the first to try new products. Opinion leaders may not have the depth of knowledge of the early adopters, but these loyal customers are revered for their social standing and drive market acceptance by the force of their recommen- dations. Mavens know a great deal about what can be purchased, at what price, and where. These social butterflies gain satisfaction from helping others find what they need in the marketplace.4

Many top firms, including GE and Charles Schwab, use the Net Promoter score to measure the power of these and more general advocacy networks. The score is derived from regular surveys of the firm’s current customers. Customers are asked a simple question: “How likely is it that you would recommend [company X] to a friend or colleague?” Customers respond on a 10-point scale, where 10 = “extremely likely” and 1 = “not at all likely.” Promoters are those giving the firm a 9 or 10, detractors are those giving the firm a 0–6, and passively satisfied customers are those giving the firm a 7 or 8. Based on these choices, the Net Promoter score is the % Promoters % Detractors. A company’s NPS trend offers insight into performance over time as does buying access to industry benchmark data available from vendors.5 Research shows that this score has a strong positive relationship with a firm’s three-year growth rate.6

How Strong Brands Impact Firm Revenues

Most of the customer equity benefits driving revenues also apply to brand equity. In this section, several unique outcomes are identified.

Increased Brand Consideration

An important feature of strong brands is that they are more easily recalled from memory when the need for a product or service is triggered. This ease of retrieval puts the brand in a strong position to enter the customer’s consideration set as she move through the purchasing journey. However, even if a brand is not easily retrieved from memory, it is also useful if the brand is recognized when

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the customer begins to search. This status increases the likelihood that the brand will be given more consideration in the process.

More Likely to Purchase

When visiting the computer monitor aisle, the venerated electronics brand Samsung stands out compared to lesser known brands such as Acer. Strong brands, such as Samsung, bring reassurance and confidence about the purchase decision to customers unwilling to spend more time accumulating information. For the same reason, distributors and retailers are much more disposed to carry a brand that is well known, with built-in demand, than one that is new to the market. This behavior is especially true when buying a product that is expensive and infrequently purchased, such as a car, or when purchasing a product in a market in which it is difficult to make comparisons, such as medical services.

Pay Price Premiums

Strong brands generally command price premiums in the marketplace relative to weaker brands. Prices need to be in the range of parity for a premium automobiles, of course, so outrageously high prices are not the focus. However, when a customer trusts a brand and prices are aligned with the total value they are receiving, prices receive less attention in the search and negotiation process. One research study reports that the average premium for strong brands is 10.8 percent—which is sizable.7 It follows that customers are less likely to switch on the basis of a price change. Price-to- switch is a metric that uses this idea. It asks customers how low the price of a competing brand has to drop before the customer is willing to switch from one brand to another. That differential is the value of the brand to customers. For many strong brands, there is no price at which loyal customers will switch.

Becton Dickinson, maker of the color-coded plastic tubes and blood collection system used to collect venous blood samples, was being pressured by a large hospital buying group in 1985 to replace the Vacutainer brand name on its product with the group’s brand name. Although the customer represented 10 percent of the entire market, Becton Dickinson was prepared, if necessary, to lose the customer in order to protect its brand name. It correctly viewed the brand name as a symbol of the company’s quality and innovation. Without it, products would not be recognized, could not command a price premium, and would ultimately become undifferentiated. In the end, Becton Dickinson did not give in and remains a market leader today.8

Bigger Growth Options

Strong brands are a growth platform. In financial terms, strong brands have greater option value that the company can convert into new offerings in a current category or into new categories. It was for this reason that Unilever made Dove—a soap brand—into a master brand in 2000. With this shift, the company expanded the brand’s authority into new categories such as hair care, deodorant, and lotions. Growth options can also be found in co-branding alliances. Companies seek out other companies to combine their brands in a new product. Companies that contend for those partnerships have strong brands that complement one another. This is why the Ford launched two generations of Explorer vehicles in partnership with Eddie Bauer, which offered special trims and other internal design features associated with the outdoor company.

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Stronger Endorsements

Like strong customer relationships, strong brands foster endorsements. However, an important difference is that in addition to customers who have first-hand experience with the brand making endorsements, strong brands also arise from non-customers who share what they think and know about brands. This can happen via word-of-mouth at a dinner party, on Facebook, or in on-line forums. People share both positive and negative information about stores they have not visited, consultants they have not hired, books they have not read, and movies they have not seen— although bad information often spreads faster. When both customer and non-customer networks endorse, brand knowledge is built, brands enter consideration sets, brands are adopted more quickly, and price premiums may be possible. The power of these social network effects is evident in the fact that many strong brands, including Starbucks, Krispy Kreme, Zara, and McKinsey do little to no media advertising.

THE EFFECT OF MARKETING ASSETS ON FIRM VALUE Rising revenues, while important to firm performance, are not going to guarantee marketing leaders a seat in the firm’s top management team. More importantly, revenues do not fully capture the many ways that marketing impacts the firm. To do so, a stronger connection to the firm’s long- term value is necessary. The impact of marketing on firm shareholder or market value is a metric used in public companies to gauge its long-term expected value. Defined as the net present value of all future cash flows expected to accrue to the firm, research has shown that firms with high customer satisfaction scores tend to beat the average stock market effects in any given period. For example, a recent study found that the cumulative company stock market returns from 2000–2014 for firms with strong customer satisfaction were 518 percent compared to a 31 percent increase for the Standard & Poor’s 500.9

Not without controversy and valuation challenges, this finance-based view is grounded in the assumption that the stock market examines firm actions, then increases or decreases the firm’s future value to reflect its assessment of how those actions are expected to change the firm’s future profits. While firm value can be defined in a multitude of ways, a commonly utilized practice in finance is the Discounted Cash Flow (DCF) model. The basic premise behind this model is that the present value of all future firm cash flows, where cash flows are the net of cash entering the firm (revenues) and cash exiting the firm (costs).

The calculation utilized for the DCF model is PV N

t 1

FCFt 1 i t

where PV, the present value

of the firm, is the sum of a firm’s future cash flows (FCF) in a given period (t), with each cash flow being discounted by the relevant discount rate (i) that reflects a measure of the risk associated with the firm and market. The model sums (Σ) over the total number of time periods (T) to some predetermined point in the future often referred to as the “terminal value” of the asset.

Given this model, there are four key ways that marketing assets can improve the future value of a firm’s cash flow: (1) the firm’s cash flows can arrive sooner (affects t); (2) the firm can receive higher cash flow levels (affect FCF); (3) the firm’s cash flows are less volatile (affect i); and (4) the firm’s cash flows are less vulnerable (affects i). Each of these is now discussed.

Faster Cash Flows

Strong brands and customer relationships can positively impact the speed at which the firm collects cash flows in many ways.

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Faster Brand Retrieval

Strong brands can increase the speed of brand recognition and recall. A strong brand, meaning a memorable brand with positive associations, will likely occupy the top of a consumer’s mind. Such brands are easily retrieved and can often become symbols of the category overall, just as Kleenex and Xerox represent tissues and copying machines. Research shows that this status not only makes the firm’s brand more likely to be recalled, but other less well-known brands less likely be recalled!

Faster Purchase Decision

Cash flows will also be accelerated with a strong brand due to the fact that consumers trust strong brands, which means they are more likely to accept uncertainty and give these brands the “benefit of the doubt”—both of which speeds up the decision-making process. The same effect occurs with strong customer relationships. This accelerated process relates not only relates to the firm’s existing portfolio, but can extend to new offerings the firm puts forward. The reason is similar— brands are a strong signal that increases customer confidence, lowers customer risk, and cuts off the need for more search.

Faster Response to Marketing Spending

Customer response to marketing spending should also be faster for strong brands and relation- ships. This is because, all else equal, customers more easily retrieve their stored memories of the brand and take action when given the opportunity. For example, when P&G puts a coupon in the Sunday paper for its Pantene shampoos and conditioners, it gets clipped and saved for the next shopping trip whereas an unknown brand may need to engage in other brand-building or trial-inducing strategies. An added benefit of these faster responses is that the firm may need to spend less overall in order to achieve profit or market share goals.

Business customers also respond more quickly to brands they trust. When Google was planning the Pixel smartphone—the first Google-branded product in the Android line-up in 2016—negotiations with intended manufacturer Huawei fell through. Google was left with a very short timeline in which to develop and launch a version of the Pixel with another manufacturer. How could they find a partner in time to pull this off? In this moment of potential crisis, with about half the time typically needed to develop a new smartphone, Google turned to a trusted brand and long-standing relationship partner, HTC. The two companies had collaborated on the very first Android device in 2008—the HTC Dream—and had a working relationship since. It was this relationship and foundation of trust between the two brands that enabled them to design and successfully launch the Pixel on its accelerated schedule. Because HTC had invested in its relationship with Google in the past, it was able to beat out the competitors and capture this major partnership opportunity.10

Higher Cash Flows

Cash flow levels can increase in two key ways: increasing revenues or reducing costs. The revenue benefits of strong customer relationships and brands have been examined in a previous section. Although nonobvious, marketing can also increase firm cash flow levels by reducing costs in several important ways.

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Lower Marketing Research and New Product Development Costs

Strong customer relationships not only allow a firm easier access to customers’ wallets, but also to their thoughts. These relationships can translate to greater communication, engagement, and transparency. When customers are more willing to engage with the firm, they more readily offer feedback that would otherwise require more spending on market research. Beyond these insights, firms can also benefit from the creativity and unique knowledge of their long-term customers. When Lays Potato Chips calls on customers to submit new flavor ideas or Lego introduces new boxed sets from customers’ creations, they effectively outsource parts of the otherwise-costly creative process to their base of engaged customers.

Lower Marketing Expenditures to Acquire Customers

If the firm has already established a reputable brand, it will need to incur fewer resources to attract new customers. This is the case because, as mentioned earlier, strong brands benefit from customer endorsements and positive word-of-mouth (WOM), which can translate into lower advertising or marketing expenditures.

Lower Employee Pay

Research shows that strong brands can reduce costs by lowering employee pay. The reason is that employees are eager to work for reputable brands in order to build their resumes or to receive other identity-based benefits of being associated with a strong brand. This effect was quantified as the following cost reduction—a one standard deviation increase in brand strength is, on average, associated with an 11.8 percent decrease in pay, which translates to roughly $1.2 million in yearly savings per firm.11

Better Human Capital

Just as brands stand out to customers in the market, they also stand out in the labor market. Potential employees often learn about companies by interacting with them as customers or through endorsements in social networks. These reputation effects make employees more likely to join and to stay with companies with strong brands, which lowers costs and boosts effectiveness if strong brands get a better selection of top employees. For example, Google has been listed as among the top ten firms on Fortune’s annual survey of “Best Companies to Work For” since 2007. It is also among the fastest rising brands valued by Interbrand in Business Week’s “Best Global Brands” during this same time period. It is not surprising that these metrics moved in the same direction for Google.

Lower Costs of Debt

A reputable brand can reduce the costs associated with financing its operations. Research demon- strates that a one unit increase in a firm’s customer satisfaction scores (measured by the American Customer Satisfaction Index, see www.asci.org) is associated with a 6 percent increase in credit ratings and a 2 percent decrease in cost of debt financing.12 With lower interest rates, cash flows should increase.

Larger Relationship Investments. Companies benefit when customers make investments on their behalf. Among B2B customers, commitments can be small, such as investing in a joint promotion for the channel. However, these investments can also be substantial, as when custo- mers build specialized equipment, locate the firm’s managers on site, train employees to sell a

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product or service, and even build shared information systems. For example, Walmart has cost-saving partnerships with P&G that focus on increasing the efficiency of order placement, order processing, cross-docking, and inventory holding and P&G, as a customer, makes invest- ments in Walmart to achieve these goals. These investments also benefit the firm because they make it much less likely customers will leave the relationship given these investments will be lost.

Less Volatile and Less Vulnerable Cash Flows

The volatility and vulnerability of cash flows reflect two different risks to a firm’s cash flow, which, in the DCF model shown earlier, reduce its value. Volatility refers to the stability of cash flows over time and vulnerability refers to the firm’s ability to withstand internal errors or competitor attacks.

Greater Customer Stability

Firms with strong customer relationships are more likely to have higher customer retention rates. Higher retention means that the firm experiences a more predictable revenue stream, which lowers cash flow volatility. When firms improve customer retention by 1 percent, they gain a 5 percent increase in firm value. This makes retention almost five times more powerful as a lever for enhancing firm value than focusing on increased margins or a lower cost of capital.13 Higher retention also means that firms do not need to replace customers and incur new acquisition costs, which are usually higher than past acquisition costs due to inflation and other economic pressures on employee salaries.

Stronger relationships also benefit business-to-business firms because deep partnerships with upstream suppliers and downstream customers allow the firm to smooth its operations in reaching the market with products and services. This is due, in part, to the fact that strong partnerships foster investments, including human and financial resources, that make the relationship function more efficiently. Companies in strong partnerships are also more likely to share information about demand, competition, and other bottlenecks that threaten performance and to do so more quickly in order to thwart problems.

Protection Against Rival Switching Strategies

Warren Buffet, perhaps the greatest investor of all time, describes a strong brand as a moat—the body of water surrounding a castle that protects it from invading armies. Strong brands are moats because customers have a great deal of stored knowledge about strong brands, can easily retrieve these brands from memory, and know they can trust and rely on these brands. As a result, customers will be unlikely to be open to competitive offers to switch, including price deals. Profiling Coca-Cola, Buffet noted, “Coca-Cola is associated with people being happy around the world . . . wherever they are happy, at Disneyland, the World Cup, the Olympics—happiness and Coke go together. You give me . . . I don’t care how much money and tell me that I’m going to do that with RC Cola around the world; to have 5 billion people around the world have a favorable image of RC in their minds—it can’t get done. You can fool around with the formula, have price discounts on the weekend—you can do anything you want to do, but you’re not going to touch it. That’s what you want to have in a business—that’s the moat and you want that moat to widen.”14

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Protection Against Rival Entry

Strong customer relationship and strong brands are also a barrier to entry for new competitors. Prospective entrants face a daunting challenge when they look at firms like LinkedIn, which had 467 million subscribers in 2016.15 Close to 70 percent of LinkedIn users have over 300 connections in LinkedIn. These connections create customer stickiness, making the industry less attract to prospective entrants.

Protection Against Internal Mistakes

A significant benefit of strong marketing assets is the ability to protect against internal mistakes and still be able to maintain loyalty after a significantly destructive activity. The ability to gain “forgiveness” is important to maintain stability in future cash flows. For example, Facebook has run into a number of privacy-related scandals in recent years, from running experiments that manipulate users’ emotions to putting users’ photos in product ads without their consent. In each case, Facebook has bounced back nearly unscathed. These quick recoveries can largely be attributed to Facebook’s exceptional marketing assets. Facebook not only has one of the industry’s strongest and most well-known brands, but it has customer relationships that are deep, long- standing, and span a vast network of customers. These assets protect and stabilize Facebook’s cash flows, in part by reducing the impact of internal mistakes.

Summary

Strong marketing assets in the form of customer relationships and brands create value for companies in a variety of ways. Figure 17.2 summarizes these different sources of value. As can be seen from this list, brands and customer relationships can often have similar effects on firm value. This is because they generally co-occur—strong customer relationships often signal the presence of strong brands and vice versa. There are, however, some effects that have only been documented for one or the other.

HOW MARKETS VALUE MARKETING ASSETS Despite the absence of many marketing assets from firms’ balance sheets and formal financial statements, their value directly appears in certain contexts. The impact of strong brands and customer relationships on firm value is particularly visible for early-stage firms that are growing quickly and do not yet have positive earnings, for corporate acquisitions involving a large premium for marketing assets, and for companies that purchase access to brand assets through licensing agreements.

Customers as Assets at High-Growth Companies

At many fast-growing new companies, particularly in the technology sector, a strong customer base is often a much better predictor of long-term success than current revenues. Indeed, such companies often have negative profits and can be very difficult to value with traditional metrics. Several analyses of financial performance in the Internet sector have found that net income often has no relationship to stock price and that firm value is best predicted by non-financial, customer- oriented metrics such as monthly active users or visit duration. One investigation demonstrated

Chapter 17 How Marketing Activities Create Value for Companies 311

Marketing Asset Financial Payoff Sources of Value

Customer Relationships

Increased revenue Lower defect rates Greater share of wallet Buy new offerings in current categories Follow company into new categories Stronger endorsements More effective human capital

Decreased costs Lower marketing research and new product development costs Lower customer acquisition costs Lower employee pay Lower employee acquisition costs Lower employee turnover Lower costs of debt Larger investments in relationship by customer

Faster cash flows Faster brand retrieval Faster purchase decision Faster response to marketing spending

Less volatile/vulnerable cash flows

Greater customer retention Protection against rival switching strategies Protection against rival entry Protection against internal mistakes

Brand

Increased revenue Price premiums Increased brand consideration Greater likelihood of purchase Bigger growth options Stronger endorsements More licensing opportunities

Decreased costs Lower customer acquisition costs Lower employee pay Lower employee acquisition costs Lower employee turnover

Faster cash flows Faster brand retrieval Faster purchase decision Faster response to marketing spending

Less volatile/vulnerable cash flows

Protection against rival switching strategies Protection against rival entry Protection against internal mistakes

Figure 17.2 A Summary of How Intangible Marketing Assets Create Company Value

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that total customer value, based entirely on customer lifetime value, was a better predictor of firm value for both Internet-based and bricks-and-mortar companies compared to traditional financial metrics or tangible assets.16

Marketing Assets in Firm Acquisitions

In 2016, Microsoft acquired LinkedIn for $26.2 billion, one of the technology industry’s biggest acquisitions ever.17 This price was a 49.5 percent premium over the trading price of LinkedIn’s stock at the announcement of the deal. Was this a mistake on Microsoft’s part? If the purpose was just to acquire LinkedIn’s technical assets, which Microsoft could instead develop in-house, this investment would be hard to justify. However, Microsoft was largely paying for marketing assets, particularly so that Microsoft could leverage LinkedIn’s extensive customer base and strong brand.18

Another acquisition that demonstrates the willingness to pay for customer relationship assets is Amazon’s 2014 purchase of Twitch for $970 million. Twitch is a video streaming platform used to watch and chat about video games; it has 10 million active users per day and over 50 million unique users per month.19 It is a market leader in the large and fast-growing world of gaming and e-sports, which draws as many as 32 million live viewers for major events like the League of Legends Championships.20 By comparison, that’s nearly quadruple the 8.9 million viewers who tuned in for the most popular episode of HBO’s landmark series Game of Thrones.21 But this acquisition was more than a media play for Amazon. The Twitch acquisition was a critical opportunity to access the coveted market of young adults that Amazon has previously targeted with offerings like free student Amazon Prime memberships.22 To penetrate the market, Amazon promptly offered Twitch subscribers discounts on Amazon-purchased video games and hardware and even rolled Twitch’s $8.99/month Turbo subscription into Amazon’s $10.99/month Prime subscription at no extra charge. This might seem generous on Amazon’s part, but it’s an investment intended to transfer Twitch’s customers into Amazon’s other product lines. Amazon knows that Prime subscribers spend more than four times as much on Amazon purchases as non-subscribers do.23 If even a modest fraction of Twitch’s large and fast-growing user base can be converted into loyal Amazon customers and Prime subscribers, the lifetime value of those customers to Amazon will be well worth the investment.

Just as acquisitions are often motivated by the ability to gain key marketing assets, they can also be undermined by the inability to do so. One of the best examples of this is the Kit Kat brand of chocolate bars, which are produced in the United States by the Hershey Company under a license agreement with Nestle. Kit Kat is one of Hershey’s top brands, with a tremendous level of brand recognition and loyalty. Importantly, the agreement with Nestle is not transferable to a new company in the event that the Hershey Company is sold. As a result, several proposed acquisitions over the years have ultimately fallen through because this important brand asset would be lost. Due to this non-transferable marketing asset, Hershey is more valuable on its own than it would be to any acquirer.

Brand Assets and Licensing

The value of brands and other marketing assets is also highly visible when those assets are sold or licensed on their own. Sir Richard Branson’s Virgin Group makes extensive use of brand licensing.

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Of the 80 or so companies bearing the Virgin name, the Virgin Group actually owns stock in less than half, and even in the 12 largest Virgin companies the group has just 27 percent ownership. Virgin Group Holdings collects licensing fees of more than $180 million per year for permitting other Virgin companies, such as Virgin Money or Virgin Mobile, to use its valuable brand name.24

On a discounted-cash-flow basis, these revenues provide a reasonable estimate of Virgin’s brand value, which adds up to about 20 percent of the Virgin Group’s total market capitalization. Although most top brands don’t use licensing as extensively as Virgin, trademark licensing fees have been similarly used to estimate the value of many companies’ brand assets. These analyses reveal that for the top ten brands, including Apple, Google, IBM, and Walmart, brand assets accounted for 19 percent of the firms’ total market value.25 In other words, brand equity at these major global firms is worth about one fourth of all other assets combined.

MANAGING MARKETING TO CONTRIBUTE TO FIRM VALUE Foster Strong Marketing Competencies

This chapter has emphasized strong brands and customer relationships as value-producing assets. However, marketing competencies—the knowledge and skills housed within the company that allow it to take smart marketing actions—are also critical to firm value. As noted in Chapter 1, marketing competencies do the heavy lifting of both developing these two valuable marketing assets and effectively leveraging them to create long-term value. These competencies must be updated over time as the marketplace changes. For example, many companies are working to create stronger digital marketing competencies so they can communicate their brands and engage with customer more effectively online.

The challenge of marketing competencies is similar to the challenge of intangible brand and customer assets. These competencies do not show up on the firm’s balance sheet and they work in the background, often invisibly, to produce and leverage the company’s customer and brand assets. Without these competencies, these assets will ultimately lose their value. Therefore, leaders need to stay vigilant in building, maintaining, and reinventing those competencies that are critical to their company’s long-term performance.

Focus on the Long Term

There is evidence that companies will often sacrifice marketing investments to meet quarterly expectations or to make their income statements appear stronger during times when the financial markets or potential suitors are paying close attention to their books. The long-run effects of such actions suggest this is unwise. Specifically, although the firm makes better returns in the short-run, the long-term costs outweigh these benefits. Simply put, the stock market exacts a price for stealing from marketing investments.

Jeff Bezos urges his employees at Amazon to think long-term and to ignore criticisms in the short-term. He said, “. . . basically if we needed to see meaningful financial results in two to three years, some of the most meaningful things we’ve done we would never have even started. Things like Kindle, things like Amazon Web Services, Amazon Prime.” When asked whether he cares about Amazon’s share price, “I care very much about our share owners, and so I care very much about our long term share price. I do not follow the stock on a daily basis, and I don’t think there’s

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any information in it. Benjamin Graham said, ‘In the short term, the stock market is a voting machine. In the long term, it’s a weighing machine.’ And we try to build a company that wants to be weighed and not voted upon.”26

KEY LEARNINGS

Marketing assets are often underappreciated, but they provide substantial value to firms. Although marketing-related expenditures are often treated as costs rather than as investments in marketing assets, they are similar to traditional, tangible assets in many ways: they can increase product value, reduce costs, create barriers to entry, enable future growth, and increase the value of other firm resources.

Strong customer relationships make market share less vulnerable, increase customer retention, increase share of wallet, allow for cross-selling of new offerings, and lead to word-of-mouth endorsements. Strong brands can demand a price premium, increase brand consideration, facilitate customer acquisition, provide better options for growth, protect against switching and new entry, attract better human capital at a lower cost, and even lower the cost of debt.

Marketing assets not only enable higher cash flows (increased revenue, decreased costs), but they also enhance firm value through other financial levers: faster cash flows, less volatile cash flows, and less vulnerable cash flows.

FOR DISCUSSION 1. You work for a big-box retailer that is on track to miss its financial targets this year and

your CEO wants to cut costs by reducing the marketing budget next quarter. How would you argue against this?

2. Look at the strong and weak recruiters coming to your university to hire. How do these firms’ marketing assets affect their success in recruiting you and your peers?

3. Take your favorite Internet start-up and rate its marketing assets as might be observed by potential acquirers. What needs to be improved and what has value?

4. Consider the placement of Starbucks into grocery stores. Pick two different local grocery store chains in your area and rate how well each performs on brand and customer relationships. How do these assets affect Starbucks’ entry and the terms of the deal?

5. Two large manufacturers make similar products but have different branding strategies: one houses all of its products under the parent brand, but the other has a collection of different brands that are unconnected in the minds of consumers. Which of these companies would you expect to have a higher discount rate, and why?

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BoxBEST DIGITAL PRACTICE

LinkedIn’s Greatest Assets

LinkedIn, the professionally-oriented online social network, was acquired in 2016 by technology giant Microsoft for $26.2 billion. Although Microsoft was partly motivated by LinkedIn’s top-notch talent and intellectual property, the vast majority of this price tag can be attributed to the firm’s network of customer relationships and brand. At the time of its acquisition, LinkedIn had a registered user base of about 430 million individuals, with about 106 million unique monthly active users (MAU).

Like many technology firms, LinkedIn gets value from its ongoing customer relationships in multiple ways. Firms often achieve this value through paid subscriptions, targeted advertising, and the sale of user-generated data to outside parties. LinkedIn is no exception. The network sells paid subscriptions that offer premium features like enhanced personal profiles and priority ranking in hire recommendations to job recruiters. For advertisers, LinkedIn can provide finely targeted ads based not just on demographic information, but also on site-specific insights like users’ personal interests, career aspirations, and social connections.

In an industry where major acquisitions (like Facebook’s purchases of Instagram in 2012 and WhatsApp in 2014) typically involve valuations of less than $50 per monthly active users (MAU), LinkedIn weighed in at over $250 per MAU. This exceptional valuation can be attributed to three unique benefits of LinkedIn’s customer relationship management model.

First, one of LinkedIn’s key sources of revenue is helping corporate recruiters connect with potential hires. The network’s large active user base offers a value proposition for both sides of the job market. Because LinkedIn is the go-to site for job seekers, it is highly attractive to recruiters. Likewise, the large presence of recruiters from top-level firms across many different industries makes LinkedIn equally attractive to job seekers. This self-reinforcing cycle makes current customer relationships a key asset for securing future customers.

Second, LinkedIn’s existing customer relationships and brand equity allow for quicker rollout and adoption of new offerings. When it sells new products, the firm starts with direct access to millions of engaged users. For example, LinkedIn purchased the professional-skills training providerLynda in2015, gaining ownership of its large catalogue of training courses and videos. Because this content was directly relevant to those on the LinkedIn network, LinkedIn was able to sell Lynda products to millions of users.

Third, LinkedIn’s active user base provides a vast, ongoing stream of data that can be leveraged for Microsoft’s other core products. A prime example of this is Cortana, Microsoft’s machine learning and artificial intelligence offering. Because the Cortana software is built around machine learning, its functionality depends entirely on having access to vast amounts of data. The continuous stream of data from LinkedIn’s users helps Microsoft’s offerings such as Cortana become more profitable.

Questions:

1. What are the three key aspects of LinkedIn’s customer management approach?

2. What new customers might Microsoft target with the data it has acquired and will continue to acquire from the LinkedIn acquisition? What types of companies would be most interested in this data?

Sources: Jay Greene, “Microsoft to Acquire LinkedIn for $26.2 Billion,” Wall Street Journal, June 14, 2016. http://www.wsj.com/articles/microsoft-to-acquire-linkedin-in-deal-valued-at-26-2-billion-1465821523

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“LinkedUp,” The Economist, June 18, 2016. http://www.economist.com/news/business-and-finance/ 21700605-it-one-most-expensive-tech-deals-history-it-may-not-be-smartest-making-sense

Grant Feller, “This is the Real Reason Microsoft Bought LinkedIn,” Forbes, June 14, 2016, http://www. forbes.com/sites/grantfeller/2016/06/14/this-is-the-real-reason-microsoft-bought-linkedin/ #7d01603e4acd

Rob Salkowitz, “Why Did Microsoft Buy LinkedIn? Ask Cortana,” Forbes, June 13, 2016.

Mahesh Vellanki, “Here is How You Really Value Snapchat, Instagram, and Other Big Consumer Apps,” Mahesh VC, July 30, 2015, http://www.mahesh-vc.com/blog/here-is-how-you-really-value-snap- chat-instagram-and-other-big-consumer-apps

Box BEST GLOBAL PRACTICE

Apple: Building the World’s Most Valuable Brand

Apple Inc. was ranked the world’s most valuable brand in 2016 (for the fourth year in a row), with an estimated value of $178 million. Interbrand creates these valuations based on experts ratings of seven key characteristics, including brand market leadership, brand stability, market stability and growth, geographic spread, trend, brand support, and brand protection. These rates form a multiplier that current sales are multiplied by to generate the brand’s future earnings (this is used instead of the discounted cash flow approach which projects future brand value and discounts back into present value).

How did Apple build such a valuable brand? The most important reason underlying all of its strategies is that Apple shows unwavering commitment to creating value for its customers. This seed was planted at the company founding by Mike Markkula, Jobs and Wozniak’s third partner, with a simple 3-point “Apple Marketing Philosophy.”

■ Empathy – We will truly understand their [customer] needs better than any other company. ■ Focus – In order to do a good job of the things we decide to do, we must eliminate all of the unimportant opportunities.

■ Impute – People DO judge a book by its cover. We may have the best product, the highest quality, the most useful software, and so on; if we present them in a slipshod manner, they will be perceived as slipshod; if we present them in a creative, professional manner, we will impute the desired qualities.

This founding philosophy has been reinforced by several key strategies.

1. Hire customer-obsessed, empathetic employees. Steve Jobs used a quote originally attrib- uted to Henry Ford to describe why customer insights were so important: “If I had asked people what they wanted, they would have said faster horses”—illustrating the problem that customers may be limited to thinking only in terms of what they know, instead of what is possible. So Jobs and colleagues thought about the customer experience more deeply than the customer could.

(continued)

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2. Iterative customer involvement. This customer obsession made formal market research less important. However, it is no secret that Apple spends an enormous amount of time observing customers using Apple’s and other companies’ technologies. Participatory design or usability testing also ensures that Apple understands customer “pain points” and “opportunities” and in the design and development process.

3. Protect against scope creep and feature bloat. There were mp3 players before the iPod and smart phones before the iPhone, but Apple’s innovation was to distill those products down to their fundamental purposes (e.g., 1000 songs in your pocket) and then design them to be simple and interesting to use. As Jobs noted, “We make progress by eliminating things.”

4. Build compatible experiences. Customers want a streamlined, intuitive way to make their computing and entertainment devices work as a system. Apple understood this and conceived of its array of products as offering the customer first a “digital hub” and then an “entertainment hub.”

5. Enable customer discovery and differentiation through Apple Stores. A retail presence gave Apple another forum to flex its design prowess. Customers come into the stores to experience the aesthetics and ease of use of Apple products. They also see the larger “solution” that the array of interconnected products offers and interact with Apple’s carefully recruited and trained sales associates. The stores also personal customer support (the Genius Bar), creating yet another touch point. The result: the highest retail sales per square foot among U.S. retailers.

6. Build a moat. Apple has done this in two ways. First, Apple’s unique products are communicated to customers through novel and provocative advertising. The 1984 Super Bowl ad introducing the Macintosh is a perfect example. Apple vividly contrasted its independent philosophy with the tired and unimaginative computer industry establishment. Apple built on this theme of indepen- dence in 1997 with its “Think Different” ad campaign which lauded “rebels” and “the crazy ones” as the source of great ideas and inventions. The iPod, heavily advertised with silhouettes of people dancing to the beat of their own drummer, kept this brand image alive and well. Steve Jobs also contributed to this renegade, non-conformist image through press accounts of his demanding aesthetic.

Second, although Apple’s utilizes multiple branded partners for some hardware and software solutions, it has turned down co-marketing efforts (such as Intel stickers on its machines) that every other major competitor participates in with those same suppliers. This keeps customers focused on the Apple brand and not its component providers. Likewise, Apple limits non-Apple products in its stores to those that complement, not compete with its offerings.

7. Devise a business model that creates ongoing customer value. Generating customer value means building a business model that ensures this value is created repeatedly. Apple’s customer- obsessed employees and retail stores are a big part of creating value for customers. However, iTunes should also be viewed as an integral part of the business model. While not a big money maker for Apple, the iTunes desktop software and Music Store make Apple’s hardware even more valuable. This bundle of integrated device and content promotes customer loyalty and cross- category spending.

8. Cannibalize when necessary. Apple has done this at this least twice. First, Apple dropped its most popular iPod, the Mini, when it introduced the Nano. Second, although offering unique features, the iPhone is a potential threat to independent iPod sales because both play music. Many organizations might have been unwilling to build a product that would detract from its most popular product. Apple understood that if it did not do it, another company would.

9. Don’t try to be all things to all customers. Many companies fail by being unwilling to make tough decisions about which customers to seek and products to offer. Apple, on the other hand,

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made these tough decisions and adopted a strategy that focused on a limited number of product lines and limited offerings within each line. When he returned in 1997, Jobs slashed Apple’s 15 product lines to just four. This strategy holds today. With laser-like focus, Apple makes a few big bets that deliver customer value and stand out in the crowd.

10. Create an ecosystem that makes offerings valuable. The introduction of the iPhone was coupled with building an online App Store. However, the App Store only works if companies are willing to develop for Apple’s iOS platform. Apple created development tools that promote a simple, consistent experience for developers. This helps speed up app development and deepen user engagement—a win-win-win for developers, customers, and Apple.

Questions:

1. Take two of the ten factors contributing to Apple’s powerful brand and assess whether its actions over the last year support or dilute the brand?

2. Why is cannibalization such an important part of building an innovative brand?

Sources: Based on Christine Moorman, “Why Apple is a Great Marketer,” Forbes, July 10, 2012. http://www. forbes.com/sites/christinemoorman/2012/07/10/why-apple-is-a-great-marketer/#2d83d3396cb0

Interbrand Best Global Brands 2016, https://sf-asset-manager.s3.amazonaws.com/95993/1052/7602. pdf

David B. Yoffie and Renee Kim (2011) “Apple in 2010,” Harvard Business School case 9-710-467.

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C A S E S T U D I E S

THE ENERGY BAR INDUSTRY In 1986, PowerBar, a Berkeley firm, created the energy bar category with its classic chewy bar. Positioned as an athletic energy food, it was distributed at bike shops and events that usually involved running or biking. The target segment was the athlete who needed an efficient, effective energy source.

Six years later, seeking to provide an alternative to the sticky, dry nature of the PowerBar, a competitor developed an energy bar with superior taste and texture and branded it the Clif Bar. Soon after, another competitor introduced the Balance bar, which offered a blend of protein, fat, and carbohydrates based on the nutrition formula associated with the “Zone Diet.” Faced with these challengers, PowerBar responded with Harvest (a bar with a much more mainstream taste and texture) and ProteinPlus (an entry into the high-protein subcategory closely related to Balance).

The makers of the Clif Bar observed that women athletes or those involved in fitness were approximately half of the market. However, their unique needs in terms of macronutrients, vitamins, and taste were not being addressed. Luna, the first nutritional (not energy) bar for women, was Clif Bar’s answer to this unmet need. The bar had a light crunchy texture, came in flavors like “lemon zest” and chai tea, and contained nearly two dozen vitamins, minerals, and nutrients. The target market consisted of time-strapped women who wanted an energy bar, but one more tailored to their needs.

Both in reaction to Luna’s success and to expand the segments for which the category was relevant, PowerBar focused on the sensitivity of women to calories and portion size. In response, the firm created Pria, which was smaller and had only 110 calories but had superior—almost indulgent—taste and texture.

The energy bar industry exploded over the next few decades exploiting the demand for health and weight control, portable meals, better ingredients, and nutritious snacks. Sales went from $100 million in 1996 to $2 billion a decade later and well over $6 billion by 2016. The growth was fueled by submarkets each driven by a unique “must have.”

These submarkets are defined by different applications, ingredients (consumers are becoming more ingredient sensitive), and value propositions. Over time, there have been nutrition bars, cereal bars (a replacement for breakfast), protein bars, diet bars (brands like Balance or Atkins that followed a popular diet), natural ingredient bars, all with numerous textures, flavors, sizes, and coatings. Over the decades, many hundreds of products were introduced. However, only a few became major players.

One of the successes was KIND, a brand that grew from nothing in 2004 to over $550 million in 2015 (33% of the market). It was driven by a clear vision to be a healthy, tasty, and natural snack in a sea of snacks that look and feel very different. KIND products are composed of whole fruits and nuts using gluten-free, non-GMO, sustainable ingredients with much less sugar than competitors. They are not cheap nor easy to produce given high-quality ingredients and production barriers that required innovation, investment, and commitment to overcome. The brand vision is

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communicated by a clear package that allows customers to see the ingredients. The tagline “ingredients you can see and pronounce” reinforces this transparency positioning. Reacting to a surge in interest in protein, KIND introduced a line of savory bars with more protein, including flavors such as honey smoked barbeque.

KIND has a higher purpose—to encourage people to reward acts of kindness. There is #kindawasomeness cards handed out to someone doing a kind act for someone else. The card has a website and code on which the card holder can request a packet of KIND bars along with another card to give to someone spotted doing an act of kindness. There have been 1.2 million documented acts of kindness as a result. There is the KIND Causes where, each month, members vote on which customer-nominated causes should be supported with a $10,000 donation. They vote by commit- ting to do an act of kindness. For example, one proposal was to train mentors for Dryhootch, a non- alcoholic rally point for military personnel.

The energy bar market represents how a dynamic fast-changing and innovative marketplace works and the evolving winners and losers over just two decades!

FOR DISCUSSION

1. Identify the different submarkets or subcategories in the energy bar market. Which have “must haves” that drive a loyal and sizable segment? What are the strategic groupings? To what extent does each submarket represent fads that will peak and decline instead of grow. Why?

2. To what extent do you think the KIND subcategory is driven by its Kindness initiatives? Are these “must haves”?

3. What are the environmental trends that will affect this industry? Considering these trends, generate two or three viable future scenarios.

4. How can brands like Luna, Pria, and KIND be leveraged to other products and categories? What makes these brands extendable?

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ASSESSING THE IMPACT OF CHANGES IN THE ENVIRONMENT The following are three environmental trends that will have a substantial impact on many categories.

Democratization of Education

Thanks to new online platforms and free access to world-class content, people can experience education on any number of topics—anywhere, anytime. Stanford offered three courses in 2011, each of which had over 100,000 attendees. By 2017, MIT offered 118 courses that included complete video lectures. These efforts are termed Massive Open Online Courses (MOOCs). Because of the massive scale of learners, MOOCs require instructional design that facilitates large-scale feedback and interaction. One approach is to leverage learner connection by encouraging peer-to-peer review and crowd source interaction and group collaboration. Another is to use automated feedback through objective, online assessments (e.g., quizzes and exams).

FOR DISCUSSION

1. What is the business model for MOOCs? 2. What should a business school do to adapt? 3. What are the threats and opportunities for a text publisher like Wiley? What changes

will they have to make to remain relevant?

4. What do these education trends mean for corporate training and company hiring?

Changing Payment Forms

Trends toward mobile payments and an increased concern for security is affecting most firms.

FOR DISCUSSION

1. What companies will be the winners and which will be the losers? 2. How will these trends affect retailers?

The 3Ps of Digital Health

Applications are enabling a new wave of innovation that is changing the face of the health care industry. The future of health care is personalized, participatory, and preventive with the help of mobile devices seamlessly integrating technology into our daily lives to drive healthy outcomes.

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FOR DISCUSSION

1. How has your own health care been affected by the 3Ps? 2. How should health insurers act on this trend to influence their bottom lines and the

health of their subscribers?

3. Dream up two new products or services ideas (including apps) that take advantage of these trends.

4. What types of businesses stand to lose and gain the most from this trend?

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CREATING A NEW BRAND FOR A NEW BUSINESS Contemporary Art

Contemporary art, often defined as nontraditional art from the 1970s, can sell for incredible sums of money. Damien created a square array of colored dots that have been sold for up to $1,500,000. Hundreds of these have been made and sold. While still an unknown artist, Hirst sold a work that consisted of flies being hatched and attracted to a decaying cow’s head only to be zapped by a bug zapper to Charles Saatchi, the advertising executive and prominent collector. It was called “A Thousand Years” and was said to depict life and death. Saatchi, who owns over 3,000 contemporary artworks, is generous about loaning them to museums if they agree to display other pieces (so that they can be said to have been displayed in the museum).

There are dozens of artists who command high prices:

On Kawara paints a date such as Nov 8, 1989 on a canvas. There are approximately 2,000 in existence; one sold for $500,000 in 2006 at a Christie’s auction. Christie’s and Sotheby’s are the two most prestigious auction houses. It has been estimated that a painting will get 20 percent more if sold at one of these two auction houses, in part, because of their brands. Christopher Wool sold a painting of fifteen stenciled letters that spelled Rundogrundogrun for $1.24 million in 2005.

In 2008 a seven-foot Mark Rothko painting that had been owned by David Rockefeller (who bought it in 1960 for $8,500) sold at Sotheby’s for $72.8 million, nearly three times more than the previous high for a Rothko. Jeff Koons, famous for making vacuum cleaners an art object, sold life-size a sculpture of Michael Jackson and his pet monkey for $5.6 million despite the fact that there were two other copies of the piece. The fact that the other copies were owned by the San Francisco MOMA and a prominent collector actually enhanced the value of the third piece. Tracey Emin, an artist with a reputation for taking on taboo topics with an autobiographical flair, established a style and the premium prices that go with it by creating a bad girl image. For example, she posed nude for commercials, created a tent embroidered with names of her past lovers, and appeared on British television so drunk that she had no memory of it.

Why these prices? One hypothesis is that this art is objectively exceptional and its high quality merits a premium price. That is demonstratively false. Consider the following.

There was a painting of Joseph Stalin, worthless until Damien Hirst painted a red nose on the subject and signed his name—it then sold for $250,000. A Jackson Pollack look-alike painting was bought at a flea market. A series of experts could not ascertain if it was an authentic Pollack or not. The same painting was either worth a few thousand or tens of millions depending on whether it was deemed authentic. An auction professional once said, “Never underestimate how insecure buyers are about contemporary art, and how much they always need reassurance.”

What makes these prices even more puzzling is the fact that several of the top artists do not do their own work. Andy Warhol famously did little of his own artwork. Hirst has a staff of 20 or so who do all of his work including the colored spots.

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Sothequestioniswhydotheseartistsattractsuchprices?Andmorebasically,howdoesapainter create a brand that will command such fantastic sums? These questions are more general than they mightseem.Therearemanybusinessesforwhichitisnotpossibletoobjectivelyknowthevalueofthe product or service. Most customers lack the information and often the expertise to evaluate service firms.Therearealsoproducts,suchasmotoroil,forwhichitisnotpossibletojudgethequality.Even products such as cars or computers are difficult to evaluate because they are complex and specifications do not tell the whole story. Furthermore, even if a person took the time to pour through Consumer Reports, it is not clear that its recommendations will reflect the right decision criteria for that customer.

FOR DISCUSSION

1. Why do people buy contemporary art? Why might the demand for contemporary art increase?

2. How does an artist develop a brand? 3. How does an art dealer develop a brand? 4. Is Damien Hirst famous because of his work and its shock value, because of Charles

Saatchi, or is Hirst “famous because he’s famous?

5. How would you develop a brand if you were a new investment advisory service? Can you use any of the techniques that artists use?

Source: This case draws on material in Don Thompson, The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art, London: Aurum Press, 2008.

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COMPETING AGAINST THE INDUSTRY GIANT Competing Against Amazon

Amazon was started in July 1994 by Jeff Bezos as a company that sold books online. In doing so, they could offer many more titles than the largest bookstore and without the costs of a storefront operation, they could sell them cheaper. It was a good model and was extended by the Kindle book reader/computer launched in 2007. In 2015 Amazon had at least a 65 percent share of the book and ebook market.

But Amazon did not stop at books—Bezos wanted to be the “Everything” store. In 1998 it added music and DVDs/videos and a year later added home improvement products, software, video games, and gifts. Every year Amazon added more categories until there is not much that you cannot buy from Amazon. It even introduced grocery products in some markets. You select the grocery items, a delivery time, and it will be there. In 2015, Amazon with some 50 fulfillment centers in the United States (and another 30 worldwide), passed $100 billion and overcame Walmart as the largest U.S. retailer. And it continued to aggressively add more fulfillment centers.

In 2005 Amazon launched the Prime program, which addressed a desire for even faster delivery speeds. It included free Two-Day Shipping for eligible purchases (grown to some 30 million items by 2015), Sunday delivery, and free same-day delivery on hundreds of thousands of products in more than 35 cities around the world. There is also unlimited streaming of movies and TV shows with Prime Video and the ability to borrow books from the Kindle Owners’ Lending Library for $99 a year or $10.99 a month. Over 50 million people were estimated to be U.S. customers of Prime in 2016.

Amazon is guided by values and a strong culture. First, it starts with an obsession with keeping the customer first. That is a bedrock of company decision making and, in particular, the drive to have low prices, a wide selection, reliable service, a personalized and easy-to-use website, and more. Second, invention and innovation are supported and encouraged. Experimentation is everywhere and failure is accepted because Amazon believes that without failures the big successes will not occur. Third, there is a long-term focus, and short-term profits are sacrificed if investments will result in a long-term payoff. Enormous investments in expansion at the expense of current profits have long been the hallmark of Amazon.

It is not all positive. Amazon with its gigantic size, hold on customers, and scope is a threat to many large and small retailers. It caused Borders to close its 400 bookstore chain and Barnes & Noble to close many of its stores. Weak retail chains and independents throughout the retail world have also had to close. Furthermore, Amazon may take over its own delivery perhaps with drones or self-driving vehicles, which would be blow to services like UPS, FedEx, and the U.S. Postal Service.

When Amazon opened its operation to third-party dealers in 2000, it created another source of competition for retailers because their suppliers now had an e-commerce option where customers could easily check to see if the Amazon price was cheaper. About 50 percent of the volume of Amazon was with third party firms in 2015. Amazon is a lender for many of these firms, thus also competing with traditional lending institutions.

In addition, Amazon has been accused of exploiting workers by unreasonable job pressures and arbitrary dismissal decisions. The acknowledged aggressive-growth culture makes these complaints credible. Amazon does have creative employee programs to help with issues such as moms returning to work after a new baby and offering financial support

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for post-secondary educational activities. But these do not counter the stress of coping with day- to-day jobs.

It is not impossible to compete with Amazon. Curiously, independent book stores have been on the rise from 2007—offering a personal experience, a sense of community, and diversified offerings. And there are other retailers that have been able to compete on ways that differentiates them from Amazon, including Costco, which is discussed next.

FOR DISCUSSION

1. Why is Amazon so successful? What are its assets and competencies? What is the role of Jeff Bezos?

2. What do you think Amazon will be like in 5 years? 10 years? 3. Is Amazon positive or negative for consumers? For the culture and economy of the

countries in which it has become a dominant power?

4. What type of retailer will be most vulnerable to Amazon’s power? Least vulnerable? 5. Amazon opened some grocery stores in 2016 with no checkout. Your phone keeps

track of what customers buy? Will grocery chains have to also replace checkout personnel with such an automation system?

6. Consider the Sephora case in Chapter 10. Describe how Sephora has thrived despite the shadow of Amazon? Why does the strategy work? Can Sephora maintain its success?

Consider Costco, which must design a strategy that will lead to success in the Amazon environment.

Costco

Costco has enjoyed healthy sales and profit growth generally in the 6–10 percent range through the Amazon era. In 2016 it had grown to nearly 120 billion in sales with nearly $2.5 billion in profit that come from over 700 stores (up from 600 in 2011).

Costco focuses on low prices and high volume with a target market of small businesses and large families. The low prices in part comes from an operational strategy that leads to a cost advantage. The assortment is limited; there is usually only one brand for any category, which gives Costco significant market power and logistic efficiencies. Where a typical Walmart Supercenter carries over 140,000 products, Costco carries fewer than 4,000. The items are generally bulk- packaged, which means customers buy more of the item on their Costco trips and the brand involved can justify having Costco sell the brand at a sharply lower price. It has a well-regarded house brand, Kirkland, that is sold at a very low profit margin—around 15 percent mark-up—and generates about 12 percent of the sales. Most products are delivered to the warehouse on shipping pallets and these pallets are used to display products for sale on the warehouse floor. Costco does not have a large advertising budget.

Costco has a membership model, which generates a close customer relationship and commitment plus significant revenue since the memberships represent about 15 percent of

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the value of the firm. The in-store experience is unique with many tasting opportunities, some upscale brands, and a lot of energy. The meat and produce selections have an outstanding quality reputation and include many organic options.

Costco was behind in e-commerce in 2016, generating only about 3 percent of sales. The firm had a slow start and a rather poor web presence compared to Amazon and even to its other competitors.

FOR DISCUSSION

1. Why is Costco immune from the Amazon threat? Will that continue going forward? What are the strengths and weaknesses?

2. How should Costco react to the Amazon threat? Besides create a more competitive website, is there anything that Costco could do to leapfrog competitors on the e-commerce side?

3. How does Amazon’s recent purchase of Whole Foods threaten Costco? What should Costco do in response?

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LEVERAGING A BRAND ASSET Dove

In 1955, Unilever (then Lever Brothers) introduced Dove, which contained a patented, mild cleansing ingredient, into the soap category. It was positioned—then and now—as a “beauty bar” with one-fourth cleansing cream that moisturizes skin while washing (as opposed to the drying effect of regular soap). Advertisements reinforced the message by showing cream being poured into the beauty bar. In 1979, the phrase “cleansing cream” was replaced with “moisturizer cream” when a University of Pennsylvania dermatologist showed that Dove dried and irritated skin significantly less than ordinary soaps. Based on this study, Unilever began aggressively marketing Dove to doctors. Soon about 25 percent of Dove users said they bought the brand because a doctor recommended it, greatly enhancing the bar’s credibility as a moisturizer. By the mid-1980s, Dove had become the best-selling soap brand and commanded a price premium.

In 1990 the Dove soap patent ran out, and arch-competitor P&G was soon testing an Olay beauty bar with moisturizing properties, a product that rolled out in 1993. One year later, Olay Body Wash appeared and soon garnered over 25 percent of a high-margin sub category. Blindsided, the Dove brand team belatedly recognized that Dove was in the best position to compete as a moisturizer body wash and that they had missed the chance to be a leader in this new subcategory. In response, the firm rushed Dove Moisturizing Body Wash into stores. The product did not live up to the Dove promise, however, and a reformulation in 1996 was only a partial improvement. In 1999, though, Dove finally got it right with the innovative Nutrium line, based on a technology that deposited lipids, vitamin E, and other ingredients onto the skin. The advanced skin-nourishing properties provided enough of a lift to allow Dove to charge a 50 percent premium over its regular body wash and ultimately pull even with Olay in the body wash category. By leveraging strong brand equity, pursuing innovative technology, and being persistent, Dove was able to overcome a late entry into the market.

In 2000 Unilever made Dove a masterbrand, which meant that it would invest in extending Dove’s authority to a broader set of categories, including hair care, lotion, and deodorant. For example, Dove introduced a deodorant line with uncharacteristically bold advertising (one tag line was “Next stop, armpit heaven”). As it turned out, the deodorants were named as one of the top 10 nonfood new products in 2001, garnering over $70 million in sales with close to 5 percent of the market and making Dove the number-two brand among female deodorants. The “one-quarter moisturizing lotion” positioning, effectively communicated as protecting sensitive underarm skin, generated a Dove spin on dryness that differentiated the product line.

The next product extension was Dove Hair Care, with moisturizing qualities directly responsive to one of the top two unmet needs in the category. The product’s branded differentia- tor, Weightless Moisturizers, is a set of 15 ingredients designed to make hair softer, smoother, and more vibrant without adding any extra weight. After achieving top-selling status in Japan and Taiwan, Dove Hair Care entered the U.S. market in early 2003 with a massive introduction campaign, joining a product family used by nearly one-third of American families. Two years later it introduced Dove Body Nourishers Intensive Firming Lotion, formulated with collagen and seaweed, intended to give the user firmer skin after two weeks.

These extensions contributed to a dramatic sales success. The brand’s business grew from around $200 million in 1990 to over $5 billion today by some estimates (exact figures have not been reported since 2011). Geographic expansion also contributed. Dove’s presence

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increased to over 100 countries, far more than in 1990, with particular strength in Europe (where it gained 30 percent of the cosmetics and toiletries market), Asia-Pacific (25 percent), and Latin America (11 percent). Kantar’s brand valuation has Dove at $5.5 billion dollars and the eighth most valuable personal care brand in the world. How did Unilever pull off this feat?

By 2004, with no major geographic expansion or brand extension in sight, Dove looked to another route to add energy and purpose to its brand. Global company research involving 3,200 interviews revealed several surprising facts about how women thought about themselves—only 2 percent of women described themselves as “beautiful,” 5 percent “pretty,” and 7 percent “good looking,”—50 percent of women thought their weight was too high (60 percent in the United States), and two-thirds of women felt that the media and advertising set unrealistic standards of beauty. Dove saw an opportunity to take a leadership role in what was ultimately called the “The Campaign for Real Beauty.”

The result was set of advertising campaigns (first created in the United Kingdom) featuring “real women” instead of ultrathin models. In the early tick-box campaign, viewers were shown pictures of a range of women and asked to vote on billboards in popular locations such as Times Square for the words “outsized” or “outstanding,” “wrinkled or wonderful,” and “44 and hot or 44 and not” by phoning 1-800-342-DOVE. In other campaigns, Dove photographed groups of women in their underwear claiming “Real Women have Real Curves.” The campaign received enormous exposure in the media with over a thousand stories and parodies, most, but not all, positive (some felt it would be ineffective, others pointed out that Unilever was still using models for its other products, and still others thought Dove was promoting obesity). It generated a 10 percent sales boost.

Based on this response, in 2006 Dove took even bolder steps by developing a Super Bowl ad, which showed adolescent girls with comments under their pictures, such as “Hates her freckles,” “Afraid she’s fat,” “Wishes she were blonde,” and ending by saying “Let’s change their minds . . . because every girl deserves to feel good about herself and to see how beautiful she really is.” This ad was a smashing success as was the program that Dove called “The Self- Esteem Fund,” which funded workshops for girls to counterbalance other media and cultural ideas about beauty. Dove’s social mission was to encourage girls to develop a positive relationship with beauty, helping to raise their self-esteem and thereby enabling them to realize their full potential. Over 119 million young people in 115 countries have received help from 2005 through 2015.

Other campaigns followed, including the very popular 2006 “Evolution” ad that won awards at the Cannes advertising festival and went straight to the web. This provocative footage shows a women going from a makeup session to a billboard and all of the alterations that are made to her and to her image in the process. This ad has spawned hundreds of such transformations and parodies on the web. In 2013, the Dove “Real Beauty Sketches” ad involves a blinded forensic artist capturing women’s descriptions of themselves compared to other women’s descriptions of these same women. The comparisons were striking with most women describing themselves as less attractive than others described them. The byline “You are more beautiful than you think,” supported Dove’s position. More recent campaigns to “Love your curls” encourage mothers and daughters to celebrate their curly hair and “Dove Selfie” involves girls and their moms capturing their own individualized beauty and to “redefine beauty one photo at a time.”

As intended, the Dove brand now serves as an umbrella for products in four main groups—bar and body wash, deodorants, skincare lotions, and haircare—and more than 100 different lines including facial wipes, firming lotions, shampoos, body washes, anti-aging cleansers, skin

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nourishing treatments, underarm deodorant, and several varieties of bar soap. The main Dove brand has also given rise to a set of new products, including Dove Firming (to reduce the appearance of cellulite), Dove Silk (a moisturizing range containing pure silk), Dove Fresh Touch, Dove Pro-Age (for “mature” skin and hair), and Dove Summer Glow (with self-tanning agents).

Dove continues to face strategic challenges in managing this powerful brand. First, Unilever, Dove’s parent, uses a house of brands management approach in which the larger corporation (Unilever) is given less attention, if at all, in promoting the brand. This allows Unilever to also promote a men’s product named Axe (called Lynx in some countries), which was introduced into the United States in 2002 as a spray deodorant and now covers shampoo, shower gels, aftershave, and other products. The Axe brand was built around the humorous premise that beautiful women would go crazy over a man who uses the Axe spray. The advertisements and promotions were widely perceived as sexist and even degrading. Some pointed out that Unilever was hypocritical to promote the Axe brand so blatantly at odds with the “real women” concept.

Second, in taking on an important societal issue such as the nature of beauty stereotypes, Unilever faced the very real threat that it would lose control of the brand conversation. In fact, a quick look at the social media that have been created over time by the reverberations of Dove’s actions suggests that this is the case. Like many companies, Unilever had to figure out a way to manage the brand when external sources were controlling a great deal of the dialogue, whether it was Jay Leno talking about the brand on the Late Show or a German company showing a group of men in their underwear in a page taken directly from Dove’s strategy.

Third, given the choice to focus on an issue that is important to contemporary women, Unilever had to question, Will Dove’s ideas about real beauty sell globally or will they need to be adapted to local markets? Will women around the world, especially in large markets such as China or Russia, be as open to the “Campaign for Real Beauty”?

FOR DISCUSSION

1. What were the keys to the success that Dove achieved in building its brand into a $5 billion business? What were the roles of success momentum and of branded differentiators?

2. What was the role of a vigorous competitor? Would Dove have gotten there without P&G pushing (or, more accurately, pulling) the brand?

3. What is your opinion of the “Real Beauty” campaign? Why does it work? What are its biggest challenges?

4. How should Unilever manage the Axe–Dove tension, if at all? 5. How should Unilever measure the success of the “Campaign for Real Beauty?” 6. Will the campaign sell in China? If not, should the brand position be adapted and if so,

how? Discuss the costs and benefits of doing so.

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A P P E N D I X A

Internal Analysis

Should the existing strategy be enhanced, expanded, altered, or replaced? Are existing assets and competencies adequate to win? An internal analysis of the business will help the strategist address these questions. This exploration is similar in scope to an analysis of a competitor or strategic group but much richer and deeper because of its importance to strategy and because much more information is available.

Just as strategy can be developed at the level of a business, a group of businesses, or the firm, internal analysis can also be conducted at each of these levels. Of course, analyses at different levels will differ from each other in emphasis and content, but their structure and thrust will be the same. The common goal is to identify organizational strengths, weaknesses, and constraints and, ultimately, to develop responsive strategies, either exploiting strengths or correcting or compen- sating for weaknesses.

Three aspects of internal analysis are discussed in this Appendix. The first, financial perform- ance, provides an initial approximation as to how the business is doing. The second, an analysis of other performance dimensions such as customer satisfaction, product quality, brand association, relative cost, new products, and employee capability, can often provide a more robust link to future profitability. The third is an analysis of the strengths and weaknesses that are the basis of current and future strategies.

FINANCIAL PERFORMANCE Internal analysis often starts with an analysis of current financials, measures of sales, and profitability. Either can signal a change in the market viability of a product line and the ability to produce competitively. Furthermore, they provide an indicator of the success of past strategies and thus can often help in evaluating whether strategic changes are needed. In addition, sales and profitability at least appear to be specific and easily measured. As a result, it is not surprising that they are so widely used as performance evaluation tools.

Sales and Market Share

A sensitive measure of how customers regard a product or service can be sales or market share. After all, if the value proposition to a customer changes, sales and share should be affected, although there may be an occasional delay caused by market and customer inertia.

Sales levels can be strategically important. Increased sales can mean that the customer base has grown. An enlarged customer base, if we assume that new customers will develop loyalty, will

332

mean future sales and profits. Increased share can provide the potential to gain SCAs in the form of economies of scale and experience curve effects. Conversely, decreased sales can mean decreases in customer bases and a loss of scale economies.

A problem with using sales as a measure is that it can be affected by short-term actions, such as promotions by a brand and its competitors. Thus, it is necessary to separate changes in sales that are caused by tactical actions from those that represent fundamental changes in the value delivered to the customer, and it is important to couple an analysis of sales or share with an analysis of customer satisfaction and loyalty, which will be discussed shortly.

Profitability

The ultimate measure of a firm’s ability to prosper and survive is its profitability. Although both growth and profitability are desirable, establishing a priority between the two can help guide strategic decision making.

A host of measures and ratios reflect profitability, including margins, costs, and profits. Building on the assets employed leads to the return on assets (ROA) measure, which can be decomposed with a formula developed by General Motors and DuPont in the 1920s.

ROA profit sales

sales assets

Thus, return on assets can be considered as having two causal factors. The first is the profit margin, which depends on the selling price and cost structure. The second is the asset turnover, which depends on inventory control and asset utilization.

The determination of both the numerator and denominator of the ROA terms is not as straightforward as might be assumed. Substantial issues surround each, such as the distortions caused by depreciation and the fact that book assets do not reflect intangible assets, such as brand equity, or the market value of tangible assets.

Shareholder Value

The concept of shareholder value, an enormously influential concept during the past two decades, provides another perspective on financial performance. Each business should earn an ROA (based on a flow of profits emanating from an investment) that meets or exceeds the costs of capital, which is the weighted average of the cost of equity and cost of debt. Thus, if the cost of equity is 16 percent and the cost of debt is 8 percent, the cost of capital would be 12 percent if the amount of debt was equal to the amount of equity; if there were only one-fourth as much debt as equity, then the cost of capital would be 14 percent. If the return is greater than the cost of capital, shareholder value will increase, and if it is less, shareholder value will decrease. Marketing can play an important role in influencing shareholder value as discussed in more detail in Chapter 17.

Some of the routes to increasing shareholder value are as follows:

Earn more profit by reducing costs or increasing revenue without using more capital.

Invest in high-return products.

Reduce the cost of capital by increasing the debt to equity ratio or by buying back stock to reduce the cost of equity.

Appendix A: Internal Analysis 333

Use less capital. Under shareholder value analysis, the assets employed are no longer a free good. If improved just-in-time operations can reduce the inventory, it directly affects shareholder value.

Increase the speed by which revenues reach the company.

Reduce the volatility and vulnerability of profits.

PERFORMANCE MEASUREMENT BEYOND PROFITABILITY One of the difficulties in strategic market management is developing performance indicators that convincingly represent long-term prospects. The temptation is to focus on short-term profitability measures and to reduce investment in new products and brand images that have long-term payoffs.

The concept of net present value represents a long-term profit stream, but it is not always operational. It often provides neither a criterion for decision making nor a useful performance measure. It is somewhat analogous to preferring $6 million to $4 million. The real question involves determining which strategic alternative will generate $6 million and which will generate $4 million.

It is necessary to develop performance measures that will reflect long-term viability and health. The focus should be on the assets and competencies that underlie the current and future strategies and their SCAs. What are the key assets and competencies for a business during the planning horizon? What strategic dimensions are most crucial: to become more competitive with respect to product offerings, to develop new products, or to become more productive? These types of questions can help identify performance areas that a business should examine. Answers will vary depending on the situation, but will often include customer satisfaction/brand loyalty, product/service quality, brand/firm associations, relative cost, new product activity, and manager/ employee capability and performance.

Product and Service Quality

Internal analysis needs to start with the ability of the firm to deliver against the promise. The quality must meet or exceed expectations of the customer base and even do more if the customer needs are different than expectations. Is the offering delivering value? How? Is it delivering superior quality?

It is important to compare the ability of a firm to deliver quality with current and future competitor offerings. One common failing of firms is to avoid tough comparisons with a realistic assessment of competitors’ current and potential offerings. A newly appointed CEO of Frito-Lay once put all programs on hold for a year until the firm’s manufacturing units around the world were able to make products that would win blind taste tests. He realized that product quality was a necessary condition for success.

In order to develop precision and diagnostics in the assessment of quality, the underlying dimensions should be identified and measured over time. For example, an automobile manufac- turer can measure defects, ability to perform to specifications, durability, reparability, and features. A bank might be concerned with waiting time, accuracy of transactions, and the quality of the customer experience. A computer manufacturer can examine relative performance specifications and product reliability as reflected by repair data. A business that requires better marketing of a good product line is very different from one that has basic product deficiencies.

334 Appendix A: Internal Analysis

Brand/Firm Associations

An important asset of a brand or firm is its associations. What comes to mind with the brand or firm becomes visible? What is its perceived quality? Perceived quality, which is sometimes very different from actual quality, can be based on experience with past products or services and on quality cues, such as retailer types, pricing strategies, packaging, advertising, and typical customers. Is a brand or firm regarded as expert in a product or technology area (such as designing and making sailboats)? Innovative? Expensive? For the country club set? Is it associated with a country, a user type, or an application area (such as racing)? Such associations can be key strategic assets for a brand or firm.

Associations can be monitored by regularly asking customers to describe their use experiences and to tell what a brand or firm means to them. The identification of changes in important associations will likely emerge from such efforts. Structured surveys using a representative sample of customers can provide even more precise tracking information.

Chapter 9 provides a discussion of why associations are strategically important and describes the major types such as having a brand personality, organizational values and programs, being global, being contemporary, and being relevant to a customer need or application.

Brand Loyalty

Perhaps the most important asset of many firms is the loyalty of the customer base. Strategic investments will be influenced by an assessment of customer loyalty. Loyalty will affect profitability by supporting prices and by reducing cost of customer acquisition and retentions. Consequently, a firm should, in general, invest behind product-markets in which a strong loyal customer base exists. If a business lacks loyalty and a program cannot be economically created to generate that missing asset, on average, that would not be a place to invest.

It is important to recognize that there are different forms and levels of loyalty. Especially in low-involvement categories, loyalty can be driven by satisfied customers that buy because of habit and because it is not worth spending time or resources reviewing whether that habit should be changed. In that case measures of distribution (making sure the purchase remains convenient), customer satisfaction (looking for warning signs that the brand is losing satisfaction), and repeat purchase (the ultimate measure) are needed. In higher involvement categories, loyalty often requires a scale that ranges from liking to having self-expressive benefits to being a brand that a person will talk about and recommend to others. In that case, measures of activity in brand communities and a willingness to recommend will be useful.

Two other comments. First, customers who have left the brand should be probed to identify the motivating problems and causes of dissatisfaction. The result is often insights that are sensitive and operational. Second, measures should be tracked over time and compared with those of competitors. Relative comparisons and changes are most important.

Chapter 9 has a discussion of brand loyalty and a component of brand equity that adds depth and texture to the concept and how it can be managed.

Relative Cost

A careful cost analysis of a product (or service) and its components, which can be critical when a strategy is dependent on achieving a cost advantage or cost parity, involves tearing down

Appendix A: Internal Analysis 335

competitors’ products and analyzing their systems in detail. The Japanese consultant Ohmae suggested that such an analysis, when coupled with performance analysis, can lead to one of the four situations shown in Figure A.1.3

If a component such as a car’s braking system or a bank’s teller operation is both more expensive than and inferior to that of the competition, a strategic problem requiring change may exist. An analysis could show, however, that the component is such a small item in terms of both cost and customer impact that it should be ignored. If the component is competitively superior, however, a cost-reduction program may not be the only appropriate strategy. A value analysis, in which the component’s value to the customer is quantified, may suggest that the point of superiority could support a price increase or promotion campaign. If, on the other hand, a component is less expensive than that of the competition, but inferior, a value analysis might suggest that it be de-emphasized. Thus, for a car with a cost advantage but handling disadvantage, a company might de-emphasize its driving performance and position it as an economy car. An alternative is to upgrade this component. Conversely, if a component is both less expensive and superior, a value analysis may suggest that the component be emphasized, perhaps playing a key role in positioning and promotion strategies.

Sources of Cost Advantage

The many routes to cost advantage include economies of scale, the experience curve, product design innovations, and the use of a no-frills product offering. Each provides a different perspective to the concept of competing on the basis of a cost advantage.

Average Costing

In average costing, some elements of fixed or semivariable costs are not carefully allocated but instead are averaged over total production. Average costing can provide an opening for

More Expensive

Change • Design • Manufacturing/systems Ignore

Value analysis • Raise prices • Promote Cost reduction

Value analysis • De-emphasize • Upgrade

Value analysis • Emphasize/promote • Leave it alone

OUR COMPONENT IS

Less Expensive

Inferior Superior

Figure A.1 Relative Cost vs. Relative Performance—Strategic Implications

336 Appendix A: Internal Analysis

competitors to enter an otherwise secure market. Large customers can be much more profitable than small ones, and premium priced products can be more lucrative than value priced ones. A product line that is subsidizing other lines is vulnerable, representing an opportunity to competitors and thus a potential threat to a business.

Innovation

Does the R&D operation generate a stream of new product concepts? How does the flow of patents compare to that for competitors? Is the process from product concept to new product introduction well managed? Is there a track record of successful new products that has affected the product performance profile and market position?

Are the new products arriving in the marketplace in a timely fashion? Time to market is particularly important in many industries, from cars to software.

More broadly, does the organizational culture support innovation? Is it possible to generate substantial (if not transformational) innovations in addition to incremental innovations? Are there programs to precipitate innovation?

Manager/Employee Capability and Performance

Also key to a firm’s long-term prospects are the people who must implement strategies. Are the human resources in place to support current and future strategies? Do those who are added to the organization match its needs in terms of types and quality or are there gaps that are not being filled? Is there enough diversity so that the organization can identify and respond to new threats and opportunities when they are not within the existing business arena?

An organization should be evaluated not only on how well it obtains human resources but also on how well it nurtures them. A healthy organization will consist of individuals who are motivated, challenged, fulfilled, and growing in their professions. Each of these dimensions can be observed and measured by employee surveys and group discussions. Certainly, the attitude of production workers was a key factor in the quality and cost advantage that Japanese automobile firms enjoyed throughout the past three decades. In service industries such as banking and fast foods, the ability to sustain positive employee performance and attitude is usually a key success factor.

Values and Heritage

The firms with strong performance over time usually have a well-defined set of values that are both known and accepted within the organization, values that are more than simply increasing financial return. Strong values that guide and even inspire are enhanced if they are supported by a well-known and relevant heritage. Values and a heritage not only create a strong and consistent brand but also support the business strategy. In fact, when business falters, one tact that often works is to return to the roots of the business—what made it strong in the first place. When McDonald’s faltered, a turnaround was based in part on their historic core values of service, people, convenience, quality, and good prices.

Values provide a reason to believe in for employees and will influence the brand as a result. Among the values that are often influential are the organizational associations discussed in

Appendix A: Internal Analysis 337

Chapter 9 such as innovation, social responsibility, concern for the customer, quality, service, and being globally and environmentally responsible.

Having a heritage based on a founder or on early success can be a guide and a value anchor. Consider L.L. Bean with a vision of their founder who designed a shoe for hunters that was waterproof. When the first batch had a problem, he took them all back. His focus on the customer and on the outdoors and the outdoorsmen continue to guide the firm. General Electric still has the innovation emphasis that was the hallmark of its founder Thomas Edison.

More generally, values are best communicated inside and outside a firm with stories. People remember and respond to stories. A firm should strive to have a story bank that collectively illustrates the values of the firm. The stories are not limited to the heritage of the firm but can reflect the actions of an employee or a program. The legend that Nordstrom’s once took back a damaged tire even though they do not sell tires (although the store that did take back a tire formerly did sell ties, although under another owner) says so much about their customer service.

ASSETS AND COMPETENCIES In developing or implementing strategy, it is important to identify the assets and competencies that represent areas of strength and weakness. A successful strategy needs to be based on assets and competencies because it is generally easier for competitors to duplicate what you do rather than who you are. Further, current assets and competencies, as illustrated in Chapter 12, can be leveraged to create new businesses.

Figure 3.4 is a partial list of the types of assets and competencies that an organization might develop. There are more than three dozen, organized under the categories of innovation, manufacturing, access to capital, management, marketing, and customer base. This checklist is a good place to start when identifying the most relevant assets and competencies. Another are the motivating questions introduced in Chapter 3 that identify assets and competencies important to customers, those developed by successful competitors, and those representing large or important parts of the value added chain.

338 Appendix A: Internal Analysis

A P P E N D I X B

Planning Forms

A set of standard planning forms can be useful for several reasons. First, they are helpful in presenting strategy recommendations and supporting analyses. Second, the forms can encourage consistency in presentations over time and across businesses within an organization. Third, they can ensure accuracy by providing a checklist of areas to consider in strategy development. The following sample forms are intended to provide a point of departure in designing forms for a specific context. The external analysis in the example is drawn from the pet food industry. The forms are for illustration purposes only.

Planning forms need to be adapted to the context involved: the industry, the firm, and the planning context. They may well be different and shorter or longer given a particular context. Forms for use with other product types—an industrial product, for example—could be modified to include information such as current and potential applications or key existing or potential customers.

THE PET FOOD INDUSTRY Section 1. Customer Analysis

A. Segments

Segments Market ($ Billions) Comments

Dog—dry 7.3 Largest segment, segmented nutritional offerings, growing Dog—canned 1.9 Made from real meat and by-products Cat—dry 3.4 Second largest segment, nutritional offerings, accelerating growth Cat—canned 2.3 Made from real meat, high levels of flavor and textural variety Dog treats 1.8 Del Monte dominates with Milk-Bone Pet specialty (including pet shops, veterinarians, farm and feed)

6.3 Large players—Science Diet and Iams, uses vets and pet stores, about 70% dog food, mostly dry, growing at 5%

339

B. Customer Motivations

Segment Motivations

Dog—dry Nutrition, convenience, teeth cleaning, often better value than canned pet food in grocery and mass channels

Dog—canned For finicky dogs, taste and nutrition, variety Cat—dry Nutrition, convenience, complement to meal, teeth cleaning Cat—canned Taste, convenient sizes, easy to serve, for finicky cats, variety of textures and flavors Treats Complement to meal, reward, animal likes it, functional nutritional benefits (e.g., tartar

control) Pet specialty Health concern, scientific nutrition, perceived superior ingredients

C. Unmet Needs

Food to accommodate dogs with special diet restrictions or physical goals Packaging that is sustainable and also convenient

Section 2. Competitor Analysis

A. Strategic Groups

Strategic Group Major Competitors 2015 Global Sales ($B)

(1) Dominant firms Big Heart (Smuckers) 17.2 Nestle Purina Petcare 12.9

(2) High-end specialty brands Hill’s (Colgate-Palmolive) 2.2 Iams (Mars) 2.2

(3) Private-label brands Other Not available

340 Appendix B: Planning Forms

Strategic Group Characteristics/

Strategies Strengths Weaknesses

(1) Dominant firms Mainstream products Large portfolio of products Wide range of price points to meet the needs of many Sell to multiple channels Heavy use of advertising Emphasis on nutrition and variety

Production-scale economies Significant presence in supermarkets and mass merchandisers, where 70% of industry

volume is sold Deep global financial resources and expertise (e.g., dedicated R&D) Long-term commitment to industry

High fixed cost commitment to capacity increases competitive pressure on all players to defend share through promotions, etc. Perception as less nutritious than specialty brands Private label share at Walmart and elsewhere is increasing

(2) High-end specialty brands

Narrowly focused, super-premium–priced product lines High presence in nonsupermarket channels, such as veterinary offices, pet breeders, and pet specialty stores (e.g., Petsmart)

Product line focus on health, natural ingredients, and nutrition, resulting in increasing consumer demand; high-margin business First-in advantage to high-end specialty segment, resulting in a perceptual edge that mainstream brands find difficult to overcome Sell through alternative channels, which are growing faster and are less competitive and offer limited access to other brands—creating a barrier to entry High volume and low unit costs

Higher ingredient and production costs Lack economies of scale Ultra premium price points limit appeal

(3) Private-label foods Sell through multiple supermarkets and mass merchandisers under house brand designation

Profit margins are attractive to retailers Power of Walmart as a large powerful retailer Good-quality offerings with high perceived consumer value

Little brand differentiation Weak brand equity

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B. Major Competitors

Competitor Characteristics/

Strategies Strengths Weaknesses

Nestle Purina Petcare

Overall market leader, product line is broad and deep Increasing move toward “premiumization” with niche product lines and upgrade of products to premium status Heavy emphasis on innovative first-to-market new products Massive advertising and promotional spending to grow share High commitment to category Deep financial resources Company takes long- term view on brand- building efforts; high level of commitment to brands Global commitment to building brands

Large, powerful brands—Alp, Friskies, Cat/Dog Chow, Moist & Meaty, Purina, ProPlan Economies of scale, low costs Supply-chain efficiencies Strong retailer relationships Global expertise and R&D support

Weak presence in specialty segment Need to support multiple brands across multiple categories with finite resources

342 Appendix B: Planning Forms

Competitor Characteristics/

Strategies Strengths Weaknesses

Big Heart (Smuckers)

Emphasis on cat food and dog treats but competes in all segments of market Low-cost producer strategy Migrating to a more consumer-centric model with recent acquisitions

Focused on few brands and categories Acquired strong brands in Milk-Bone and Meow Mix

Relatively weak in brand building Milking brands, such as 9-Lives Lack of product innovation in cat and dog food

Mars Leadership position outside of the U.S. Commitment to building brands Upgrading supermarket brands for premium appeal

Dog food expertise Economies of scale, low costs with acquisition of the private-label supplier Doane Deep financial resources Strong brands—Pedigree, Whiskas

Lack of cat food expertise and market share in U.S.

Hill’s Petfood Strong player in specialty and vet markets Entry barriers in vet business for Science Diet brand

Leading recipient of veterinary recommendation Best niche-market product positioning in the industry

No presence in supermarkets or mass outlets, where 60% of industry volume is sold Under pressure from new high-end specialty Brand (e.g., Blue Buffalo)

Iams (Mars) Traditionally a specialty market brand, with emphasis on specialty-store sales and referrals from pet breeders Moved to grocery and mass merchandise channels, which stimulated growth

Deep financial recourses Strong brand equity

Economies of scale Limited market penetration and share Limited portfolio variety

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C. Competitor Strength Grid

344 Appendix B: Planning Forms

Assets and Competencies

Name recognition

Breadth of product line

Breadth of channel coverage

Specialty/veterinarian coverage

Financial resources

Cost structure

Geographic coverage

U.S.

International

Index:

Nestlé Purina Petcare

Big Heart Pet Brands (Smuckers) Hill’s

Iams (Mars)

Pet Food Competitors in the U.S. Market

Strong

Above average

Average

Less than average

Weak

Section 3. Market Analysis

A. Market Identification: The U.S. Pet Food Market

B. Market Size

1990 1995 2000 2005 2008 2013

U.S. industry sales ($ in billions) 7.7 9.1 12.2 13.9 18.9 23.1

Emerging Submarkets

Special diet-based products

Walmart and other private-label products

Wellness-focused items (e.g., Naturals)

Product “humanization”

Market Growth (in Dollars vs. 2011)

Overall pet—growing at 5 percent

Supermarket—growing at 3 percent

Specialty store—growing at 3 percent annually

Mass merchandisers—growing at 7 percent annually

Online—fastest growing retail sales

Factors Affecting Sales Levels

Growth of pet population

Growth of higher-value products

General economic consumer pressure, especially at low end of the market

C. Market Profitability Analysis

Barriers to Entry

Brand awareness, budget for marketing programs, access to distribution channels, large investment required for manufacturing, science, and technology.

For pet specialty segment—loyalty to Hill’s Science Diet and other entrenched specialty brands; difficulty of getting recommendations of vets and other influentials

Potential Entrants

The probability of new entrants is quite low because the pet food industry is already very competitive, with lots of incumbents, and barriers to entry are high.

Threats of Substitutes

Human food leftovers

Food cooked especially for pets

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Bargaining Power of Suppliers

Growing

Raw materials shared with human food markets

Consolidation of suppliers

Quality of raw ingredients requirements growing

Bargaining Power of Customers

Grocery stores and warehouse clubs have strong bargaining power over pet food suppliers.

Specialty stores and veterinarians might have moderate bargaining power.

Mass merchandisers (especially Walmart, with around 24 percent of the volume in this category) have very strong bargaining power.

D. Cost Structure

Diversified firms have lower cost because of economies in advertising, manufacturing, promotion, and distribution.

Specialized firms have higher costs and often are required to co-manufacture their products.

E. Distribution System

Major Channels

Online retailers have grown from 7 percent in 2010 to 9.3 percent in 2015.

Supermarkets are dominant in terms of quantity they deal with (35 percent).

Mass merchandisers handle about 29 percent of market and are growing.

Pet foods are effective traffic builders in supermarkets and mass merchandisers.

Farm-supply stores are generally located in suburbs.

Pet stores handle most premium brands and many “mainstream” national brands.

Veterinarians handle only super-premium brands.

Observations/Major Trends

Vets’ sales are flat and have very high margins both for producers and for themselves.

Specialty stores’ sales are growing at approximately 6 percent.

These two channels have captured high-involvement customers’ needs to feed their pets healthier foods.

Warehouses have gained footholds in market-leader brands.

Innovations in packaging are begging to address unmet needs around convenience.

Product innovations are creating subcategories.

Online especially is appealing to Millennials.

346 Appendix B: Planning Forms

Transparency of labeling is increasing in importance.

Use of premium and healthy ingredients—grain-free, organic, raw veggies, etc.

F. Market Trends and Developments

Premium and super-premium brands have grown, and most producers are introducing new products in this area.

Large manufacturers are introducing new products continuously.

G. Key Success Factors

Present

Brand recognition

Product quality

Access to major channels

Gain market share in premium brands

Introduction of new products

Breadth of product line

Marketing program

Cost reduction

Awareness or recommendation by specialists

Packaging

Capitalizing on relevant human trends (naturals; shift to healthier, higher-quality ingredients)

Future

Continue to capture the trends of consumers

Packaging

Follow the trends of distributors

Ability to demonstrate corporate responsibility (e.g., environmental sustainability)

Appendix B: Planning Forms 347

Section 4. Environmental Analysis

A. Trends and Potential Events

Source Description Strategic Implication Time Frame Importance

Technological New product forms Limited Low Regulatory Impose standards of

content Limited Low

Economic Insensitive to economic changes

Very limited Low

Cultural Think of pets as members of families

Demand for new, healthy products

Users’ needs have diversified

Growth of super-premium brands

Introduction of healthy products Multiple specialized segments

Since the mid- 1980s

High

Demographic Household formation is slowing

The number of cats is increasing more than dogs

The baby boomer is aging

Continued innovation of product and communications to keep brands relevant

Since the 1980s

Medium– high

Threats High dependence on animal proteins

Risk of animal-borne diseases (e.g., BSE) could severely impact ingredient

Current Medium

Opportunities Growing market for premium brands

Expanding market for private labels

There is still room for growth in specialized segments

Since the mid- 1980s

High

348 Appendix B: Planning Forms

B. Scenario Analysis

Two most likely are:

Little growth in specialty-store and super-premium segments

High growth in both specialty-store and super-premium segments

C. Key Strategic Uncertainties

Will growth in demand for super-premium specialty products continue?

What new subcategories will emerge as significant markets?

Section 5. Internal Analysis

A. Performance Analysis

Objective Area Objective Status and Comment

1. Sales 2. Profits 3. Quality/service 4. Cost 5. New products 6. Customer satisfaction 7. People 8. Other

B. Summary of Past Strategy

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C. Strategic Problems

Problem Possible Action

D. Characteristics of Internal Organization

Component Description—Fit with Current/Proposed Strategy

Culture, competencies, structure, metrics, incentives, leaders, and talent.

E. Portfolio Analysis

High

Business Position

Market Attractiveness

Low

LowHigh

SBUa

SBUdSBUc

SBUb

SBUe

Note: An SBU (strategic business unit) can be defined by product or by segment.

350 Appendix B: Planning Forms

F. Analysis of Strengths and Weaknesses

Reference Strategic Group

Competencies/Competency Deficiencies, Assets/Liabilities, Strengths/Weaknesses with Respect to Strategic Groups

G. Financial Projections Based on Existing Strategy

Past Present Projected

Operating Statement Market share Sales Cost of goods sold Gross margin R&D Selling/advertising Product G&A Div. & corp. G&A Operating profit

Balance Sheet Cash/AR/inventory AP Net current assets Fixed assets at cost Accumulated depreciation Net fixed assets Total assets—book value Estimated market value of assets ROA (base—book value) ROA (base—market value)

Uses of Funds Net current assets Fixed asset Operating profit Depreciation Other

Resources Required ________________ ________________ ________________ ________________

Note: Resources required could be workers with particular skills or backgrounds or certain physical facilities. A negative use of funds (i.e., profit) is a source of funds. Projected numbers could be for several relevant years.

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Section 6. Summary of Proposed Strategy

A. Business Scope—Product-Market Served

B. Strategy Description

Investment Objective Product Market Withdraw ⃞ Milk ⃞ Maintain ⃞ Growth in market share ⃞ Market expansion ⃞ Product expansion ⃞ Vertical integration ⃞

Value Proposition Product Market Functional value ⃞ Innovation value ⃞ Design value ⃞ Service value ⃞ Social responsibility value ⃞ Price value ⃞ Relational value ⃞

Assets and Competencies Providing SCAs

Functional Strategies

C. Key Strategy Initiatives

352 Appendix B: Planning Forms

D. Financial Projections Based on Proposed Strategy

Past Present Projected

Operating Statement Market share Sales Cost of goods sold Gross margin R&D Selling/advertising Product G&A Div. & corp. G&A

Operating profit Balance Sheet Cash/AR/inventory AP Net current assets Fixed assets at cost Accumulated depreciation Net fixed assets Total assets—book value Estimated market value of assets ROA (base—book value) ROA (base—market value)

Uses of Funds Net current assets Fixed assets Operating profit Depreciation Other

Resources Required ________________ ________________ ________________ ________________

Appendix B: Planning Forms 353

N O T E S

Chapter 1 1. A. G. Lafley, “What Only the CEO Can Do,” Harvard Business Review, May 2009, p. 58. 2. Richard Rumelt, “The Perils of Bad Strategy,” McKinsey Quarterly, 2011, Number 1, pp. 30–39. 3. Theodore Levitt, “Marketing Myopia,” Harvard Business Review, July–August 1960, pp. 45–56. 4. Renee Dye and Olivier Sibony, “How to Improve Strategic Planning,” McKinsey Quarterly, Number 3,

2007, pp. 41–49. 5. Constantine von Hoffman, “Armed with Intelligence,” BrandWeek, May 29, 2006, pp. 17–20.

Chapter 2 1. Andrew Tilim, “Will the Kids Buy It?” Business 2.0, May 2003, pp. 95–99. 2. This insert was inspired by Nanette Byrnes, “Secrets of the Male Shopper,” BusinessWeek, September 4,

2006, pp. 45–53. 3. Clayton M. Christiansen, Scott Cook, and Taddy Hall, “Marketing Malpractice: The Cause and the

Cure,” Harvard Business Review, December 2005, pp. 74–83. 4. Melinda Cuthbert, “All Buyers Not Alike,” Business 2.0, December 26, 2000. 5. Abbie Griffin and John R. Hauser, “The Voice of the Customer,” Marketing Science, Winter 1993,

pp. 1–27. 6. Eric von Hippel, “Lead Users: A Source of Novel Product Concepts,” Management Science, July 1986,

p. 802. 7. Ibid. 8. For more on web-based qualitative research, see revolutionglobal.com. 9. Richard J. Harrington and Anthony K. Tjan, “Transforming Strategy One Customer at a Time,” Harvard

Business Review, March, 2008, p. 67. 10. Spencer E. Ante, “The Science of Desire,” Business Week, June 5, 2006, pp. 99–106. 11. Ibid., p. 104. 12. George S. Day, “Creating a Superior Customer-Relating Capability,” Sloan Management Review,

Spring 2003, pp. 82–83.

Chapter 3 1. David Halberstam, The Reckoning, New York: William Morrow, 1986, p. 310. 2. Ibid. 3. Michael E. Porter, Competitive Strategy, New York: The Free Press, 1980, pp. 20–21. 4. Study by Enterbrain mentioned in Nikkei Business Daily, July 23, 2007.

Chapter 4 1. For more details in the relevance concept, see David A. Aaker, “The Brand Relevance Challenge,”

Strategy & Business, Spring 2004, and David A. Aaker, Brand Portfolio Strategy, New York: The Free Press, 2004, Chapter 3.

2. Chris Anderson, The Long Tail, New York: Hyperion, 2006.

354

3. This section draws on Michael E. Porter, Competitive Advantage, New York: The Free Press, 1985, Chapter 1.

4. Scott Davis of Prophet Brand Strategy suggested the Schwinn case. 5. Irma Zandl, “How to Separate Trends from Fads,” Brandweek, October 23, 2000, pp. 30–35. 6. Faith Popcorn and Lys Marigold, Clicking, New York: HarperCollins, 1997, pp. 11–12. 7. James Daly, “Sage Advice—Interview with Peter Drucker,” Business 2.0, August 22, 2000, pp. 134–144. 8. George S. Day, Adam J. Fein, and Gregg Ruppersberger, “Shakeouts in Digital Markets: Lessons for

GB2B Exchanges,” California Management Review, Winter 2003, pp. 131–133. 9. Steven P. Schnaars, “Growth Market Forecasting Revisited: A Look Back at a Look Forward,” California

Management Review, Summer 1986, pp. 71–88.

Chapter 5 1. Ram Charan, “Sharpening Your Business Acumen,” Strategy & Business, Spring 2006, pp. 49–57. 2. Amit Chowdhry, “WhatsApp Hits 500 Million Users,” Forbes, April 22, 2014, http://www.forbes.com/

sites/amitchowdhry/2014/04/22/whatsapp-hits-500-million-users/#5237f7c11c63 3. Wan He, Daniel Goodkind, and Paul Kowal, “An Aging World: 2015,” U.S. Census Bureau International

Population Reports, U.S. Government Publishing Office, Washington, DC: U.S. Government Publishing Office, p. 3.

4. “Global Population Estimates by Age, 1950–2050,” Pew Research Center, January 30, 2014, http://www. pewglobal.org/2014/01/30/global-population/

5. Sandra L. Colby and Jennifer M. Ortman, U.S. Census Bureau Current Population Reports, P25-2243, “Projections of the Size and Composition of the U.S. Population: 2014 to 2060,” March 2015, U.S. Government Publishing Office, Washington, DC, p. 9.

6. D’Vera Cohn and Andrea Caumont “10 Demographic Trends that are Shaping the U.S. and the World,” Pew Research Center, March 31, 2016, http://www.pewresearch.org/fact-tank/2016/03/31/10- demographic-trends-that-are-shaping-the-u-s-and-the-world/

7. Kim Parker, “The Boomerang Generation,” Pew Research Center, March 15, 2012, http://www.pewsocial trends.org/2012/03/15/the-boomerang-generation/

8. Akin Oyedele “Homeownership in the US Has Never Been Lower,” Business Insider, July 28, 2016, http://www.businessinsider.com/homeownership-rate-is-at-multi-decades-low-but-may-be-bottom- ing-2016-7

9. List derived, in large part from: “Cultural Drivers & Consumer Trends,” Mindshare, https://www. mindshareworld.com/sites/default/files/Culture%20Vulture_Manual%20Edition_Final_2.pdf

10. “Freecycle.org,” 2016, https://www.freecycle.org 11. “The Sustainability Imperative: New Insights on Consumer Expectations,” The Nielsen Company,”

October 2015, http://www.nielsen.com/content/dam/nielsenglobal/dk/docs/global-sustainability-report- oct-2015.pdf

12. Gerald J. Tellis, Unrelenting Innovation: How to Build a Culture for Market Dominance, San Francisco: Jossey-Bass, 2013.

13. Jeffrey M. Jones, “In U.S., Telecommuting for Work Climbs to 37%,” Gallup, August 19, 2015, http://www.gallup.com/poll/184649/telecommuting-work-climbs.aspx

14. Laurene Bradford, “13 Tech Companies that Offer Cool Work Perks,” Forbes, July 27, 2016, http://www. forbes.com/sites/laurencebradford/2016/07/27/13-tech-companies-that-offer-insanely-cool-perks/2/ #26b1bfbb63c8

15. “Slack’s Growth Could be Slowing Because of What Made it Attractive in the First Place,” Business Insider, October 24, 2016, http://www.businessinsider.com/slack-growth-signs-of-slowing-2016-10

Notes 355

16. O.H. Maycotte, “Millennials Are Driving the Sharing Economy—And so is Big Data,” Forbes Magazine, May 5, 2015, http://www.forbes.com/sites/homaycotte/2015/05/05/millennials-are-driving-the-sharing- economy-and-so-is-big-data/#6654e4f62991

17. David Kiron, Nina Kruschwitz, Knut Haanaes, and Ingrid Von Streng Velken, “Sustainability Nears a Tipping Point,” MIT Sloan Management Review, Winter 2012, pp. 69–74.

18. Captain Planet, Harvard Business Review, June 2012, pp. 112–118. Op cit. p. 114. 19. “The Unilever Sustainable Living Plan” 2016, https://www.unilever.com/sustainable-living/the-

sustainable-living-plan/reducing-environmental-impact/ 20. Mac Gunther, “The Green Machine,” Fortune, August 7, 2006, pp. 42–57. 21. Fred Krupp, “Walmart: The Awakening of an Environmental Giant,” The Huffington Post, February 17,

2016, http://www.huffingtonpost.com/fred-krupp/walmart-the-awakening-of_b_9253920.html 22. “Sustainability,” Walmart, 2016, http://corporate.walmart.com/global-responsibility/sustainability/ 23. Personal communication, John Gerzema, Y&R’s BAV, 2016. Walmart’s performance on these metrics is

also due to its response to national disasters starting with Hurricane Katrina. However, other research supports a strong environmental record as well. Walmart USA was in the 78th percentile of companies (where 100% is high) in terms of environmental efforts according to CSRHub and in the top 15 percent of companies for efforts related to increasing energy efficiency and combatting climate change. “Walmart Stores, INC. CSR Ratings,” CSRHUB, 2016, https://www.csrhub.com/subscription_sample/

24. Natalie Mizik and Robert Jacobson, “Myopic Marketing Management: Evidence of the Phenomenon and its Long-Term Performance Consequences in the SEO Context,” Marketing Science, May 2007, pp. 361–379.

25. Kayleen Schaefer, “Hard Times, but Your Lips Look Great,” The New York Times, May 1, 2008, http://www.nytimes.com/2008/05/01/fashion/01SKIN.html

26. Andrew Beattie “Industries that Thrive on Recession,” Investopedia, September 14, 2014, http://www. investopedia.com/articles/stocks/08/industries-thrive-on-recession.asp

27. Raji Srinivasan, Gary L. Lilien, and Shrihari Sridhar, “Should Firms Spend More on Research and Development and Advertising During Recessions?” Journal of Marketing, May 2011, pp. 49–65.

28. George Day and Paul Schoemaker, “Are You a ‘Vigilant Leader’?” MIT Sloan Management Review, Spring 2008, pp. 43–51.

29. “The Last Kodak Moment?” The Economist, January 14, 2012, http://www.economist.com/node/ 21542796

30. Chunka Mui, “How Kodak Failed,” Forbes, January 18, 2012, http://www.forbes.com/sites/chunkamui/ 2012/01/18/how-kodak-failed/2/#4e430b3d1a42

31. Claudia H. Deutsch, “Chief Says Kodak is Pointed in the Right Direction,” The New York Times, December 25, 1999, http://www.nytimes.com/1999/12/25/business/chief-says-kodak-is-pointed-in-the- right-direction.html

32. Peter Lewis, “Texas Instruments’ Lunatic Fringe,” Fortune, November 14, 2006, http://archive.fortune. com/magazines/fortune/fortune_archive/2006/09/04/8384732/index.htm

33. Jon Gertner, “The Truth about Google X: An Exclusive Look Behind the Secretive Lab’s Closed Doors,” Fast Company, April 15, 2014, https://www.fastcompany.com/3028156/united-states-of-innovation/ the-google-x-factor

34. Based on an interview with Dan Vermeer, Professor of the Practice, Fuqua School of Business, Duke University and former head of the Global Water Initiative at The Coca-Cola Company.

35. Arnold Cooper, Edeard Demuzlio, Kenneth Hatten, Elijah Hicks, and Donald Tock, “Strategic Responses to Technological Trends,” Academy of Management Proceedings, 1976, pp. 11–12.

36. Hugh Courtney, “Decision-Driven Scenarios for Assessing Four Levels of Uncertainty,” Strategy & Leadership, Vol. 31, No. 1, 2003, pp. 14–16.

37. Sharon Terlep “Dollar Shave Club’s $1 Billion Deal: A Victory for Simplicity over Technology,” The Wall Street Journal, July 20, 2016, http://www.wsj.com/articles/dollar-shave-clubs-1-billion-deal-a-victory-for- simplicity-over-technology-1469044731

356 Notes

38. Sharon Terlep and Khadeeja Safdar, “Online Upstart Harry’s Razor Jumps into Gillette’s Turf,” The Wall Street Journal, November 9, 2016, http://www.wsj.com/articles/online-upstart-harrys-razor-jumps-into- gillettes-turf-1478707250

Chapter 6 1. “Darn Tough—FAQs,” https://darntough.com/ 2. Colleen Kan, “Why a $223,000 Hermes Birkin Bag Might Actually be a Good Investment,” Fortune,

June 23, 2015, http://fortune.com/2015/06/23/hermes-birkin-investment/ 3. Silvia Killingsworth, “The Commercial Zen of Muji,” The New Yorker, December 19, 2015, http://www.

newyorker.com/business/currency/the-commercial-zen-of-muji 4. Sophie-Claire Hoeller, “Here’s Why Singapore Airlines was Just Named the Best International Airline in

the World,” Insider, July 6, 2016, http://www.thisisinsider.com/singapore-airline-best-international- airline-2016-7/#they-also-have-full-shared-bathrooms-3

5. Valarie Zeithaml, A. Parasuraman, and Leonard L. Berry, Delivering Quality Service: Balancing Customer Perceptions and Expectations, New York: Simon and Schuster, 1990.

6. Leigh Buchanan, “What’s Next from Toms, the $400 Million For-Profit Built on Karmic Capital,” Inc., May 2016, http://www.inc.com/magazine/201605/leigh-buchanan/toms-founder-blake-mycoskie-social- entrepreneurship.html

7. Richard Normann and Rafael Ramirez, “From Value Chain to Value Constellation: Designing Inter- active Strategy,” Harvard Business Review, July/August 1993, pp. 65–77.

8. Tom Murphy, “Intel’s Window Closing in Portable Device Market,” Electronic News (May 27, 2002), http://findarticles.com/p/articles/mi_m0EKF/is_22_48/ai_86875517/

9. Damon Darlin, “Cashing In its Chips: Texas Instruments on the Rebound,” New York Times, BU1 and BU7, July 9, 2006.

10. Coreen Bailor, “Texas Instruments Takes a Walk,” CRM Magazine, August 2, 2004, http://www.activapr. com/news.detail.php?articleID=13

11. “Our Low Fees,” https://www.fidelity.com/why-fidelity/pricing-fees 12. “Fidelity Private Wealth Management,” https://www.fidelity.com/wealth-management/private-wealth-

management 13. Similar criteria are proposed by Devon Sharma, Chuck Lucier, and Richard Molloy, “From Solutions

to Symbiosis: Blending with Your Customers,” Strategy + Business (Second Quarter 2002): 38–43. For empirical support, see Kapil R. Tuli, Ajay K. Kohli, and Sundar G. Bharadwaj, “Rethinking Customer Solutions: From Product Bundles to Relational Processes,” Journal of Marketing, July 2007, pp. 1–17.

14. “‘Power by the Hour’: Can Paying Only for Performance Redefine How Products Are Sold and Serviced?,” Knowledge@Wharton, February 21, 2007.

15. “Briefing Rolls-Royce: Britain’s Lonely High Flier,” The Economist, January 10, 2009, p. 63. 16. “Canadian Sugar Industry,” Canadian Sugar Institute website, http://www.sugar.ca/english/

canadiansugarindustry/sugarmarket.cfm 17. Rick Tetzeli, “Slack’s Workplace Revolution,” Fast Company, September 15, 2015, http://www.

fastcodesign.com/3050294/innovation-by-design/slacks-workplace-revolution. “From 0 to $1B – Slack’s Founder Shares Their Epic Launch Strategy,” First Round Review, http://firstround.com/review/From- 0-to-1B-Slacks-Founder-Shares-Their-Epic-Launch-Strategy/. Jack Flanagan, “7 Workplace Chat Apps to Keep Your Team in Sync,” Huffington Post, January 26, 2015, http://www.huffingtonpost.com/fueled/ 7-workplace-chat-apps-to_b_6548914.html

18. David Benoit and Heather Haddon, “Whole Foods Overhauls Board; Vows Big Changes,” Wall Street Journal, May 11, 2017, A1.

19. Christoph Zott and Raphael Amit, “Business Model Design: An Activity System Perspective,” Long Range Planning, June 2009, pp. 216–226.

Notes 357

Chapter 7 1. David Court, Dave Elzinga, Susan Mulder, and Ole Jùrgen Vetvik. “The Consumer Decision Journey,”

McKinsey Quarterly, 2009, p. 3. 2. Ibid., p. 4 3. Jim Lecinski, Winning at the Zero Moment of Truth. N.p.: Google, 2011, p. 9. 4. Google Consumer Surveys, U.S., May 2016. 5. Court et al., op cit, p. 4. 6. Court et al., op cit, p. 6. 7. Court et al., op cit, p. 5. 8. “The Social Lifecycle: Consumer Insights to Improve Your Business,” Hubspot, October 29, 2014,

http://www.slideshare.net/HubSpot/the-social-lifecycle-consumer-insights-to-improve-your-business 9. “Automotive Brands Ranked by Digital IQ Score – 2016,” L2, February 10, 2016, http://www.

rankingthebrands.com/The-Brand-Rankings.aspx?rankingID=99&year=1042 10. Court et al., op cit, p. 8. 11. Katherine N. Lemon and Peter C. Verhoef, “Customer Experience Along the Customer Journey,”

Journal of Marketing, November 2016, pp. 69–96. 12. Halligan and Shah, op cit, pp. 123–124. 13. Loizos Heracleous and Jochen Wirtz, “The Globe: Singapore Airlines Balancing Act,” Harvard Business

Review, July–August 2010, pp. 145–149. 14. Joseph B. Pine II and James H. Gilmore, “Welcome to the Experience Economy,” Harvard Business

Review, July–August 1998, p. 97. 15. Lemon and Verhoef, op cit, p. 76. 16. Scott M. Davis and Michael Dunn, Building the Brand Driven Business, San Francisco: Josey-Bass 2002,

pp. 133–134. 17. Pine and Gilmore, op cit, p. 99. 18. Leonard L. Berry, Lewis P. Carbone and Stephan H. Haeckel, “Managing the Total Customer

Experience,” MIT Sloan Management Review, Spring 2002, p. 45. 19. Joann Peck and Terry Childers, “To Have and to Hold: The Influence of Haptic Information on Product

Judgments,” Journal of Marketing, April 2003, pp. 35–48. 20. Joann Peck and Terry Childers, “Sensory Factors in Consumer Behavior,” in Handbook of Consumer

Psychology, 2008, 193–219. 21. Kevin Peters, “Office Depot’s Resident on How ‘Mystery Shopping’ Helped Spark a Turnaround,”

Harvard Business Review, November 2011, pp. 47–50. 22. Roland T. Rust, J. Jeffrey Inman, Jianmin Jia, and Anthony Zahorik, “What You Don’t Know about

Customer-Perceived Quality: The Role of Customer Expectation Distributions,” Marketing Science, February 1999, pp. 77–92.

23. MarketingSherpa, “Consumer Purchase Preference Survey,” 2016. 24. Ruth N. Bolton, “Creating Customer Experiences That Build Relationships,” Marketing Science

Institute Webinar, 2016. 25. Mary Jo Bitner, Amy L. Ostrom and Felicia N. Morgan, Service Blueprinting: A Practical Technique for

Service Innovation, California Management Review, Spring 2008, pp. 72–74. 26. A. Parasuraman, Valarie A. Zeithaml, and Leonard L. Berry (1991), “Refinement and Reassessment of

the SERVQUAL Scale,” Journal of Retailing, Winter 1991, pp. 420–450. 27. Valarie A. Zeithaml, Mary Jo Bitner, and Dwayne D. Gremler, Services Marketing: Integrating

Customer Focus Across the Firm, 2013, McGraw Hill-Irwin, p. 125. 28. A. Parasuraman, A., Valarie Zeithaml, and Leonard Berry, “SERVQUAL: A Multiple-item Scale for

Measuring Consumer Perceptions of Service Quality,” Journal of Retailing, Spring 1988, pp. 12–40. 29. Emma K. Macdonald, Hugh N. Wilson, and Umut Konuş, “Better Customer Insight—in Real Time,”

Harvard Business Review, September 2012, pp. 102–108.

358 Notes

30. Tony Costa, “How Location Analytics Will Transform Retail,” Harvard Business Review, March 12, 2012, https://hbr.org/2014/03/how-location-analytics-will-transform-retail

31. Ewan Duncan, Harald Fanderi, Nicholas Maechler, and Kevin Neher, “Customer Experience: Creating Value Through Transforming the Customer Journey,” McKinsey Quarterly, July 2016, p. 6.

32. Barbara L. Fredrickson and Daniel Kahneman, “Duration Neglect in Retrospective Evaluations of Affective Episodes,” Journal of Personality and Social Psychology, July 1993, p. 45.

33. Disney at Work, http://disneyatwork.com/disneys-four-keys-to-a-great-guest-experience 34. This touchpoint process model is taken from Scott M. Davis and Michael Dunn, Building the Brand

Driven Business, San Francisco, Jossey-Bass, 2002. 35. Allen P. Adamson, The Edge: 50 Tips from Brands that Lead, London: Palgrave Macmillan, 2013, p. 97. 36. Zeithaml, Bitner and Gremler, op cit, pp. 36–45. 37. Duncan, Fanderi, Maechler, and Neher, op cit, p. 17. 38. Ethan Morantz, Miglena Armutlu, Cody Greer, and Vishal Pua, “Making Banking Intimate: Fintech and

the Customer Experience,” American Marketing Association, 2016, https://www.ama.org/resources/ Pages/making-banking-intimate-fintech-customer-experience.aspx

39. Lemon and Verhoef, op cit, p. 8. 40. Bill Doyle, “Case Study: Charles Schwab Storms Back by Focusing on Customer Loyalty,” Forrester

Research, May 21, 2008, pp. 1–7. 41. Charles Schwab Corporation 2007 Annual Report. 42. “Investors Adopt More Hands-On Approach to Advisors, Says J.D. Power Full Service Investor

Satisfaction Study,” J.D. Power, April 7, 2016, http://www.jdpower.com/press-releases/2016-us-full- service-investor-satisfaction-study

43. “First Direct Branchless Banking,” INSEAD Case 597-028-1, Fontainebleau, France: INSEAD 1997. 44. This section is drawn from George S. Day and Christine Moorman, Strategy from the Outside In,

New York: MacMillian, 2010. 45. Stephen S. Tax and Stephen Brown, “Recovering and Learning from Service Failure,” Sloan Manage-

ment Review, Fall 1998, pp. 75–88. 46. The key ideas in this literature are best summarized in C. K. Prahalad and Venkat Ramaswamy, The

Future of Competition: Co-creating Unique Value with Customers, Boston, MA: Harvard Business School Press, 2004.

47. Kapil Tuli, Sundar Bhardawaj, and Ajay Kohli, “Ties That Bind: The Impact of Multiple Types of Ties with a Customer on Sales Growth and Sales Volatility,” Journal of Marketing Research, February 2010, pp. 36–50.

Chapter 8 1. Don Peppers and Martha Rogers, “Return on Customer: A New Metric of Value Creation,” Journal of

Direct, Data and Digital Marketing Practice, April/June 2006, pp. 318–332. 2. Alison Savery, “How to Calculate & Track a Leads Goal That Sales Supports,” Hubspot, March 16, 2012,

https://blog.hubspot.com/blog/tabid/6307/bid/31902/How-to-Calculate-Track-a-Leads-Goal-That- Sales-Supports.aspx#sm.0000bzy3uc8dcfruui516q6zd8sdg

3. Ibid. 4. Pamel Vaughan, “The Steps You Need to Define the Stages of Your Sales & Marketing Funnel,”

Hubspot, October 17, 2012, http://blog.hubspot.com/blog/tabid/6307/bid/33711/The-Steps-You-Need- to-Define-the-Stages-of-Your-Sales-Marketing-Funnel.aspx#sm.0000bzy3uc8dcfruui516q6zd8sdg

5. Brian Halligan and Dharmesh Shah, Inbound Marketing, Hoboken, NJ: John Wiley & Sons, Inc, pp. 109–140.

6. Mike Volpe, “The 6 Marketing Metrics & KPIs Your CEO Actually Cares About [Cheat Sheet],” January 15, 2013, http://blog.hubspot.com/blog/tabid/6307/bid/34054/The-6-Marketing-Metrics-Your- CEO-Actually-Cares-About-Cheat-Sheet.aspx#sm.0000bzy3uc8dcfruui516q6zd8sdg

Notes 359

7. Ibid. 8. Halligan and Shah, op cit, p. 122. 9. David B. Godes “Avaya (A),” Harvard Business School Publishing, Boston: MA, 2008.

10. Jonathan John, “7 Ways You Could be Screwing Up Your Sales Funnel,” Smart Insights, August 21, 2015, http://www.smartinsights.com/ecommerce/7-ways-you-could-be-screwing-up-your-sales-funnel/

11. Halligan and Shah, op cit, p. 113. 12. Philip E. Pfeifer and Paul W. Farris, “Customer Profitability,” University of Virginia Note HBS - UV0407

(2005) and Elie Ofek, “Customer Profitability and Lifetime Value,” Harvard Business School Note 9-503-019, Cambridge, MA: Harvard Business School, 2002.

13. Sunil Gupta, Donald R. Lehmann, and Jennifer Stuart, “Valuing Customers,” Journal of Marketing Research, February 2004, pp. 7–18.

14. V. Kumar and Denish Shah, “Expanding the Role of Marketing: From Customer Equity to Market Capitalization,” Journal of Marketing, November 2009, pp. 119–136.

15. Thomas Steenburgh, Jill Avery, and Naseem Daho, “HubSpot: Inbound Marketing and Web 2.0,” Harvard Business School Case 9-509-049, Cambridge, MA: Harvard Business School, 2011.

16. Pfeifer and Farris, op cit. 17. “About Us,” XO Group, http://xogroupinc.com/about-us/ 18. V. Kumar, Andrew Petersen, and Robert P. Leone, “How Valuable is Word of Mouth?,” Harvard

Business Review, October 2007, pp. 139–146. 19. Once the average individual customer value is derived, it can be multiplied by the number of firm

customers in the segment in order to derive the total value of the segment. 20. V. Kumar, Managing Customers for Profits, Upper River Saddle, NJ: Pearson, 2008. 21. Sunil Gupta and Donald R. Lehmann, “Customers Assets,” Journal of Interactive Marketing, December

2003, pp. 9–24. Sunil Gupta and Donald R. Lehmann, Managing Customers as Investments, Philadel- phia: Wharton School Publishing, 2005.

22. If companies are effectively spending on acquisition, these budgets should be lifting their acquisition rates. This potential relationship can be accounted for in a regression model. To do so, the company needs to understand the relationship between spending and response. Think of this like an elasticity—for each dollar spent on acquisition, what happens to the acquisition rate? This calculation, estimated in a simple regression model, can use the company’s data or, if working with a consultant, broader industry data. Once calculated, the company can take the resulting parameters from the output of the estimated equation (which are the intercept α and slope β) and use these together with any acquisition cost (AC) level to compute an adjusted acquisition rate (AR) that accounts for the impact of acquisition spend. This is shown in the following equation where AR is replaced by α β1 ACs as in PLV s α β1 ACs CLV s ACs. This can be made more complicated by allowing for diminishing returns in AC’s effect on AR but a good start on assessing the shape of the relationship will be captured in a simple linear regression.

Chapter 9 1. David A. Aaker, Managing Brand Equity, New York: Free Press, 1991, p. 57. 2. “Shoppers Like Wide Variety of Houseware Brands,” Discount Store News, October 24, 1988, p. 40. 3. Leo Bogart and Charles Lehman, “What Makes a Brand Name Familiar?” Journal of Marketing

Research, February 1973, pp. 17–22.

Chapter 10 1. This touchpoint process model is taken from Scott M. Davis and Michael Dunn, Building the Brand

Driven Business, San Francisco: Jossey-Bass, 2002.

360 Notes

2. Patrick Spenner and Karen Freeman, “Keep It Simple,” Harvard Business Review, May, 2012, pp. 109–114.

3. Rajeev Batra, Aaron Ahuvia, and Richard P. Bagozzi, “Brand Love,” Journal of Marketing, March, 2012, pp. 1–16.

4. Russell W. Belk, “Possessions and the Extended Self,” Journal of Consumer Research, September 1988, p. 139.

5. Batra et.al., op cit, p. 8. 6. Batra et.al., op cit, p. 8. 7. Jim Stengel, “GROW: How Ideals Power Growth and Profit at the World’s Greatest Companies,” Crown

Business, 2011.

Chapter 11 1. Branded differentiators and branded energizers are introduced and discussed in more detail in Chapter 5

of David Aaker, Brand Portfolio Strategy, New York: The Free Press, 2005. 2. Gregory S. Carpenter, Rashi Glazer, and Kent Nakamoto, “Meaningful Brands from Meaningless

Differentiation: The Dependence on Irrelevant Attributes,” Journal of Marketing Research, August 1994, pp. 339–350.

3. John Gerzema and Ed Lebar, The Brand Bubble, San Francisco: Jossey-Bass, 2008, Chapters 1 and 2. 4. Kevin Lane Keller, Strategic Brand Management, 2nd ed. Saddle River, NJ: Prentice Hall, 2003, p. 317. 5. James Crimmins and Martin Horn, “Sponsorship: From Management Ego Trip to Marketing Success,”

Journal of Advertising Research, July–August 1996, pp. 11–21. 6. Ibid. 7. Kellie A. McElhaney, Just Good Business, San Francisco: Berrett-Koehler Publishers, 2008.

Chapter 12 1. “TippingSprung Publishes Results for Fifth Annual Brand-Extension Survey,” PRWEB, January 7, 2009. 2. Op. cit. 3. Chris Zook, “Finding Your Next Core Business,” Harvard Business Review, April 2007, p. 70. 4. Adrian Slywotsky and Richard Wise, How to Grow When Markets Don’t, New York: Warner Business

Books, 2003. 5. Chris Zook with James Allen, Profit from the Core, Boston: Harvard Business School Press, 2001; Chris

Zook, Beyond the Core, Boston: Harvard Business School Press, 2004. 6. Zook, Beyond the Core, p. 22. 7. Ibid, p. 112. 8. Ibid, pp. 87–88. 9. Ibid, p. 36.

10. “How eBay Developed a Culture of Experimentation,” Harvard Business Review, March 2011, pp. 93–97.

11. Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance, New York: Harper Business, 2002, pp. 251–252.

12. Robert G. Eccles, Kirsten L. Lanes, and Thomas C. Wilson, “Are You Paying Too Much for That Acquisition?” Harvard Business Review, July–August 1999, pp. 136–143.

Chapter 13 1. David Aaker, Brand Relevance: Making Competitors Irrelevant, San Francisco: Jossey-Bass, 2011. 2. Richard Foster and Sarah Kaplan, Creative Destruction, New York: Doubleday, 2001, p. 47. 3. W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy, Boston: HBS Press, 2005, p. 7.

Notes 361

4. Peter N. Golder and Gerard J. Tellis, “Pioneer Advantage: Marketing Logic or Marketing Legend?” Journal of Marketing Research, May 1993, pp. 158–170.

5. Gerard J. Tellis and Peter N. Golder, “First to Market, First to Fail? Real Causes of Enduring Market Leadership,” Sloan Management Review, Winter 1996, pp. 65–75.

6. Special thanks to John Gerzema and staff at BAV Consulting for providing this list. 7. James Daly interview with Peter Drucker, “Sage Advice,” Business 2.0, August 22, 2000, p. 139. 8. The example is recounted in James C. Anderson and James A. Narus, “Selectively Pursuing More of Your

Customer’s Business,” MIT Sloan Management Review, Spring 2003, pp. 43–49. 9. Rita Gunther McGrath and Ian C. MacMillan, “Market Busting,” Harvard Business Review, March

2005, pp. 81–89. 10. Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail,

Boston: Harvard Business School Press, 1997; Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth, Boston: Harvard Business School Press, 2003; and Clayton M. Christensen, Scott D. Anthony, and Erik A. Roth, Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change, Boston: Harvard Business School Press, 2004.

11. Matthew S. Olsen, Derek van Berer, and Seth Verry, “When Growth Stalls,” Harvard Business Review, March, 2008, pp. 51–61.

12. George S. Day, “Is It Real? Can We Win? Is It Worth Doing,” Harvard Business Review, December, 2007, pp. 110–120.

13. Robert G. Cooper, “Your NPD Portfolio May Be Harmful to Your Business Health,” PDMA Visions, April 2005.

14. Mizik, Natalie (2010), “The Theory and Practice of Myopic Management,” Journal of Marketing Research, 47 (4), pp. 594–611.

Chapter 14 1. Douglas B. Holt, John A. Quelch, and Earl L. Taylor, “How Global Brands Compete,” Harvard Business

Review, September 2004, pp. 68–75. 2. C. K. Prahalad and Hrishi Bhattacharyya, How to be a Truly Global Company,” Strategy & Business, 64,

Autumn, 2011, pp. 54–61. 3. Gary Hamel and C. K. Prahalad, “Do You Really Have a Global Strategy?” Harvard Business Review,

July–August 1985, pp. 139–148. 4. Geoffrey Jones, “The Growth Opportunity that Lies Next Door,” Harvard Business Review, July–

August 2012, p. 145. 5. Theodore Levitt, “The Globalization of Markets,” Harvard Business Review, May–June 1983, pp. 92–102. 6. The material in this section draws from Chapter 5 of the book Spanning Silos by David Aaker, Boston:

Harvard Publishing Company, 2008. 7. KarleneLukovitz,“BrandsLoseRelevanceinFood-BuyingDecisions,”MarketingDaily,October21,2008. 8. Toshio Wakayama, Junjiro Shintaku, and Tomofumi Amano, “What Panasonic Learned in China,”

Harvard Business Review, December 2012, pp. 109–112. 9. James Root and Josef Ming, “Keys to Foreign Growth: Four Requisites for Expanding Across Borders,”

Strategy & Leadership, Vol. 34, No. 3 (2006), pp. 59–61. 10. Victoria Griffith, “Welcome to Your Global Superstore,” Strategy + Business, Vol. 26, 2002, p. 95. 11. Ibid. 12. “Heading for the Exit,” Economist, August 5, 2006, p. 54. 13. Normandy Madden, “Looking to Grow in China? Ad Age Has 10 Surefire Tips,” Advertising Age, May 4,

2009, pp. 3, 30. 14. Anita Chang Beattie, “Catching the Eye of the Chinese Shopper,” Advertising Age, December 10, 2012.

pp. 20–22.

362 Notes

15. Jeffrey H. Dyer, Prashant Kale, and Harbir Singh, “How to Make Strategic Alliances Work,” MIT Sloan Management Review, Summer 2001, pp. 37–43.

Chapter 15 1. Tom Kraeutier, “The Home Depot drops EXPO business,” Weblogs, January 27, 2009. 2. Chris Zook, Beyond the Core, Boston: HBS Press, 2004, p. 23. 3. Zook, op-cit, p. 24. 4. Lee Dranikoff, Tim Koller, and Antoon Schneider, “Divestiture: Strategy’s Missing Link,” Harvard

Business Review, May 2002, pp. 75–83. 5. An excellent article that documents these biases and suggests solutions is John T. Horn, Dan P. Lovallo,

and S. Patrick Viguerie, “Learning to Let Go: Making Better Exit Decisions,” McKinsey Quarterly, 2006, No. 2, pp. 65–76.

6. Dale E. Zand, “Managing Enterprise Risk: Why a Giant Failed,” Strategy & Leadership, 2009, Vol. 37, No. 1, pp. 12–19.

7. This material draws from David Aaker, Brand Portfolio Strategy, New York: The Free Press, 2004, Chapter 10.

Chapter 16 1. Jeff Bezos, “Video from Jeff Bezos about Amazon and Zappos,” YouTube, July 22, 2009, https://www.

youtube.com/watch?v=-hxX_Q5CnaA 2. Tony Hsieh, Delivering Happiness, New York: Business Plus, 2010. 3. Many of the ideas in this chapter were drawn from George S. Day and Christine Moorman,

Strategy from the Outside In, New York: McGraw Hill, 2010 and Christine Moorman and George S. Day, “Organizing for Marketing Excellence,” Journal of Marketing, November 2016, pp. 6–35.

4. Peter Drucker, The Practice of Management, New York: Harper and Row, 1954. 5. Ahmet H. Kirca, Satish Jayachandran, and William O. Bearden, “Market Orientation: A Meta-Analytic

Review and Assessment of Its Antecedents and Impact on Performance,” Journal of Marketing, April 2005, pp. 24–41.

6. Christian Homburg and Christian Pflesser, “A Multiple-Layer Model of Market-Oriented Organizational Culture: Measurement Issues and Performance Outcomes,” Journal of Marketing Research, November 2000, pp. 449–462. Gary F. Gebhardt, Gregory S. Carpenter, and John F. Sherry, Jr. (2006), “Creating a Market Orientation: A Longitudinal, Multifirm, Grounded Analysis of Cultural Transformation,” Journal of Marketing, October 2006, pp. 37–55.

7. George S. Day and Christine Moorman, “Regaining Customer Relevance: The Outside-In Turn- around,” Strategy & Leadership, June 2013, pp. 17–23.

8. A.G. Lafley and Ram Charan, “The Customer is Boss,” The Game-Changer, New York: Crown Business 2008.

9. Theodore Levitt, “Marketing Myopia,” Harvard Business Review 38 (July/August 1960): 56. 10. Paul Kaihla, “Best Kept Secrets of the World’s Best Companies,” Business 2.0 (3, 2006), p. 94. 11. Louis V. Gerstner Jr., Who Says Elephants Can’t Dance, New York: Harper Business, 2002. 12. Ron Winslow, “How a Breakthrough Quickly Broke Down for Johnson & Johnson,” Wall Street Journal

(September 18, 1998), p. A1. 13. Gebhardt, Carpenter, and Sherry, op cit. 14. Son K. Lam, Florian Kraus, and Michael Ahearne, “The Diffusion of Market Orientation Throughout

the Organization: A Social Learning Theory Perspective,” Journal of Marketing, September 2010, pp. 61–79.

Notes 363

15. Kohli, Ajay K. and Bernard J. Jaworski (1990), “Market Orientation: The Construct, Research Propositions, and Managerial Implications,” Journal of Marketing, April 1990, pp. 1–18.

16. Kirca, Jayachandran, and Bearden, op cit. 17. George S. Day and Paul Schoemaker, Peripheral Vision, Boston: Harvard Business School Press, 2006. 18. This part of the chapter draws on David Aaker, Spanning Silos: The New CMO Imperative, Boston:

Harvard Business Press, 2008. 19. Based on an interview with Dr. Yanos Michopoulous, Global Leadership Team, Shell International. 20. Philip Kotler, Neil Rackham, and Suj Krishnaswamy, “Ending the War Between Sales & Marketing,”

Harvard Business Review, July/August 2006, pp. 1–13. 21. Goutam Challagalla, Brian R. Murtha, and Bernard Jaworski (2014), “Marketing Doctrine: A Principles-

based Approach to Guiding Marketing Decision Making in Firms,” Journal of Marketing, July 2014, pp. 4–20.

22. Matt Egan, “5,300 Wells Fargo employees Fired Over 2 Million Phony Accounts,” CNN Money, September 9, 2016, http://money.cnn.com/2016/09/08/investing/wells-fargo-created-phony-accounts- bank-fees/

23. “Wells Fargo’s Phony-Account Scandal, Explained,” The Week, September 17, 2016, http://theweek. com/articles/649015/wells-fargos-phonyaccount-scandal-explained

24. Gail McGovern and John Quelch, “Gary Loveman Interview,” Measuring Marketing Performance, Cambridge, MA: Harvard Business School Publishing, 2007.

25. Beth Comstock, Ranjay Gulati, and Stephen Liguori, “Unleashing the Power of Marketing,” Harvard Business Review, October 2010, pp. 90–98.

26. “Beth Comstock: Make Heroes Out of the Failures,” 99U, http://99u.com/videos/7079/Beth-Comstock- Make-Heroes-Out-of-the-Failures

27. Tom Peters, “LEADERSHIP: 4 Most Important Words,” YouTube, August 11, 2010, https://www. youtube.com/watch?v=aOoy7QavONQ

28. Felicitas M. Morhart, Walter Herzog and Torsten Tomczak, “Brand-Specific Leadership: Turning Employees into Brand Champions,” Journal of Marketing, September 2009, pp. 122–142.

29. Tom J. Brown, John C. Mowen, D. Todd Donovan, and Jane Licata (2002), “The Customer Orientation of Service Workers: Personality Trait Effect on Self- and Supervisor Performance Ratings,” Journal of Marketing Research, February 2009, pp. 110–119.

30. Alex R. Zablah, George R. Franke, Tom J. Brown, and Darrell E. Bartholomew, “How and When Does Customer Orientation Influence Frontline Employee Job Outcomes? A Meta-Analytic Evaluation,” Journal of Marketing, May 2012, pp. 21–40.

31. Steven P. Brown and Son K. Lam, “A Meta-Analysis of Relationships Linking Employee Satisfaction and Customer Responses,” Journal of Retailing, September 2008, pp. 243–255. Wagner A. Kamakura, Vikas Mittal, Fernando de Rosa, and Jose Afonso Mazzon, “Assessing the Service-Profit Chain,” Marketing Science, Summer 2002, pp. 294–317.

32. Marc Gunther, “Marriot Gets a Wake-Up Call,” Fortune 160 (July 2009), p. 62. 33. Marc Gunther, “Marriot Family Values,” Fortune, May 25, 2007, http://archive.fortune.com/2007/05/24/

news/companies/pluggedin_gunther_marriott.fortune/index.htm 34. C.C. Miller, “Now at Starbucks: A Rebound,” New York Times, January 21, 2010, B9. 35. “About Southwest,” Southwest Airlines, https://www.southwest.com/html/about-southwest/index.html?int

Chapter 17 1. See discussion in Rajendra Srivastava, Tasadduq A. Shervani, and Liam Fahey, “Market-Based Assets

and Shareholder Value: A Framework for Analysis,” Journal of Marketing, January 1998, pp. 5–6. 2. George S. Day and Christine Moorman, Strategy from the Outside In, New York: McGraw Hill, 2010,

pp. 135–139.

364 Notes

3. “USAA Auto Insurance Reviews,” The Planned Life, http://www.theplannedlife.com/insurance/auto- usaa.htm. Jeremy Hope and Tony Hope, Competing in the Third Wave: The Ten Key Management Issues of the Information Age, Boston, MA: Harvard Business School Press, 1997.

4. Lawrence F. Feick and Linda L. Price, “The Market Maven: A Diffuser of Marketplace Information,” Journal of Marketing, January 1987, pp. 83–97.

5. “2016 B2C Net Promoter Benchmarks,” Net Promotor Network, https://www.netpromoter.com/2016- nps-benchmarks/

6. Frederick F. Reichheld, “The One Number You Need to Grow,” Harvard Business Review, December 2003, pp. 1–9.

7. John Gerzema and Ed Lebar, “The Trouble with Brands,” Strategy + Business, Summer 2009, pp. 48–57.

8. Frank Cespedes and V. Kasturi Rangan, “Becton Dickinson & Company: VACUTAINER Systems Division (Condensed),” Harvard Business School Case 9-592-037, Cambridge, MA: Harvard Business School, 1991.

9. Claes Fornell, Forrester V. Morgeson III, and G. Tomas M. Hult, “Stock Returns on Customer Satisfaction Do Beat the Market: Gauging the Effect of a Marketing Intangible,” Journal of Marketing, September 2016, pp. 92–107.

10. Ron Amadeo, “The Google Pixel: A Nine Month Dash to Model an HTC Phone into a Google Product,” ArsTechnica,October24,2016,http://arstechnica.com/gadgets/2016/10/the-google-pixel-a-nine-month- dash-to-mold-an-htc-phone-into-a-google-product/

11. Nader T. Tavassoli, Alina Sorescu, and Rajesh Chandy (2014), “Employee-based Brand Equity: Why Firms with Strong Brands Pay Their Executives Less,” Journal of Marketing Research, December 2014, pp. 676–690.

12. Eugene W. Anderson and Sattar A. Mansi, “Does Customer Satisfaction Matter to Investors,” Journal of Marketing Research, October 2009, pp. 403–414.

13. Sunil Gupta, Donald R. Lehmann, and Jennifer Ames Stuart, “Valuing Customers,” Journal of Marketing Research, February 2004, pp. 7–18.

14. LeylandPAM, “Warren Buffett speaks with Florida University,” YouTube, July 2, 2013, https://www. youtube.com/watch?v=2MHIcabnjrA

15. “About Us,” Linkedin, https://press.linkedin.com/about-linkedin 16. Gupta, Lehmann, and Stuart, op cit. 17. Sarah Frier and Adam Satariano, “Microsoft Pays $26 Billion for LinkedIn in Biggest Deal Yet,”

Bloomberg Technology, June 13, 2016, https://www.bloomberg.com/news/articles/2016-06-13/ microsoft-to-buy-linkedin-in-deal-valued-at-26-2-billion-ipe079k9

18. Thomas H. Davenport, “7 Ways Microsoft Can Make LinkedIn Worth $26 Billion,” Harvard Business Review Blog, June 13, 2016, https://hbr.org/2016/06/7-ways-microsoft-can-make-linkedin-worth-26- billion

19. “About Twitch,” Twitch, https://www.twitch.tv/p/about 20. David Carr, “Amazon Bets on Content in Deal for Twitch,” The New York Times, August 31, 2014, http://

www.nytimes.com/2014/09/01/business/media/amazons-bet-on-content-in-a-hub-for-gamers.html?_r=0 21. Laura Prudom, “Game of Thrones Season 6 Finale Ratings Hit Series High,” Variety, June 28, 2016,

http://variety.com/2016/tv/ratings/game-of-thrones-ratings-season-6-finale-record-1201805035/ 22. Adam Satariano and Brad Stone, “Amazon Bets on Game Website Twitch in $970 Million Deal,”

Bloomberg, August 26, 2014, https://www.bloomberg.com/news/articles/2014-08-25/amazon-buying- gamer-website-twitch-for-1-billion

23. Eugene Kim, “Amazon Just Made Thousands of Books Free for Its Prime Members – Here’s a Simple Reason Why,” Business Insider, October 5, 2016, http://www.businessinsider.com/amazon-prime- members-spend-a-lot-more-than-non-prime-members-2016-10

Notes 365

24. Sarah Gordon, “Virgin Group: Brand it like Branson,” Financial Times, November 5, 2014, https://www. ft.com/content/4d4fb05e-64cd-11e4-bb43-00144feabdc0

25. Sean Stonefield, “The 10 Most Valuable Trademarks,” Forbes, June 15, 2011, http://www.forbes.com/ sites/seanstonefield/2011/06/15/the-10-most-valuable-trademarks/#7b8a43a41c29

26. Adi Ignatius, “Jeff Bezos on Leading for the Long-Term at Amazon,” Harvard Business Review, January 2013, https://hbr.org/2013/01/jeff-bezos-on-leading-for-the.html

366 Notes

I N D E X

A acquisitions for leveraging a business,

215 actual and potential market

potential market, 62 substantial business, 62

Acura, 107 Adidas, 26, 184, 204 advantages. See also leveraging the

business; sustainable competitive cost advantage, 248, 251, 257, 267 innovator’s advantage, 234–236

affinity charts, 29 Aflac, 206 aggregate impact, 28 Airbnb, 85, 99–100, 181, 201, 257 airline industry, 25, 29, 32, 42, 98, 296 Aldi, 107, 188 Align brand identity, 174 alliance partners, 259–263 alternative value propositions (AVPs).

See also scale economies performance value, 104–107 price value, 107–108 relational value, 108–110

Amazon, 63, 283, 286 breadth of product line, 167 competing against Amazon,

326–328 customer-centric culture, 286 customer relationships, 8 early positioning, 167 failure to brand customer reviews,

196–197 growth into new categories, 69 long-term, 314 niche marketing, 63 One-Click, 196 ordering process as value added

component, 50 purchase of Twitch, 313 scope of, 6 synergies, 117 value proposition of, 7

American Can Company, 274

American Express, 140, 141, 155, 173, 191

Ampex video recorders, 235 analysis outputs. See also external

analysis; internal analysis; opportunities

competitive strength grid, 52–55 overview, 11 scenario analysis, 21, 22, 349

Annie Chun, 220, 241 annual strategic plan. See also

business strategies anthropological research, 34, 239 Apple

building a valuable brand, 317–319 competing with General Motors,

117 customer experience, 130 design, 50, 130, 231 doctrine, 291 innovation, 241, 242 iPhone, 197, 234 iPod, 196, 198 logo, 187 Macintosh, 241 Newton’s failure, 73 ordering process as value added

component, 50 scope of, 6 self-expressive benefit, 188 Steve Jobs, 207 store, 201 user group, 82 value proposition of, 7

App Store, 78, 319 Aquafina, 98, 111 Ariat, 31 Arm & Hammer, 27, 209, 219 Asahi Dry Beer, 232, 235, 238 Asea Brown Boveri, 110 aspirational association, 172 asset leverage, 236 assets and competencies. See also

brand assets; relevant assets and competencies

of competitors, 49, 50, 342 identifying for leveraging, 215 and innovation evaluation, 241 key success factors, 70–71 overview, 7–8 protecting during strategic

alliances, 261, 262 and strategic imperative, 174

assets and liabilities, 163. See also brand

associations, 170, 171. See also brand associations

automobile industry 4-wheel drive offerings, 197 luxury car market competitor

strength grid, 52–54 as powerful customer for tire

companies, 68 relevance concept, 61 transformational innovations in, 84

aviation industry, 28 Avon, 183, 185, 206, 207, 221, 257 Avon Breast Cancer Crusade,

206, 207

B B2B (business-to-business)

experience, 72 backward integration, 44 Bain & Company, 269 Balance bar, 41, 320 Banana Republic, 26, 36, 173 Bank of America, 41, 52, 226,

245, 263 Barbie, 169, 226 barriers to success, 235. See entry

barriers; exit barriers Baskin–Robbins, 254 Bausch & Lomb, 7 Bayer, 239 Beiersdorf, 26 benefits from product segmentation

variables, 25 Best Buy, 73 Betty Crocker, 36, 181, 239

367

biases inhibiting new business creation, 242–243

big data trends, 83 Birkins, 105 Black & Decker, 35, 97, 167, 215, 216 BMW, 24, 53, 54, 82, 87, 105, 162,

173, 187, 201, 232 Boston Consulting Group (BCG),

267, 268 BP, 253 brand. See also brand strategy

business strategy and, 162, 175, 267 Gallo of Sonoma market strategy,

13 local heritage, 256 marketing and, 200–207 overbranding, 275 standardization vs. customization,

253–257 strategic alliances for gaining access

to, 260–261 subbrands, 275, 278

brand analysis, 255–257 brand architecture. See also assets and

competencies; brand equity brand awareness, 163–164 leveraging, 215, 216

brand assets, 15, 86, 162, 168, 200, 216, 236, 311, 313–314, 329–331

Brand Asset Valuator (Young & Rubicam), 86, 200

brand associations brand personality, 45, 168, 187 contemporary, 167–168 emotional benefits, 172, 187–188 the experience, 195–196 global, 250 organizational intangibles, 166 overview, 165 product category, 166 self-expressive benefits, 173

brand awareness, 148, 162–164 brand descriptor roles, 278 branded CEOs, 207 branded differentiators, 198–199,

202, 203 branded energizers, 202–203 branded promotional activities, 205 branded social programs, 206–207 branded sponsorships, 203–204 brand endorsers, 204–205 brand equity, 162–176

brand add value, 218–219 brand awareness, 163–164 brand fit new product, 218

brand identity, 171–176, 217 brand personality, 168 brand position, 196–198, 256 brand salience, 163 extension and brand name, 219 and goodwill, 303 impact on firm revenues, 304–307 impact on firm value, 307–311 intangible marketing assets, 304 and Dove, 329 overview, 162

brand essence, 173 brand extension logic, 217 brand extensions for leveraging the

business, 216–219 brand/firm associations, 334, 335 brand identity, 171–176, 217 brand image, 52, 130, 134, 162, 167,

171, 217, 255, 269, 292, 294, 318, 334

BrandJapan, 47 brand loyalty

as aspect of brand equity, 164 and customers, 26, 27, 52, 164 loyalty matrix, 26, 27

brand management, global, 256, 263 brand managers, 254, 290 brand personality, 45, 166, 168 brand portfolio, 275–280 brand position, 175–176, 198–200,

259 brand proliferation, 266 brand relevance, 231 brand salience, 163 brand strategy

brand identity, 171–176 brand personality, 168 and business strategy, 267 and relevance, 61

brand-use associations, 40–42 Branson, Richard, 169, 201, 207 British Airway, 170 Budweiser, 43, 52 Buick, 25, 27, 276 building and managing customer

relationships customer decision journey,

122–128 improving customer experience,

135–137 long-term customer relationships,

138–142 measuring customer experience,

133–135 Burger Chef, 224

Burger King, 26 business and technology trends big data, 83 cultivating vigilance, 88 economic trends, 87–88 government/policy trends, 86–87 innovations, 83–84 sustainable businesses, 85–86 workplace, 84–85

businesses and competitor analysis, 44–46,

51, 52 and innovation, 2 intangible benefits, 171 limitations and high-growth market

risks, 71–75 overview, 3–4 position and divestiture decision,

269, 270 prospects and brand value, 277

business model elements, 116 value-capture mechanisms, 116 value-creating system, 115

the business portfolio, 266, 268, 275, 348

business strategies and brand, 162, 267 contingency plans, 92 and core identity, 172–173 criteria for selecting, 9–10 decentralization model, 2,

273, 274 and divestment or liquidation

decision, 269–272 functional strategies and programs,

3–4, 8–10 and global footprint, 249, 257–259,

263 indications of need for global

strategies, 250, 251 and innovation evaluation, 242 milking cash cows, 272–274, 278,

280, 281 overview, 3–11, 15 product-market investment

strategy, 350 ROI considerations, 9, 241 and strategic market management

system, 10–14 strategic uncertainties and, 21

business-to-business (B2B) exchanges, 72

business units. See silo units Business Week, 73

368 Index

buyer hot buttons, 30 buyer sophistication, 65

C Cadillac, 54, 196, 231 Caesars Entertainment Corporation,

292 Campbell Soup, 28, 44, 255 Canon, 234, 241, 254 capital, 21, 45, 51 Cardinal Health, 220 cash cows or milking strategy,

272–275, 279 category perceptions, managing,

236–237 Caterpillar, 50, 52, 195, 252 CD sales, 73 cement market, 65 Cemex, 239 Centurion Industries, 279, 280 CEOs, branded, 207 channel barriers, 42, 43 channels of distribution, 69 Charles Schwab, 62, 138, 211,

232, 305 Chase Manhattan, 208 Chase & Sanborn, 273 Chevrolet, 27, 167, 231, 276 Chevron, 62, 139, 198, 289 Chief Marketing Officer (CMO), 3,

14, 162, 293 China, marketing in, 259 Chipotle Mexican Grill, 65 Christensen, Clayton, 240 Chrysler, 207, 231–233, 260 Chux disposable diapers, 235 Circuit City, 26 Cirque du Soleil, 84, 230–232,

242 Cisco, 40, 84 CitiGroup, 167 Clairol, 223 Clarke American Checks, 220 Clif, 41, 42, 320 Clinique, 126, 127, 209 Clorox, 46, 120, 163 CNN, 41, 56, 168 Coach, 219 Coca-Cola

“American” position of brands, 254 brand energy, 201 global brand building, 250, 251 Global Water Initiative, 89–90 in India, 258 moats, 310

partner with World Wildlife Foundation, 182–183

share of wallet, 305 size curse of, 243

Coca Cola Company, 89–90, 98, 111 coffee competitors, 41 Colgate’s Total, 195 collectivism trend, 80 Comcast, 113 commitment curse, 243 communication, 198, 207, 209 communication modalities, 225 companion products, 218 company performance

customer and brand equity impact, 304–307

how markets value marketing assets, 311–314

managing marketing firm value, 314–315

marketing assets effect, 307–311 competencies. See assets and

competencies competition. See also competitor

analysis; competitors; sustainable competitive advantage

brand loyalty as buffer, 164, 165 from existing competitors, 62–63 and market selection in global

arena, 258 from potential competitors, 67 overcrowding, 71–72, 74 superior competitive entry, 72 vulnerability to innovation, 165,

218 competitive intensity and divestment

decision, 269 competitive risks in high-growth

markets, 71–74 competitive strength grid, 52–54

analysis process, 54 analyzing submarkets, 54 luxury car market, 52–54

competitor actions model, 44–49 competitor analysis, 39–55

assessing strengths and weaknesses, 48–52

brand identity, 171–176 and business portfolio, 267, 268 competitive strength grid, 52–54 competitor identification, 40–43 Nintendo’s success with, 47, 48 obtaining information on

competitors, 55 overview, 12, 39, 40, 55

planning form, 338–342 potential future competitors, 44 understanding competitors, 44–49 underestimating quantity and

commitment, 72 competitors and business strategy, 4–7 and cross-subsidization threat, 252 and loyalty matrix, 27 and market profitability, 66 major competitor planning form,

340, 341 primary vs. indirect, 41, 42 strength grid, 342 understanding your, 44–49

Comstock, Beth, 293 confirmation bias, 271, 272 Consumer Reports, 325 contemporary art price premiums,

188 contemporary brand associations,

167–168 contingency plans, 92 convenience shoppers, 28 Coppertone, 218 core business and stand-alone

innovative entity, 243, 244 core identity, 172–173 corporate brand and silos, 13, 14 cost advantage and market-share dimension, 267,

268 sources of, 215, 249, 251, 252, 258 and superiority, 51

cost of maintaining unprofitable business units, 269, 271

cost structure, 46, 68–69, 344 Courtyard by Marriott, 219 Crayola, 163 creating new businesses, 230–244 arenas for, 231, 237 from ideas to market, 242–244 managing category perceptions,

236–237 overview, 230

creating strategic synergies, 116–117 creating valuable customers customer lifetime models, 152–157 customers as valuable assets, 157 pitfalls in funnel management,

150–152 purchase funnel, 147–150

creative external analysis, 22 creative thinking methods, 199–200 credible brand positions, 176

Index 369

Credit Swiss, 204 Crest, 6, 166, 186, 206 critical mass in global arena, 258, 259 CRM. See customer relationship

management cross-market exposures, 253 cross-subsidization, 252 Crystal Pepsi, 224 CT scanner industry, 50 cultural trends (social), 80–82, 256 culture (business)

and brand equity, 165, 175 and competitor analysis, 45, 46, 51 core identity as reflection of,

172–173 customer-centric, 284–286 entrepreneurial, 52 frugal, 107 synergies, 225 culture (global strategies), 257,

259, 262 current strategies and competitor

analysis, 45, 46 curse of success, 243, 245 customer analysis, 23–35

brand identity, 171–176 buyer hot buttons, 30 consumer motivations, 28–31, 35 and cultural trends, 80–82 customer use experience, 220 overview, 12, 23, 24 planning form, 337, 338 segmentation strategies, 23, 204 unmet needs, 31–35, 239

customer-centric approach, 283 customer-centric competencies,

286–288 customer centricity, 283–285

customer-centric organizational cultures, 284–286

customer-centric structure, 288–291

customer-centric talent, 294–296 leading for, 292–294 metrics and incentives for, 291–292

customer-centric organizational cultures

building and sustaining, 285–286 traits of, 284–285

customer-centric organizational structure

centralize selectively, 291 silos, 288–291 managing structure to span silos,

289–291

customer-centric talent align internal and external brand,

296 customer value, 294–295 educate employees on customer

requirements, 295 employee and customer

satisfaction, 294 empower employees, 295–296 hire customer-oriented employees,

294 customer characteristics approach to

segmentation, 24, 204 customer decision journey

complex nature of, 124–127 consideration set, 125 core elements of, 122–123 information gathering, 125 managing the, 127–128 post-purchase, 126 preference, 125 purchase, 125 skincare, 126–127 trigger, 124–125

customer-driven idea Web sites, 33 customer equity

definition, 146 erosion, 285 impact on firm revenues, 304–305 impact on firm value, 307–311 intangible marketing asset, 304

customer experience manage by brand or its partners, 131 controlled by the customer, 132 different meanings of, 128–129 factors affecting, 129–130 GE power systems, 130–131 office depot’s customer experience

turnaround, 131 social/external sources control,

132–133 strategic importance of, 129

customer lifetime models account for and facilitate customer

transitions, 154–155 acquisition cost expenditures, 157 assign marketing costs, 156 customer management and

acquisition, 153–154 general approaches, 152–153 invest in prospects, 156–157 by lowering acquisition costs, 155 missing individual data, 155 need to account for when money

arrives, 155

predict and mitigate churn, 154 typical customer is active,

155–156 customer orientation, 3, 51, 52 customer relationship management

(CRM), 109, 238 customer decision journey,

122–128 improving customer experience,

135–137 long-term customer relationships,

138–142 measuring customer experience,

133–135 customer relationships buy new offerings, 305 endorse the firm, 305 greater share of wallet, 305 lower defection rates, 304

customers as active partners, 31–34 and branded social programs, 207 and brand loyalty, 26, 27, 52 for competitor identification,

40–42 and customer trends, 240 existing usage of, 208–211 involving in brand energizing, 201 low-end market, 240 power superior to seller’s, 67–68 priorities of, 31 satisfaction and loyalty of, 334 sophistication and knowledge of, 65

customer service branded differentiators, 198–199 innovation in, 167–168 type of performance value,

104–107 customers valuable assets, 157 customer value, 294–295 customer value leadership business model, 114 changing market realities, 117–118 creating strategic synergies,

116–117 evolving value propositions,

113–114 managing for, 114 monitoring morphing market

boundaries, 117 parity performance, 111 points of difference, 112 points of parity, 112 tradeoffs, 114 workplace communications, 113

370 Index

customer value propositions identifying motivations central to,

29, 30 marketing role in determining, 14 overview, 7 and submarket growth, 65

customized products and brands in global arena, 254–257

D Daimler-Benz, 255 Darn Tough, 105 Dasani, 98, 111 Datsun, 163 Day, George, 241–242 DDB Needham’s Sponsor-Watch,

204 DeBeers, 181, 253 decentralization model, 2, 273, 275.

See also silo units decision-driven scenarios, 93 defensive strategies, 44 Dell Computer

brand image and distribution, 51, 52

business model, 84 call center as value added

component, 50 direct sales model, 43 Ideastorm Web site for customers,

33 Del Monte, 339 demographic data, 25, 346 demographics, defining segments, 25 demographic trends, 79–80 Denny’s, 201 descriptor roles for brands, 278 design and manufacturing skills, 216 design quality, 105 digital, see best digital practice

examples in each chapter community, 182 impact on competitive

threats, 117 health, 322 Lincoln campaign, 54 marketing skills and competences,

2, 314 photography, 88 platform at the XO Group, 154 technologies for customer

relationship management, 109, 157

differential value proposition (DVP) System, 293

differentiation branded differentiators, 198–199,

202, 203 and brand position, 198–199, 202,

203 core identity, 172–173 as entry barrier, 67 failure to utilize opportunities,

196–197 in global markets, 257–259 and low cost, 230–232 price pressure from lack of, 65, 67 and profitability analysis, 67 and trends vs. fads, 69, 70

Direct2Dell blog, 182 direct vs. indirect competitors, 41, 42 discounted cash flow (DCF) model,

152, 307, 314, 317 Disney

diversification of, 51, 52 leveraging brand, 117, 216–219 service delivery capability, 95

distribution constraints, 74 distribution systems, 69

constraints of, 74 as entry barrier, 67 and expansion into new market

segments, 221 and global strategies, 254 and market/submarket analysis, 69 planning form for market analysis,

344–345 utilizing excess capacity, 216

diversification, 6, 48, 51, 52 divestment or liquidation decision,

269–272, 280, 281 Dollar Shave Club (DSC), 96 Dometic, 220, 221 dominant brands, 163 Dove brand (Unilever), 253, 329–331 Dow, 32, 200, 289 Dow Chemical, 289 downhill skis, 22 driving forces. See also motivations

brand recall, 209, 277 global vs. local share, 258 identifying, 63 product-driven growth, 207, 208 scale economies, 263 for strategic repositioning, 195, 196 trends drivers, 70, 169

Drucker, Peter, 6, 70, 96, 272, 283, 284

dual organizations, 244 durable goods forecasts, 64

Duracell, 8, 203 dynamic markets. See market

dynamics

E EAS, the vitamin supplement, 222 eBay, 50, 63, 224, 235, 238 e-commerce, 224 economic recessions, 87–88 economies of scale. See scale

economies Eddie Bauer Edition Ford Explorer,

199 Elastic Compute Cloud (EC2), 117 emerging key success factors, 70 emerging market, owning, 236 emerging submarkets, 60–62, 343 emotional attachment to business

unit, 46, 47 emotional benefits and unmet needs,

172 employees and customer satisfaction, 294 educate employees on customer

requirements, 295 empower employees, 295–296 hire customer-oriented employees,

294 empower employees, 295–296 Endless Waters, 111 endorsed brands, 219 endorsers, 204–205 Energizer bunny, 203 energizing the business, 194–211 branded energizers, 202–203 energizing the brand and

marketing, 200–207 innovating the offering,

195–199 overview, 194–195, 210–211

energy bar market, 41–42, 320–321

Enterprise Rent-A-Car, 230 enthusiastic shoppers, 28 entrepreneurial culture, 51, 52 entry barriers assets and competencies, 50 channel barriers, 43 and competitive overcrowding,

71, 72 in global arena, 258 loyalty of existing customers,

164–165 overview, 67 and trends vs. fads, 69–70

Index 371

environmental analysis, 11, 12, 79–88. See also future environment; trends

cultural trends, 80–82 customer trends, 79 demographic trends, 79–80 economic trends, 87–88 and government regulations, 86–87 impact analysis of strategic

uncertainties, 91, 92 planning form, 346–347 scenario analysis, 347 sustainability, 82

Ernhart, 215–216 escalation of commitment bias, 271 ethnographic research, 33–35 evaluation of brands, 276, 277 evaluation of major innovations, 241 Evian, 187, 248 excess capacity of assets, 215 execution of strategic alliances,

261–262 executives surveyed on strategies, 14 exit barriers, 43, 45, 47, 48, 50, 260,

270–272 Expedia, 113 extended identity, 172 external analysis, 19–35

defining the market, 22 global focus, 248–249 objectives, 19, 20 overview, 11–12, 19, 20, 22–23, 35 strategic uncertainties, 19–22, 89,

347 timing of, 23

external energizer brands, 203

F fads vs. trends, 69–70 fashion quality, 105 fatal biases inhibiting new business

creation, 242 FedEx, 50, 67, 223, 326 femininity trend, 80 Ferragamo, 106 Fiat, 260 Fidelity Investments, 109 Fidelity Private Wealth Management,

109 financial performance. See also

investment decisions overview, 332 profitability, 44, 277, 333 sales and market share, 332–333 sales patterns and forecasts, 64

shareholder value, 333–334 financial projections, 349, 351 financing and access to capital, 51 firm revenues, brand impact

bigger growth options, 306 increased brand consideration,

305–306 pay price premiums, 306 purchase, 306 stronger endorsements, 306

firm revenues, customer relationships buy new offerings, 305 endorse the firm, 305 greater share of wallet, 305 lower defection rates, 304

firm revenues, marketing assets acquire customers, lower marketing

expenditures, 309 better human capital, 309 brand assets and licensing,

313–314 faster brand retrieval, 308 faster cash flows, 307–308 faster purchase decision, 308 faster response to marketing

spending, 308 firm acquisitions, 313 higher cash flows, 308–310 high-growth companies, 311–313 larger relationship investments,

309–310 lower costs of debt, 309 lower employee pay, 309 lower marketing research, 309 new product development costs,

309 fixed-cost industries, 67 focus strategy. See also alternative

value propositions; customer value propositions

Ford, Henry, 34 Ford Motor Co.

business units, 4, 8 Eddie Bauer Edition of Explorer,

199 envisioning the mass market, 235 Galaxy in Europe, 239, 255

forecasting demand, 73 and economic recessions, 87 and government regulations, 86–87 growth, 64 and incremental innovation, 83 and reaction strategies, 92 technology, 91

forecasting market growth demographic data, 64 sales of related equipment, 64

Fortune, 73 forward integration, 44 frugal shoppers, 28 Frito-Lay, 62, 67, 295, 334 functional quality, 105 functional strategies and programs,

8–9 funnel management pitfalls attract enough leads, 151 attracting poor quality leads, 150 link funnel problems to their

causes, 151 optimize through experimentation,

151 sales and marketing to work

together, 151 future environment. See also

environmental analysis driving force identification, 63–64 key success factors, 345 potential competitors, 44–49 and strategic uncertainties, 21, 22

future events, 19, 20, 43, 347. See also forecasting

G Galaxy in Europe, 255 Gallo of Sonoma brand, 13 Gap, 26 Gates, Bill, 234 GE Money, 291 General Electric (GE) breakthrough innovations, 244 creating new business, 237 and CT scanner industry, 50 divestment decisions, 269 ethnographic research, 35 geographic expansion, 221 GE Profile subbrand, 219 GE’s decision, 97 global trickle down innovation, 251 leading innovation, 293 managing customer experiences,

130–131 market attractiveness/business

position matrix, 268 net promoter, 305 organizational culture, 244 portfolio model, 268 scope of, 6 selling of small-appliance division,

97, 271

372 Index

size curse of, 243 successful diversification, 51, 52 synergy, 116 technology breakthrough ideas,

237, 238 turbine research, 216 visibility of, 164

General Foods, 273 General Mills, 210 General Motors, 117, 283

backward integration strategy, 44 multiple segments strategy, 28 OnStar, 199 restructuring of, 266, 267 strategic alliances, 260, 261

generic positions in advertising, 254 geographic expansion, 221 geographic focus strategy, 27 German brand Gerolsteiner, 112 Germany, Wal-Mart’s failure in, 258 Gerstner, Lou, 6, 285 Gillette, 6, 8, 62, 96, 187 Givenchy, 106 global brand associations, 250 global brand leadership, 256 Globalization of markets (Levitt), 253 global, see best global practice

examples in each chapter expanding the global footprint,

257–259 marketing management, 262 motivations behind, 249–252 overview, 194–195, 248, 249, 263 standardization vs. customization,

253–257 strategic alliances, 259–262 strategies, 248–263

Gold Violin, 25 Google, 63, 88 green movement/trend, 82, 85 growth. See also energizing the

business and competitor analysis, 44 divestiture program in support of,

269–272 and market analysis, 343 market growth-based shakeouts

and price wars, 73 options and marketing assets, 306 overview, 194–195 stall points vs., 240, 241 sustainable growth performance,

222–224 growth platform development, 2–3 growth rate, 63–65, 71,

growth-share matrix, 267 growth strategy, 14, 160, 273

H Haas School of Business at UC

Berkeley, 173 habit and brand loyalty, 164 Halberstam, David, 39 Hallmark, 168, 187, 326, 338 Harley-Davidson, 82, 183, 184, 188,

202, 254 healthy eating trend, 256 healthy refreshment beverages

(HRBs), 240 heavy users, 48, 208 Heineken, 253, 254 Hermes, 105 Hertz, 225, 230 Hewlett Packard, 111, 294 high-growth companies, 311–313 high-growth markets risks

competitive overcrowding, 71–72 distribution constraints, 74 market growth disappointment, 73 price instability, 73–74 resource constraints, 74

Hill’s Petfood, 42, 343 Hippel, Eric von, 32 historical data and growth forecasts,

64 hold strategy, 272, 274, 275 Home Depot, 7, 185, 206, 207, 269 Honda, 24, 25, 72, 127, 175, 255 hot buttons, 30, 36 How to Grow When Markets Don’t

(Slywotsky and Wise), 220 HRBs. See healthy refreshment

beverages (HRBs) hybrid submarket, 61 Hyundai, 50, 54, 173, 209

I Iacocca, Lee, 207 Iams Company, 42 IBM

ad agency consolidation, 254 brand, 218–219 geographic expansion, 257 Gerstner and, 6 product-market investment

strategy, 6 as trend driver, 196 user-developed products, 32

ideal brand, 190 ideal experience, 35

ideas to market, 242–244 Ideastorm Web site (Dell), 33 Ikea, 107–108, 176, 233 image and positioning strategy, 45–46 immediacy of strategic uncertainties,

92 impact analysis, 89–92 impact of innovations, 83–84 impact of new technologies, 268 impact of strategic uncertainties, 91 improving customer experience channel challenges, 137 evaluation and improvement

process, 135 maintain a customer focus, 135 manage the extended delivery

network, 137 incentives. See rewards and incentives incremental innovations, 83–84, 233,

234 incumbent curse, 243, 245 incumbent firms. See also businesses divestiture or liquidation process

bias, 269–270 making new businesses viable,

242–244 need for energy, 200 new business development bias,

234–236, 242–244 strategic stubbornness, 84

indirect vs. primary competitors, 41–42

individualism trend, 80 indulgences trend, 80 industrial firms, 70 industry economies, 248–249 industry mobility, 49, 50. See also

barriers to success information sources, competitor, 55 innovation quality, 105 innovations advantages, 234–236 and branded differentiators,

198–199, 202, 203 branding innovations, 198 as competitor strength, 49, 50 creating new business arenas,

237–242 creative thinking methods, 199–200 Drucker’s do’s and don’ts, 237 employees as source of, 164 evaluating potential of, 233–234 global influence, 250 from ideas to market, 242–244 incremental, 83–84

Index 373

innovations (Continued) low-end disruptive innovations,

240–241 managing category perceptions,

236–237 overview, 2, 195–196 perceived innovativeness, 236 performance analysis of, 337 relentless leadership for,

235–236 and silos, 242–243 substantial, 83–84 transformational, 83–84 types of, 83–84 vulnerability to innovations of

competitors, 165–166 intangible benefits, 167 intangible marketing assets

create company value, 312 vs. tangible assets, 304

Intel, 34, 163, 266, 272 Intel Americas, 108, 114 Intel Inside brand, 163 internal analysis. See also

performance analysis brand identity, 171–176 identifying assets and competencies

for leveraging, 222–224 overview, 12 planning form, 347–349 strategic options, 11, 248 strategy development, 96–97

International Harvester, 271 Internet, 78, 82, 83, 95, 96

B2B dot-com experience, 72 channel barriers and e-marketing, 43 customer-driven idea web sites, 33 customer segments, 28–29 and maturiteen male segment, 26 web sites, 63

Internet bubble, 67, 71 Internet sales. See Amazon; Dell

Computer interviewing customers, 29, 30 Intuit, 33 investment decisions. See also

financial performance business units as a portfolio

approach, 266–268 and future direction, 7 and niche segments, 62 product-market investment

strategy, 350 investment mindset, 293 Irma Zandl, 70

J Jaguar, 24, 168, 281 Jamba Juice, 221 Japan, 39, 47, 53, 231, 252, 254–257 Jell-O, 163, 209 J. I. Case, 271 Jim Lecinski, 125 Jobs, Steve, 207, 234, 317, 318 John Deere, 168, 200, 220, 271 Johnson & Johnson (J&J), 88,

221, 285 Joie de Vivre, 168, 177 joint ventures, 260–262

K Kao Corporation, 50 Kelleher, Herb, 207 key strategic assets. See assets and

competencies; brand assets key success factors (KSFs)

employee attitudes, 337 and external analysis, 23 and market analysis, 59 and market trends, 71–74 overview, 70–71 planning form for market analysis,

345 and segmentation strategy, 23 shift from product to process technology, 72–73 and strategic alliances, 259–262 and strategy development,

96–97 KFC, 88, 169, 221, 254 KitchenAid, 63 KLM Cargo’s Fresh Partners

Initiatives, 238–239 Kmart, 176 knowledge hubs, 295 knowledge-sharing sessions, 295 Kodak, 61, 88, 118, 235, 241 Kraft, 205, 210 KSFs. See key success factors

L Lafley, A.G., 284 Lane Bryant, 167 lateral thinking, 200 layered analysis, 22 lead countries in global strategy, 254 leading indicators of market sales, 64 lead users, 32–33 The Learning Company, 226 L’eggs, 235 Lenox, 217

leveraging a brand asset case challenge, 329–331

leveraging the business, 214–226 brand extensions, 216–220 core business, 222–223 evaluating your options, 222–224 expanding the scope of the

offering, 220–221 and global strategies, 248 identifying assets and competency

for leveraging, 215–216 new business and market leader,

223–224 overview, 194–195, 214–215 product market, 222 strategy, 224 synergy and, 224–226

leveraging to achieve synergy, 260 Levi’s, 26, 187, 253, 254 Levitt, Theodore, 5, 10, 284 Lexus, 25, 54, 173, 188, 232, 239 Lincoln, 54 line extensions, 195–196 LinkedIn’s greatest assets, 316 liquidation or divestment decision,

269–272 L.L. Bean, 169, 245, 338 local celebration trend, 82 The Long Tail (Anderson), 63 long-term customer relationships attitudinal loyalty, 138 build habit, 140 company credit, 139 connect the product or service

performance, 139 create multiple relationships, 142 deepen commitment, 140 defend the, 141 differentiate value, 141 foster customer co-creation, 142 grant exclusivity, 142 impact on firm revenues, 304–305 impact on firm value, 307–311 and impact on firm revenues increase investments in customers,

141 raise customer switching costs, 140 rebuff competitor challenges, 141 refresh the relationship, 142 remember the need and offering,

139–140 resolve need for variety, 141 satisfy the customer with an

offering, 139 long-term orientation trend, 80

374 Index

Lovemen, Gary, 295 low-cost labor or materials and global

strategies, 251 low-cost production, 43, 72 low-end disruptive innovations, 240,

241 Lowe’s, 7 low-involvement products, 163 loyalty matrix, 26–27. See also brand

loyalty Luna bar, 42, 231, 239, 320, 321 luxury car market competitor strength

grid, 52–54 Lycra, 254

M Macy’s, 26 male shoppers, 26, 36 management. See also marketing

as competitor strength, 50–52 and divestiture or liquidation

decision, 269–272 marketing management, 262 utilizing for competitor analysis, 55

manager/employee capability and performance, 337

managing category perceptions, 236–237

managing customer experience by brand or its partners, 131 controlled by the customer, 132 different meanings of, 128–129 factors affecting, 129–130 GE power systems, 130–131 office depot’s customer experience

turnaround, 131 social/external sources control,

132–133 strategic importance of, 129

managing marketing, firm value foster strong marketing

competencies, 314 long-term, 314–315

manufacturing, 51, 52 market. See also market position; new

markets; submarket analysis coping strategy for contradictory

claims, 196 core identity, 172–173 declining demand and divestiture

decision, 271 defining the market, 22 growth-based shakeouts and price

wars, 73 from ideas to, 242–244

and innovation evaluation, 241–242 overcrowding in, 71, 74 owning emerging markets, 236 price instability, 73–74 selection, basic dimensions, 258 straegically important, 252 and submarket profitability analysis,

65–68 market and submarket growth

forecasting growth, 64 identifying driving forces, 63–64

market and submarket profitability analysis

change in technology, 73 cost structure, 68–69 customer power, 67–68 existing competitors, 67 Porter’s Five-Factor Model, 66–67 potential competitors, 67 substitute products, 67 supplier power, 68

market changes and high-growth market risks, 71–73

market demand and divestment decision, 269

market dynamics and business strategy, 10–14 innovation requirement, 242–244 plan requirements, 1–3 and relevance concept, 61 understanding, 61

market expansion, 6, 44 market growth disappointment, 73 marketing

and growth strategy, 14 and strategic management, 14–15

marketing assets and competencies, 10, 15

marketing assets in firm value acquire customers, lower marketing

expenditures, 309 better human capital, 309 brand assets and licensing, 313–314 faster brand retrieval, 308 faster cash flows, 307–308 faster purchase decision, 308 faster response to marketing

spending, 308 firm acquisitions, 313 higher cash flows, 308–310 high-growth companies, 311–313 larger relationship investments,

309–310 lower costs of debt, 309 lower employee pay, 309

lower marketing research, 309 new product development costs,

309 marketing doctrine, 291 marketing management, 262 “marketing myopia” (Levitt), 10 marketing–sales alignment, 290–291 marketing skills and leveraging the

business, 215 marketing strategy, 10, 14–15 market position brand position, 232, 249, 251 and divestiture decision, 270 market attractiveness/business

position matrix, 268 and sustainable competitive

advantage, 52 market realities changes, 117–118 market sales forecasts, 64 market selection in global arena,

258–259 market/submarket analysis, 59–74 cost structure, 47 dimensions, 59–60 emerging submarkets, 60–62 market trends and distributive

systems, 60 profitability and cost structure, 60 size and growth, 60

market trends. See also trends vs. fads, 69–70

Marks & Spencer, 258 Marriott, 35, 87, 166, 219, 220 Marriott Hotels, 115, 294 Mars, 42, 264, 340, 343, 344 masculinity trend, 80 MasterCard, 52 Maturiteen male segment, 26 maturity and decline of market

sales, 65 Maytag, 205 Mazda, 232, 260 McDonalds competing with Starbucks, 41 expansion, 253 Ronald McDonald House, 203, 207

McElhaney, Kellie, 206 McKinsey, 14, 124, 126, 136, 168,

233, 268, 307 measuring customer experience attribution models, 134 customer journey analysis, 134–135 mobile technology, 133–134 service blueprinting, 133 SERVQUAL, 133

Index 375

Medtronic, 105, 283, 285 memorable branded symbols,

205–206 Me Nation trend, 81 Mercedes, 98, 127, 204, 254, 266 mergers of competitors, 44 merging brands, 277 MetLife and Peanuts characters, 203,

205, 206 Metrosexual male segment, 26 Michelin, 205, 252 Microsoft, 8, 48, 62, 191, 196, 207,

224, 234, 281, 313, 316 Microsoft Office, 8, 188 milking strategy or cash cows, 266,

267, 272–274 mobile technologies, 78, 133–134,

136 mobility barrier concept, 43 Montblanc, 254 morphing market boundaries, 117 motivation analysis, 29, 35 motivations

and competitor analysis, 44 customer analysis for determining,

23 for global strategies, 248–252 key customer motivation strategy,

50 of offshore firms, 261 planning form, 337 scale economies, 248

MTV, 253 Muji, 106, 201, 233 multiple brand identities, 175 multiple businesses, 2 multiple segments vs. a focus strategy,

27–28 myopic product focus, 10 My Tribe trend, 82

N name dominance, 163 national investment incentives and

global strategy, 251–252 Neiman Marcus, 111 Nestle, 256, 266, 278, 340, 342 Nestle Purina Petcare, 42, 340, 342,

344 Netflix, 41, 143, 158–159, 196, 201,

218 newbie shoppers, 28 new business. See also creating new

businesses creating viability, 243–244

in established organizations, 243–244

and innovation, 91 leveraging a business into, 223–224 and niche segments, 239 overview, 194–195 and resource allocation, 244

new business arenas components to systems, 238–239 customer trends, 240 evaluation, 241 lower price point, 240–241 niche markets, 239 technological innovation, 238 unmet needs, 239

new-market disruptive innovations, 241

new markets adapting to, 223 case challenge, 320–321 of competitors, 46 disruptive innovations, 241 diversification, 6, 48, 51, 52 expanding segments, 221–222 fulfilling unmet needs, 31 geographical expansion, 221 for leveraging the business,

222, 226 market expansion, 6, 44 from new technologies, 91 and relevance, 61–62 sales forecasts for, 64 sources of advantage, 214–215

new networking trend, 82 niche segments, 204 Nike

differentiation in global markets, 258

global businesses, 253 Niketown showcase stores, 164 performance strategy, 25 repeatable leveraging strategy, 224 and retrosexual male segment, 26

Nintendo, 47–48, 56, 196 Nissan, 127, 163, 254, 260 Nokia, 108 nonfinancial objectives, 46 Nordstrom, 26, 36, 166, 167, 174,

198, 235, 338 Norwest Bank, 280

O objectives, commitment, and

competitor analysis, 44–46 Ocean Spray, 210

Office Depot’s customer experience, 131–132

OfficeMax, 31 offshore firms, 261 Ogilvy & Mather, 225, 253 Olay brand (P&G), 6, 8, 33, 37, 42,

50, 96, 187–188, 190, 196, 235, 250, 255, 310

Old Navy, 26, 219 Old Spice, 26 operations, 51, 216 opportunities failure to utilize, 196–197 identifying, 20 managing category perceptions,

236–237 opportunity cost of hanging on, 269 organic foods and products, 86 organizational biases. See incumbent

firms organizational characteristics. See also

internal analysis internal analysis planning form, 349

organizational cultures, customer- centric, 284–286

organizational intangibles and brand associations, 167

Organon, 287 Oscar Mayer Wienermobiles, 183,

205 overbranding, 198, 275 overcapacity, 67, 71, 97, 222

P packaged goods forecasts, 64 packaging innovation, 238 Pampers, 6, 37, 164, 182, 183, 185,

187, 195, 232, 235, 254, 257 Panda Express, 65 Panera Bread, 65 Pantene, 6, 8, 187, 250, 253,

263, 308 parity. See points of parity parity performance, 29, 111, 114 Pedigree Adoption Drive, 207 PepsiCo, 41, 74, 98, 111, 166, 258 perceived innovativeness, 236 perceived need or desire, 61 perceived quality and BAV, 200 brand and firm associations, 335 and brand equity, 277 and brand/firm associations, 335 of global brands, 250, 254 value of quality, 87

376 Index

perceived value authenticity as, 206–207 impact of customer and brand

equity, 304 Perdue chickens, 52 performance analysis. See also

financial performance brand and firm associations, 335 customer satisfaction, 230, 334–335 innovation considerations, 337 of managers and employees, 337 overview, 12, 332, 334 planning form for internal analysis,

349–351 relative cost, 334–336 shareholder value, 333–334 values and heritage, 337–338

performance dimensions analysis, 332 performance value

design quality, 105 fashion quality, 105 functional quality, 105 innovation quality, 105 service quality, 106 social responsibility quality,

106–107 Perrier, 95, 111 pet food industry strategic groups,

42–43, 339–340 Peugeot, 252 Philip Morris, 216, 235 Pillsbury, 205, 218 Pizza Hut, 52 planning cycles, 2, 13–14, 22 planning forms, 337–351 points of difference, 112 points of parity, 112

and assets and competencies, 8 and brand position, 175–176 close enough to, 173 and cost analysis, 335–336 and customer motivations, 28–29 and key success factors, 70–71 market sensitivity and price

parity, 21 and relative cost analysis, 335–336 and strategic necessities, 70

political uncertainties and global strategy, 258

Polo Ralph Lauren, 26 Popcorn, Faith, 70, 218–219 Porter’s Five-Factor Model of Market

Profitability, 66 portfolio

brand, 275–280

business, 266–268, 348 positioning strategies. See also market

position for brand and submarkets, 61–62 of General Motors, 27, 44 in global markets, 254–255 market attractiveness/business

position matrix, 268 potential market, 44, 62 potential synergy, 2, 10, 137, 224–226 PowerBar, 41, 42, 239, 320 power distance trend, 80 power play trend, 81 power systems manages customer

experiences, 130–131 Pratt & Whitney, 110 preference and brand loyalty,

164–165 price instability, 73–74 price points, 170 price premiums, 163, 188 price pressure, 65, 270 price sensitivity benefit dimension,

24–25 price instability, 71, 73–74 price value

general strategy, 107 disciplined cost management,

107–108 superior pricing acumen, 108

primary vs. indirect competitors, 41–42

Pringles, 236, 253, 291 priorities, customers, 31 priorities for businesses and brands,

266–281 the brand portfolio, 275–280 the business portfolio, 267–268,

273, 275 divestment or liquidation decision,

269–272, 280 milking strategy, 272–274, 281 opportunity/threat identification,

95–96, 337 overview, 266–267, 280 prioritizing brands, 278

private-label manufacturers, 41–43, 87, 201, 340

problem research, 32–33 Procter & Gamble (P&G)

assets and competencies of, 8 BeingGirl Web site, 33 brand ideal, 190 branding competency, 96 business scope, 6

in China, 37–38 ethnographic research, 34–35 global brand building, 250 Global Marketing Officer’s

Leadership team, 289 “house of brands” strategy, 279 investment criteria, 62 leveraging the business, 216–217 product expansion, 6 product-market investment

strategy, 6–7 products of, 42, 195–196 sharing R&D across business

units, 8 Thank Mom campaign, 187–188 value added components, 50 and WalMart, 68

product and service quality, 334 product category and brand

associations, 166–167 product expansion, 44, 195–196 product line quality, reputation, and

breadth, 51. See also product quality

product-market investment strategy, 4, 6, 15

product markets, 6, 8, 15, 22, 63, 72, 103, 167, 208, 214–216, 279, 335

product market value propositions. See alternative value propositions

product quality, 46, 51, 53, 55, 274 product-related approach to

segmentation, 24 products brand associations and breadth of

product line, 167, 195–196 customers’ use of, 27 finding new uses for, 209–210 KSF changes over time, 70 and segmentation, 24 standardization vs. customization,

253–257 substitute products, 66, 67 value of authenticity, 206–207

profitability, 43–46, 55, 268 analysis, 343–344

profitability measurement average costing, 336–337 brand/firm associations, 335 brand loyalty, 335 cost advantage, 336 innovation, 337 manager/employee capability and

performance, 337 product and service quality, 334

Index 377

profitability measurement (Continued)

relative cost, 335–336 values and heritage, 337–338

profitable survivors, 63 Progressive Corporation, 108 promotional activities, branded, 205 proof points and strategic initiatives,

173–174 prospect lifetime value (PLV), 156 publicity events, 149, 164, 171, 201,

204 purchase funnel

creating the, 147–149 failure to attract enough leads, 151 management, 151–152 metrics, 149–150

Q Quaker Oats, 188, 227 qualitative research, 33–34 quality. See perceived quality Quality Function Deployment (QFD)

program, 29 quality of life trend, 80

R Ralph Lauren, 26, 187 R&D skills, 216 reaction strategies, 92 Redbirds minor league baseball

team, 195 regulations, government, 86 relational value

comprehensive solution management, 109–110

customer relationship management, 109

general strategy, 108–109 relative cost, 335–337 reluctant shoppers, 28 renting not owning trend, 82 repeatable strategies

expansion strategies, 257 in leveraging in general, 224

research Brand Asset Valuator of Young &

Rubicam, 200, 236 DDB Needham’s Sponsor-Watch,

204 on growth initiative success, 269–270 homemakers naming brands from

memory, 163–164 research and development (R&D)

and global innovations, 250 and innovativeness, 51–52

sharing across business units, 8 resource allocation

and brand loyalty, 26–27 constraints, 74 importance of, 2–3, 14 and milking strategy, 272–273 and rapid growth, 74 and strategic uncertainty, 21

resource constraints, 71, 74 restraint trend, 80 retailing, 74, 105, 233 retrosexual male segment, 26 return on investment (ROI), 9, 83,

150 risks

developing business outside core abilities, 214

of entering global markets, 258 of milking strategy, 273

Robert Mondavi, 43 ROI. See return on investment Rolls-Royce, 109, 110 Ronald McDonald House, 165,

203, 207 Rossignol powder skis, 44 Royal Crown’s Diet-Rite cola, 74

S Sainsbury, 223 Saks, 111, 181 sales, 91, 144, 145, 194, 221 sales and market share, 332–333 sales or distribution capacity, 215, 216 sales patterns and forecasts, 64 Samsung, 57, 58, 108, 164, 204, 306 Samuel Adams, 221 saturation, 65 Saturn, 239, 267 SBUs. See strategic business units SCA. See sustainable competitive

advantage scale economies

as entry barrier, 67 and global strategies, 248, 249 and growth-share matrix, 267, 268 for leveraging the business, 216 loss of, 333 from product standardization, 249,

253–257 and strategic alliances, 260, 261

scenario analysis, 21, 22, 92–94, 347 create, 93 estimate probabilities, 94 relate to strategies, 94

scenarios, creating, 21, 22, 347 Schweppes, 166

Schwinn, 69, 216, 219 scope dynamics defining the market, 22 expanding the scope of the

offering, 220–221 overview, 6 and visibility, 164

scope expansion, 6, 220–221 “Sea of Ideas” meetings (Texas

Instruments), 88 segmentation benefits, 25 definition, 23 how to approach, 24–28 male shopper segments, 26 multiple segments vs. a focus

strategy, 27–28 petfood segmentation strategies,

339, 340 variables, 24, 25, 222

segment level. See submarket analysis self-expressive benefits, 54,

172, 186, 188–190, 199, 204, 239, 241, 254, 269, 335

service quality, 106, 133, 139, 170, 334

shareholder value, 13, 243, 333–334 Shell International, 290 short-term financial pressure curse,

242, 245 short-term orientation trend, 80 Siebel, 231, 238 silo curse, 242–243, 245 silo units customer segments align to, 290 managing structure to, 289–291 marketing doctrine development,

291 marketing–sales alignment,

290–291 matrix organization, 289 organize teams to, 289 overview, 3–4 as portfolio, 266 problem of, 288–289 synergy among, 4

simplification trend, 81–82 Singapore Airlines, 106, 129, 134,

169, 232 Sirius, 35 size curse, 243, 245 size of competitor, 44 skincare customer decision journey,

126–127 Slack, 85, 113

378 Index

snacking trend, 82 Snapple, 226 SoBe, 233, 240 social programs, 206–207 social responsibility quality, 106–107 Sony

competing against Nintendo, 48 creating synergies, 116 design and manufacturing skills,

216 global businesses, 253 and retrosexual male segment, 26 visibility of, 164

sponsorships, branded, 203–204 Sprite, 254 standardized products and brands in

global arena, 253–257 Starbucks

customer centricity, 295 expanding offering scope, 220–221 as indirect competitor of Folgers,

41 in Japan, 9 My Starbucksidea site, 33 niche market, 239 reward program and customer

management, 159 standardization, 253

stock return, 242, 262 role of cash flows and marketing

assets, 307–311 strategic advantage. See sustainable

competitive advantage strategic alliances, 249, 259–262 strategically important markets, 252 strategic analysis, 42, 43. See also

analysis outputs; external analysis; internal analysis

immediacy of strategic uncertainties, 92

impact analysis, 89–90 impact of strategic uncertainties, 91 managing strategic uncertainties,

92 strategic brand consolidation process,

275–281 strategic business units (SBUs),

12, 348 definition, 12 portfolio analysis, 350

strategic decisions, 19–21, 63, 96–97 strategic fit evaluations, 270, 277 strategic flexibility

and business strategy selection, 10 as company strength, 51 and global strategies, 249

strategic analysis, 89 strategic groups

competitor identification, 42, 43, 338–342

creative thinking, 199–200 strategic initiatives and proof points,

173–174 strategic market management system,

10–14 strategic necessities, 70 strategic options, 10, 12 strategic paralysis, 275 strategic shoppers, 28 strategic strengths, 70 strategic stubbornness, 117 strategic uncertainties, 20, 21, 347

immediacy, 92 impact of, 91 managing, 92

strategic value for collaborators, 261–262

strategic visions, 55, 116, 243, 244, 269, 280

strategy, 1–3, 19, 20. See also business strategies; marketing

strategy development, 9, 12–14, 52, 93, 257

strategy performance system, 14, 339 strengths and weaknesses

internal analysis, 12 and leveraging options, 202 market decline, 274 planning form for internal analysis,

349 profitable survivors of market

decline, 274 strategic analysis, 97 strategic strengths, 70 SWOT analysis, 94–95

strengths and weaknesses of competitors, 49–52

competitive strength grid, 52–55

relevant assets and competencies, 49–52

strategies based on, 48–49 subbrands

effect on brand reputation, 217–219

and endorsed brands, 220–221 subcategory labels, 237 submarket

emerging, 61 new technologies in, 91

submarket analysis actual and potential size, 62–63

defining the submarket, 22 dimensions, 59–60 emerging, 61 growth, 63 profitability analysis, 65–68

submarket growth, 65 substantial innovation, 84 substitute products, 65 superior position and SCA, 52 supplier power, 68 sustainability, 9, 81, 82, 85, 86, 90,

182, 195 sustainable competitive advantage

(SCA). See also assets and competencies; competition

access to low-cost labor and materials as, 251

and assets and competencies, 7–8, 214–215

and barriers to competition, 43 and brand loyalty, 164 and business strategy, 9 from channel of distribution, 69 from distribution, 69 from geographic focus strategy, 27 and global strategies, 249 from geographic focus strategy, 27 overview and creating, 2 sales, market share, and, 333–334 from segmentation, 23 and selecting business strategies,

9–10 and standardized products, 253 superior position and, 52

Swatch, 164 sweet-spot program, 183–185 switching costs and brand loyalty, 164 SWOT analysis, 94–96 symbols, branded, 205 synergies creating, 116–117 difficult to obtain, 225 and global strategies, 248 between offerings, 28

T tangible benefits of going green, 204 Target, 26, 95, 96, 201, 282 TaskRabbit, 85 technological innovation, 238 technology as bargaining chip in strategic

alliances, 261 branded differentiators, 198–199 business trends, 83–86 impact of new, 91

Index 379

technology (Continued) information technology strategy, 9 innovation, 238 innovation quality, 105 leverage to manage customer

experiences, 136 mobile, 133–134 motivation for strategic alliances,

260 R&D skills, 216, 268 strategic uncertainties, 21

Tenneco Oil Company, 271 Tesco grocery chain, 223 Tesla, 105 Texas Instruments, 67, 88, 108 The Learning Company, 226 Thomson Corporation, 34, 78 threats

and cross-subsidization concept, 252 competitor analysis, 44 customer analysis, 79 of e-mail, to FedEx and UPS, 67 emerging, 10–12, 20 entrepreneurial culture, 72 established firms, 31 to growth rate, 72 immediacy of threats, 92 impact of threats, 92 intangible attribute, 167 superior competitive entry, 72 SWOT analysis, 94–96

Tide, 187, 190, 196, 199 Tiffany, 168, 254 Timex, 235 Tokyo, 106, 164, 228 Tommy Hilfiger, 169 Toms Shoes, 106, 110 Toshiba, 164, 200, 261 Toyoda, Aiko, 284 Toyota, 284

and demographic segments, 25 competitor analysis, 53 intangible brand value and

associations, 167 joint venture with GM, 260, 262 manufacturing as strength, 51 recalls and quality problems, 284 scale economies, 260 U.S. and European factories, 252

trade barriers, 248, 251, 252, 260 trade-off questions for customer

interviews, 30 transformational innovations, 83–84.

See also creating new businesses transformational leadership, 294

transparency trend, 81 trends

cultivating vigilance, 88 cultural trends, 80–82 customer trends, 79–80 environmental analysis of, 12, 346 fads vs., 69–70 identifying with external analysis,

22 and market/submarket analysis,

59–60 planning form, 337–351 and strategic analysis, 2

23andMe, 105

U Uber, 84, 85, 100, 155, 201, 233 Udi, 184, 202 unaided recall, 164 uncertainties, strategic, 20–21 uncertainty avoidance trend, 80 Unilever, 34, 85, 96, 193, 256, 278,

290, 306, 329–331 Union Bank of California, 27 United Airlines, 225, 227 unmet needs, 3, 12, 23–24, 31–35, 40,

195, 237–239, 247, 283, 285, 290, 320, 329, 340

Upshaw, Lynn, 175 user-developed products, 32

V value added components, 49, 50, 55,

60, 261 value-added stages, 68 value-capture mechanisms, 116, 118 value chain, 50, 68, 120, 219, 252, 261 value chain analysis, 68–69 value-creating system, 115, 116 value proposition, 7, 9, 12, 20,

104–110, 113–114, 181, 195, 237, 275, 293, 301

Valvoline and NASCAR, 203–204 Vanguard Group, 107 Victoria’s Secret, 167 vigilance, 88 Virgin Atlantic Airlines, 166, 169–171,

177 Virgin brand, 170, 207 Visa, 10, 167, 204, 221, 253, 254 visibility, 54, 164, 182, 183,

185, 196, 216, 219, 262, 280

visualization trend, 81 Vodafone, 253

volatility and vulnerability, cash flows greater customer stability, 310 internal mistakes, 311 rival entry, 311 rival switching strategies, 310

Volvo, 54, 165, 176, 186, 187

W Wall Street Journal, 73, 141, 154 Walmart, 107 breadth dimension, 167 competencies, 51 failure in Germany, 258 green strategies, 85–86 operational capacity and efficiency,

51 power over suppliers, 68 price value leadership, 139, 166 and Procter & Gamble, 202 scope of, 6 single segment focus originally, 27 supplier power, 68 value proposition of, 7 and Unilever, 290

Warby Parker, 107, 201 Wasa Crispbread, 166 weaknesses. See strengths and

weaknesses Web sites, 63, 209, 212 Welch, Jack, 220, 269, 281 Wells Fargo, 114, 200,

280, 292 Westin Hotel Chain’s Heavenly Bed,

131, 197–199, 233 Whole Foods, 113, 195, 201, 232,

233, 240 Williams-Sonoma, 6, 30 wine industry competitor analysis, 43 Woods, Tiger, 224 workplace communications, 113

X Xerox, 61, 234, 237, 308

Y Yahoo, 209 Yoplait’s Go-Gurt, 238 Young & Rubicam, 168, 225 YouTube, 81, 82, 178, 227

Z Zappos, 15, 113, 128, 129, 166, 167,

190, 232, 233 Zara, 36, 116, 188, 233, 307 Zook, Chris, 222–224

380 Index

External Analysis

• Customer analysis • Competitor analysis • Market/submarket analysis • Environmental analysis

Internal Company Analysis

• Size, growth, and financial performance • Assets and competencies (including brand, customer

relationships, innovation) • Image and positioning • Current and past strategies • Organizational culture • Cost structure

STRATEGIC ANALYSIS

External Assessment

Opportunities, threats, trends,

insights, and external

uncertainties

Internal Company Assessment

Firm strengths, weaknesses, liabilities, problems, constraints, and uncertainties

STRATEGIC ANALYSIS OUTPUT

• Identify strategy alternatives - Product-market investment strategies

- Customer value proposition

- Assets, competencies, and synergies

- Functional strategies and programs • Select strategy

CREATING AND ADAPTING STRATEGY

IMPLEMENTING STRATEGY AND PRODUCING FIRM VALUE

• Implement strategy • Measure performance

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