Discussion Question

Week 1, "What Is Strategic Marketing?" was derived from Principles of Marketing, which was adapted by the Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensee. © 2015, The Saylor Foundation.

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Week 1 What Is Strategic Marketing?

What makes a business idea work? Does it only take money? Why are some products a huge

success and similar products a dismal failure? How was Apple, a computer company, able to

create and launch the wildly successful iPod, yet Microsoft's first foray into MP3 players was a

total disaster? If the size of the company and the money behind a product's launch were the

difference, Microsoft would have won. But for Microsoft to have won, it would have needed

something it's not had in a while—good marketing so it can produce and sell products that

consumers want. In the first week of the course, we will focus first on understanding what marketing means as a

discipline, and how it integrates within an organization. Once we have an understanding of what

marketing is and does, we will get more specific as to how marketing activities are planned and

implemented. Also, if you are interested in a marketing career, we outline some of the potential

marketing positions most commonly considered the main marketing jobs. We will begin our

discussion on marketing ethics and sustainability, two themes you will see frequently throughout

the course.

1.1 Defining Marketing

L E A R N I N G O B J E C T I V E S

1. Define marketing. 2. Outline the four components of marketing: creating, communicating, delivering, and exchanging

value. Marketing is defined by the American Marketing Association as "the activity, set of institutions,

and processes for creating, communicating, delivering, and exchanging offerings that have value

for customers, clients, partners, and society at large" (AMA, 2009). If you read the definition

closely, you see that there are four activities, or components, of marketing:

● Creating. The process of collaborating with suppliers and customers to create offerings

that have value.

● Communicating. Broadly, describing those offerings, as well as learning from

customers.

● Delivering. Getting those offerings to the consumer in a way that optimizes value.

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● Exchanging. Trading value for those offerings.

The traditional way of viewing the components of marketing is via the four Ps:

1. Product. Goods and services (creating offerings).

2. Promotion. Communication.

3. Place. Getting the product to a point at which the customer can purchase it (delivering).

4. Price. The monetary amount charged for the product (exchange).

Introduced in the early 1950s, the four Ps were called the marketing mix, meaning that a

marketing plan is a mix of these four components. If the four Ps are the same as creating, communicating, delivering, and exchanging, you might be

wondering why there was a change. The answer is that they are not exactly the same. Product,

price, place, and promotion are nouns. As such, these words fail to capture all the activities of

marketing. For example, exchanging requires transaction mechanisms, which consist of more

than simply a price or place. Exchanging requires, among other things, the transfer of ownership.

For example, when you buy a car, you sign documents that transfer the car's title from the seller

to you. That's part of the exchange process. Even the term product, which seems pretty obvious, is limited. Does the product include services

that come with your new car purchase (such as free maintenance for a certain period of time on

some models)? Or does the product mean only the car itself? In this course, we will more

commonly refer to products as offerings, which captures the full gamut of tangible product,

intangible service, augmented benefits like warranties, and all other components that go into a

consumer's decision to buy. Finally, none of the four Ps describes particularly well what marketing people do. However, one of

the goals of this book is to focus on exactly what it is that marketing professionals do.

Value Creating value for customers is at the center of everything marketing does (Figure 1.1). What does

value mean?

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Figure 1.1

Marketing is composed of four activities centered on customer value:

creating, communicating, delivering, and exchanging value. When we use the term value, we mean the benefits buyers receive that meet their needs. In other

words, value is what the customer gets by purchasing and consuming a company's offering. So,

although the offering is created by the company, the value is determined by the customer. Furthermore, our goal as marketers is to create a profitable exchange for consumers. By

profitable, we mean that the consumer's personal value equation is positive.

The personal value equation is

value = benefits received – [price + hassle]

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Hassle is the time and effort the consumer puts into the shopping process. The equation is a

personal one because how each consumer judges the benefits of a product will vary, as will the

time and effort he or she puts into shopping. Value, then, varies for each consumer.

One way to think of value is to think of a meal in a restaurant. If you and three friends go to a

restaurant and order the same dish, each of you will like it more or less depending on your own

tastes. Yet the dish was exactly the same, priced the same, and served the same way. Because your

tastes varied, the benefits you received varied. Therefore, the value varied for each of you. That's

why we call it a personal value equation.

Creating Offerings That Have Value

Marketing creates those goods and services that the company offers at a price to its customers or

clients. That entire bundle consisting of the tangible good, the intangible service, and the price is

the company's offering. When you compare one car to another, for example, you can evaluate

each of these dimensions—the tangible, the intangible, and the price—separately. However, you

can't buy one manufacturer's car, another manufacturer's service, and a third manufacturer's

price when you actually make a choice. Together, the three make up a single firm's offer. Marketing people do not create the offering alone. For example, when the iPhone was created,

Apple's engineers were also involved in its design. Apple's financial personnel had to review the

costs of producing the offering and provide input on how it should be priced. Apple's operations

group needed to evaluate the manufacturing requirements the iPhone would need. The company's

logistics managers had to evaluate the cost and timing of getting the offering to retailers and

consumers. Apple's dealers also likely provided input regarding the iPhone's service policies and

warranty structure. Marketing, however, has the biggest responsibility because it is marketing's

responsibility to ensure that the new phone delivers value. Creating and managing offerings will

be the focus of Week 3, "Market Segmenting, Targeting, and Positioning," and Week 5, "Creating

Offerings," in this book.

Communicating Offerings

Communicating is a broad term in marketing that means describing the offering and its value

to your potential and current customers, as well as learning from customers what it is they want

and like. Sometimes communicating means educating potential customers about the value of an

offering, and sometimes it means simply making customers aware of where they can find a

product. Communicating also means that customers get a chance to tell the company what they

think. Today, companies are finding that to be successful, they need a more interactive dialogue

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with their customers. For example, Comcast customer service representatives will watch

consumer websites such as Twitter. When they observe consumers "tweeting" (posting) problems

with Comcast, the customer service reps will post resolutions to their problems. Similarly,

JCPenney has created consumer groups that talk among themselves on JCPenney-monitored

websites. The company might post questions, send samples, or engage in other activities designed

to solicit feedback from customers.

Figure 1.2

A Porsche Boxster can cost three times as much as a Pontiac Solstice, but why is it worth more?

What makes up the complete offering?

Source: (Left) Thomas Doerfer. (2008). Wikimedia Commons. Used under the terms of the Creative Commons Attribution-ShareAlike 3.0 Unported license. (Right) IFCAR. (2007). Wikimedia Commons. In the public domain.

Companies use many forms of communication, including advertising on the web or television, on

billboards or in magazines, through product placements in movies, and through salespeople.

Other forms of communication include attempting to have news media cover the company's

actions (part of public relations), participating in special events such as the annual International

Consumer Electronics Show in which Apple and other companies introduce their newest gadgets,

and sponsoring special events such as the Susan G. Komen Race for the Cure.

Delivering Offerings

Marketing can't just promise value—it also has to deliver value. Delivering an offering that has

value is much more than simply getting the product into the hands of the user; it is also making

sure that the user understands how to get the most out of the product and is taken care of if he or

she requires service later. Value is delivered in part through a company's supply chain. The

supply chain includes a number of organizations and functions that mine, make, assemble, or

deliver materials and products from a manufacturer to consumers. The actual group of

organizations can vary greatly from industry to industry, and include wholesalers, transportation

companies, and retailers. Logistics, or the actual transportation and storage of materials and

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products, is the primary component of supply chain management, but there are other aspects of

supply chain management that we will discuss during Week 6.

Exchanging Offerings

In addition to creating an offering, communicating its benefits to consumers, and delivering the

offering, there is the actual transaction, or exchange, that has to occur. In most instances, we

consider the exchange to be cash for products and services. However, if you were to fly to

Louisville, Kentucky, for the Kentucky Derby, you could "pay" for your airline tickets using

frequent-flier miles. You could also use Hilton Honors points to "pay" for your hotel, and cash-

back points on your Discover card to pay for meals. None of these transactions would actually

require cash. Other exchanges, such as information about your preferences gathered through

surveys, might not involve cash. When consumers acquire, consume (use), and dispose of products and services, exchange occurs,

including during the consumption phase. For example, via Apple's "One-to-One" program, you

can pay a yearly fee in exchange for additional periodic product training sessions with an Apple

professional. So, each time a training session occurs, another transaction takes place. A

transaction also occurs when you are finished with a product. For example, you might sell your

old iPhone to a friend, trade in a car, or ask the Salvation Army to pick up your old refrigerator. Disposing of products has become an important ecological issue. Batteries and other components

of cell phones, computers, and high-tech appliances can be harmful to the environment, and

many consumers don't know how to dispose of these products properly. Some companies, such as

Office Depot, have created recycling centers to which customers can take their old electronics.

Apple has a web page where consumers can fill out a form, print it, and ship it along with their old

cell phones and MP3 players to Apple. Apple then pulls out the materials that are recyclable and

properly disposes of those that aren't. By lessening the hassle associated with disposing of

products, Office Depot and Apple add value to their product offerings. Other companies such as

Cycling Solutions or PCDisposal.com have actually created offerings for proper and

environmentally safe disposal of electronic products. This is a need for which many companies

and individuals are willing to pay a fee.

1 . 1 K E Y T A K E A W A Y

The focus of marketing has changed from emphasizing the product, price, place, and promotion mix to one that emphasizes creating, communicating, delivering, and exchanging value. Value is a function of the benefits an individual receives and consists of the price the consumer paid and the time and effort the person expended making the purchase.

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1.2 Who Does Marketing?

L E A R N I N G O B J E C T I V E

1. Describe how all types of organizations—for profit, nonprofit, governments, and individuals—engage

in marketing. The short answer to the question of who does marketing is "everybody!" But that answer is a bit

glib and not too useful. Let's take a moment and consider how different types of organizations

engage in marketing.

For-Profit Companies The obvious answer to the question, "Who does marketing?" is for-profit companies like

McDonald's, Procter & Gamble (the makers of Tide detergent and Crest toothpaste), and

Walmart. For example, McDonald's creates a new breakfast chicken sandwich for $1.99 (the

offering), launches a television campaign (communicating), makes the sandwiches available on

certain dates (delivering), and then sells them in its stores (exchanging). When Procter & Gamble

(or P&G for short) creates a new Crest tartar control toothpaste, it launches a direct mail

campaign in which it sends information and samples to dentists to offer to their patients. P&G

then sells the toothpaste through retailers like Walmart, which has a panel of consumers sample

the product and provide feedback through an online community. These are all examples of

marketing activities.

Nonprofit Organizations Nonprofit organizations also engage in marketing. When the American Heart Association (AHA)

created a heart-healthy diet for people with high blood pressure, it bound the diet into a small

book, along with access to a special website that people can use to plan their meals and record

their health-related activities. The AHA then sent copies of the diet to doctors to give to patients.

When does an exchange take place, you might wonder? And what does the AHA get out of it? From a monetary standpoint, the AHA does not directly benefit, unless it finds a direct correlation

with an increase in AHA awareness and donations. Nonetheless, the organization is meeting its

mission, or purpose, of getting people to live heart-healthy lives and considers the campaign a

success when doctors give the books to their patients. The point is that the AHA is engaged in the

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marketing activities of creating, communicating, delivering, and exchanging. This won't involve

the same kind of exchange as a for-profit company, but it is marketing. When a nonprofit

organization engages in marketing activities, this is called nonprofit marketing. Some schools

offer specific courses in nonprofit marketing, and many marketing majors begin their careers with

nonprofit organizations. Government entities also engage in marketing activities. For example, when the US Army

advertises to parents of prospective recruits, sends brochures to high schools, maintains a

Facebook page, or brings a Bradley Fighting Vehicle to a state fair, the Army is engaging in

marketing. The Army also listens to its constituencies, as evidenced by research aimed at

understanding how to serve military families more effectively. One result was advertising aimed

at parents and improving their response to their children's interest in joining the Army; another

was a program aimed at encouraging spouses of military personnel to access counseling services

when their spouses are serving overseas. Similarly, the Environmental Protection Agency (EPA) runs a number of advertising campaigns

designed to promote environmentally friendly activities. One such campaign promoted the

responsible disposal of motor oil instead of simply pouring it on the ground or into a storm sewer.

The objective of such a campaign is to communicate the idea that the EPA is doing good things. There is a difference between these two types of activities. When the Army is promoting the

benefits of enlisting, it hopes young men and women will join the Army. By contrast, when the

EPA runs commercials about how to properly dispose of motor oil, it hopes to change people's

attitudes and behaviors so that social change occurs. Marketing conducted in an effort to achieve

certain social objectives can be done by government agencies, nonprofit institutions, religious

organizations, and others and is called social marketing. Convincing people that global

warming is a real threat via advertisements and commercials is social marketing, as is the

example regarding the EPA's campaign to promote responsible disposal of motor oil.

Individuals If you create a résumé, are you using marketing to communicate the value you have to offer

prospective employers? If you sell yourself in an interview, is that marketing? When you work for

a wage, you are delivering value in exchange for pay. Is this marketing, too? Some people argue that these are not marketing activities and that individuals do not necessarily

engage in marketing. (Some people also argue that social marketing really isn't marketing, either.)

Can individuals market themselves and their ideas?

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What about politicians in an election campaign? Aren't they really trying to "sell" you on the idea

that they are the best person for the position? Aren't they using many of the marketing

communications techniques of advertising, social media, public relations or personal selling? If, as a result of completing this course, you can learn how to more effectively create value,

communicate and deliver that value to the receiver, and receive something in exchange, then

we've achieved our purpose. That may come in handy next time you apply for a job.

1 . 2 K E Y T A K E A W A Y

Marketing can be thought of as a set of business practices that for-profit organizations, nonprofit organizations, government entities, and individuals can use. When a nonprofit organization engages in marketing activities, this is called nonprofit marketing. Marketing conducted in an effort to achieve certain social objectives is called social marketing.

1.3 Why Study Marketing?

L E A R N I N G O B J E C T I V E

1. Explain the role marketing plays throughout an individual firm and society as a whole.

Marketing Enables Profitable Transactions to Occur Products don't, contrary to popular belief, sell themselves. Generally, the "build it and they will

come" philosophy doesn't work. Good marketing educates customers so that they can find the

products they want, make better choices about those products, and extract the most value from

them. In this way, marketing helps facilitate exchanges between buyers and sellers for the mutual

benefit of both parties. Likewise, good social marketing provides people with information and

helps them make healthier decisions for themselves and for others. Of course, all business students should understand all functional areas of the firm, including

marketing. There is more to marketing, however, than simply understanding its role in the

business. Marketing has tremendous impact on society.

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Marketing Delivers Value Not only does marketing deliver value to customers, but also that value translates into the value of

the firm as it develops a reliable customer base and increases its sales and profitability. So when

we say that marketing delivers value, marketing delivers value to both the customer and the

company. Franklin D. Roosevelt, the US president with perhaps the greatest influence on our

economic system, once said, "If I were starting life over again, I am inclined to think that I would

go into the advertising business in preference to almost any other. The general raising of the

standards of modern civilization among all groups of people during the past half century would

have been impossible without the spreading of the knowledge of higher standards by means of

advertising" (Famous Quotes & Authors, 2009). Roosevelt referred to advertising, but advertising

alone is insufficient for delivering value. Marketing finishes the job by ensuring that what is

delivered is valuable.

Marketing Benefits Society Marketing benefits society in general by improving people's lives in two ways. First, as we

mentioned, it facilitates trade. As you have learned, or will learn, in economics, being able to trade

makes people's lives better. Otherwise, people wouldn't do it. (Imagine what an awful life you

would lead if you had to live a Robinson Crusoe-like existence as did Tom Hanks's character in

the movie Cast Away.) In addition, because better marketing means more successful companies,

jobs are created. This generates wealth for people, who are then able to make purchases, which, in

turn, creates more jobs. The second way in which marketing improves the quality of life is based on the value delivery

function of marketing, but in a broader sense. When you add together all the marketers who are

trying to deliver offerings of greater value to consumers and are effectively communicating that

value, consumers are able to make more informed decisions about a wider array of choices. From

an economic perspective, more choices and smarter consumers are indicative of a higher quality

of life.

Marketing Costs Money Marketing can sometimes be the largest expense associated with producing a product. In the soft

drink business, marketing expenses account for about one-third of a product's price—about the

same as the ingredients used to make the soft drink itself. At the bottling and retailing level, the

expenses involved in marketing a drink to consumers make up the largest cost of the product.

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Some people argue that society does not benefit from marketing when it represents such a huge

chunk of a product's final price. In some cases, that argument is justified. Yet, when marketing

results in more informed consumers receiving a greater amount of value, then the cost is justified.

Marketing Offers People Career Opportunities Marketing is the interface between producers and consumers. In other words, it is the one

function in the organization in which the entire business comes together. Being responsible for

both making money for your company and delivering satisfaction to your customers makes

marketing a great career. In addition, because marketing can be such an expensive part of a

business and is so critical to its success, companies actively seek good marketing people. There's a

great variety of jobs available in the marketing profession. These positions represent only a few of

the opportunities available in marketing.

● Marketing research. Personnel in marketing research are responsible for studying

markets and customers in order to understand what strategies or tactics might work best

for firms. ● Merchandising. In retailing, merchandisers are responsible for developing strategies

regarding what products wholesalers should carry to sell to retailers such as Target and

Walmart. ● Sales. Salespeople meet with customers, determine their needs, propose offerings, and

make sure that the customer is satisfied. Sales departments can also include sales support

teams who work on creating the offering. ● Marketing communications. Whether it's for an advertising agency, a web marketing

agency, a PR agency, a brand management agency, or inside a company, some marketing

personnel work on marketing communications. Television commercials and print ads, the

communications with which we are most familiar, are only part of the advertising mix.

Many people who work in marketing communications spend all their time creating

advertising for electronic media, such as websites and their pop-up ads, podcasts, and the

like. Others plan trade shows, buzz campaigns, contests, generate positive press for the

company, or engage in crisis public relations management. ● Product development. People in product development are responsible for identifying

and creating features that meet the needs of a firm's customers. They often work with

engineers or other technical personnel to ensure that value is created. ● Direct marketing. Professionals in direct marketing communicate directly with

customers about a company's product offerings via channels such as e-mail, chat lines,

blogs, social media, telephone, or direct mail.

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● Event marketing. Some marketing personnel plan special events, orchestrating face-to-

face conversations with potential and current customers in a special setting. A career in marketing can begin in a number of different ways. Entry-level positions for college

graduates are available in many of the positions mentioned above. A growing number of CEOs are

people with marketing backgrounds. Some legendary CEOs like Ross Perot and Mary Kay Ash got

their start in marketing. CEOs such as Mark Hurd, who runs Oracle Corporation, and Jeffrey

Immelt at GE are showing how marketing careers can lead to the highest pinnacles of the

organization.

1 . 3 K E Y T A K E A W A Y

By facilitating transactions, marketing delivers value to both consumers and firms. At the broader level, this process creates jobs and improves the quality of life in a society. Marketing can be costly, so firms need to hire good people to manage their marketing activities. Being responsible for both making money for your company and delivering satisfaction to your customers makes marketing a great career.

1.4 How Is Marketing Done?

L E A R N I N G O B J E C T I V E S

1. Understand that marketing is both a firm-wide activity and a functional-level department. 2. Identify the strategic planning elements that are included in a corporate strategic plan and how

functional plans such as marketing flow from the corporate strategic plan. 3. Appreciate the changes in the marketing environment.

Marketing's Role in the Organization We previously discussed marketing as a set of activities that can affect an entire organization.

Marketing is also a functional area in companies, just like operations and accounting. Within a

company, marketing might be the title of a department, but some marketing functions, such as

sales, might be handled by another department. Marketing activities do not occur separately from

the rest of the company, however. As previously explained, pricing an offering, for example, will involve a company's finance and

accounting departments in addition to the marketing department. Similarly, a marketing strategy

is not created solely by a firm's marketing personnel. Instead, it flows from the company's overall

strategy.

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Everything Starts with Customers Most organizations start with an idea of how to serve customers better. Apple's engineers began

working on the iPod by looking at the available technology and thinking about how customers

would like to have their music more available, as well as more affordable, through downloading

MP3 files or live streaming services such as iTunes Radio. Many companies think about potential

markets and customers when they start. John Deere, for example, founded his company on the

principle of serving customers. When admonished for making constant improvements to his

products even though farmers would take whatever they could get, Deere reportedly replied,

"They haven't got to take what we make and somebody else will beat us, and we will lose our

trade" (John Deere [a.], 2009). He recognized that if his company failed to meet customers'

needs, someone else would. The mission of the company then became the following (John Deere

[b.], 2009):

We aspire to distinctively serve customers—those linked to the land—through a great business, a

business as great as our products. To achieve this aspiration, our strategy is:

• Exceptional operating performance

• Disciplined SVA growth

• Aligned high-performance teamwork

Here are a few mission statements from other companies. Note that they all refer to their

customers, either directly or by making references to relationships with them. Note also how

these are written to inspire employees and others who interact with the company and may read

the mission statement.

IBM IBM will be driven by these values: ● Dedication to every client's success. ● Innovation that matters, for our company and for the world. ● Trust and personal responsibility in all relationships (IBM, 2009).

Coca-Cola Everything we do is inspired by our enduring mission: ● To refresh the world…in body, mind, and spirit. ● To inspire moments of optimism…through our brands and our actions. ● To create value and make a difference…everywhere we engage (Coca-Cola Company,

2009).

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McDonald's ● To be our customers' favorite place and way to eat (McDonald's, 2009).

Merck ● To provide innovative and distinctive products and services that save and improve

lives and satisfy customer needs, to be recognized as a great place to work, and to

provide investors with a superior rate of return (Merck & Co., 2009). Not all companies create mission statements that reflect a marketing orientation. Apple, for

example, does not publish a mission statement, yet most consumers recognize Apple as a need-

fulfilling company. Apple's mission statement used to be: "Apple ignited the personal computer

revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with

the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning

computers, OS X operating system, and iLife and professional applications. Apple is also heading

the digital media revolution with its iPod portable music and video players and iTunes online

store, and has entered the mobile phone market with its revolutionary iPhone" (Apple, Inc.). This

antiquated mission statement reflects a production orientation, or an operating philosophy based

on the premise that Apple's success is due to great products and that simply supplying them will

lead to demand for them. The challenge, of course, is how to create a "great" product without

thinking too much about the customer's wants and needs. Apple, and for that matter, many other

companies, have fallen prey to thinking that they knew what a great product was without asking

their customers. In fact, Apple's first attempt at a graphic user interface (GUI) was the LISA, a

dismal failure. Clearly, the old mission statement needed to go. The Marketing Plan The marketing plan is the strategy for implementing the components of marketing: creating,

communicating, delivering, and exchanging value. Once a company has decided what business it

is in and expressed that in a mission statement, the firm then develops a corporate strategy. This

is the first level of strategic planning. Marketing strategists subsequently use the corporate

strategy and mission and combine that with an understanding of the market to develop the

company's marketing plan. This is the third level of strategic planning. (We'll cover the second

level a little bit later.)

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Figure 1.3 Steps in Creating a Marketing Plan

Once this information is gathered and digested, the planners can then work to create the right

offering. Products and services are developed, bundled at a price, and then tested in the market.

Decisions have to be made as to when to alter the offerings, add new ones, or drop old ones. Have you ever wondered how an organization decides which products and services to develop,

price, promote, and sell? Organizations typically develop plans and strategies that outline how

they want to go about this process. Such a plan must take into account a company's current

internal conditions, such as its resources, capabilities, and technology. The plan must also

account for conditions in the external environment, such as the economy, competitors, and

government regulations that could affect what the firm wants to do. Just as your personal plans—such as what you plan to major in or where you want to find a job—

are likely to change, organizations also have contingency plans. Individuals and organizations

both must develop long-term (longer than a year) strategic plans, match their strengths and

resources to available opportunities, and adjust their plans to changing circumstances.

The Changing Marketing Environment At the beginning of this week, we mentioned that the view of marketing has changed from a static

set of four Ps to a dynamic set of processes that involve marketing professionals as well as many

other employees in an organization. The way business is being conducted today is changing, too,

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and marketing is changing along with it. We will incorporate many of these changes throughout

the course in the coming weeks. Some of these changes include ethics and social responsibility. Businesses exist only because

society allows them to. When businesses begin to fail society, society will punish them or revoke

their license. The crackdown on companies in the subprime mortgage-lending industry is one

example. The collapse of Enron and the jailing of its executives is another. Scandals such as these

illustrate how society responds to unethical business practices. However, whereas ethics require

that you only do no harm, the concept of social responsibility requires that you must actively

seek to improve the lot of others. Today, people are demanding businesses take a proactive stance

in terms of social responsibility, and they are being held to ever-higher standards of conduct. Sustainability is an example of social responsibility and involves engaging in practices that do

not diminish the earth's resources. SC Johnson, the company that makes Pledge and Windex, was

among the first companies to engage in manufacturing practices that reduced or eliminated

pollution. Right now, companies do not have to engage in these practices, but because firms really

represent the people behind them (their owners and employees), forward-thinking executives are

seeking ways to reduce the impact their companies are having on the planet. You might have noticed that we use the word offering a lot instead of the term product. That's

because of service-dominant logic, the approach to business that recognizes that consumers

want value no matter how it is delivered. That emphasis on value is what drives the functional

approach to value—that is, creating, communicating, delivering, and exchanging value.

Finally, technology has increased the amount of information available to decision makers. As

such, the amount and quality of data for evaluating a firm's performance is increasing. Earlier in

our discussion of the marketing plan, we explained that customers communicate via transactions.

Although this sounds both simple and obvious, better information technology has given us a

much more complete picture of each exchange. Using this data, we can build more effective

marketing metrics that can then be used to create better offerings and better communication

plans.

1 . 4 K E Y T A K E A W A Y

A company's marketing plan flows from its strategic plan. Both begin with a focus on customers. The essential components of the plan are understanding customers, creating an offering that delivers value, communicating the value to the customer, exchanging with the customer, and evaluating the firm's performance. A marketing plan is influenced by environmental trends such as social responsibility, sustainability, service-dominant logic, the increased availability of data, and effective metrics.

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1.5 The Value Proposition

L E A R N I N G O B J E C T I V E S

1. Explain the concept of a company's or product's value proposition. 2. Understand why a company may develop different value propositions for different target markets.

What Is a Value Proposition? Individual buyers and organizational buyers both evaluate products and services to see if they

provide desired benefits. For example, when you're exploring your vacation options, you want to

know the benefits of each destination and the value you will get by going to each place. Before you

(or a firm) can develop a strategy or create a strategic plan, you first have to develop a value

proposition. A value proposition is a 30-second "elevator speech" stating the specific benefits a

product or service offering provides a buyer. It shows why the product or service is superior to

competing offers. The following is an example of a value proposition developed by a sales consulting firm: "Our

clients grow their business, large or small, typically by a minimum of 30–50% over the previous

year. They accomplish this without working 80-hour weeks and sacrificing their personal

lives" (Lake, 2009). Note that although a value proposition will hopefully lead to profits for a firm, when the firm

presents its value proposition to its customers, it doesn't mention its own profits. That's because

the goal is to focus on the external market, or what customers want.

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Figure 1.4

Like any other company, Beaches, an all-inclusive chain of resorts for families, must explain

what its value proposition is to customers. In other words, why does a Beaches resort provide

more value to vacationing families than do other resorts?

Source: Photo by Matt H. Wade (UpstateNYer) (2006). Wikimedia Commons. Used under the terms of the Creative Commons Attribution-ShareAlike 3.0 Unported license.

Firms typically identify different target markets, or groups of customers, they want to reach

when they are developing their value propositions. Target markets will be discussed in more

detail in Week 4, "Market Segmenting, Targeting, and Positioning." For now, be aware that

companies sometimes develop different value propositions for different target markets. The value

proposition tells each group of customers why they should buy a product or service, vacation to a

particular destination, or donate to an organization. Once the benefits of a product or service are clear, the firm must develop strategies that support

the value proposition. The value proposition serves as a guide for this process. In the case of our

sales consulting firm, the strategies it develops must help clients improve their sales by 30

percent-50 percent. Likewise, if a company's value proposition states that the firm is the largest

retailer in the region with the most stores and best product selection, opening stores or increasing

the firm's inventory might be a key part of the company's strategy.

1 . 5 K E Y T A K E A W A Y

A value proposition is a 30-second "elevator speech" stating the specific value a product or service provides to a target market. Firms may develop different value propositions for different groups of customers. The value proposition shows why the product or service is superior to competing offers and why the customer should buy it.

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1.6 Where Strategic Planning Occurs Within Firms

L E A R N I N G O B J E C T I V E S

1. Identify the different levels at which strategic planning may occur within firms. 2. Understand how strategic planning that occurs at multiple levels in an organization helps a company

achieve its overall corporate objectives.

Strategic planning is a process that helps an organization allocate its resources to capitalize on

opportunities in the marketplace. Typically, it is a long-term process. So how and where does

strategic planning occur within organizations? In large organizations, strategic planning is likely

to occur at a number of different levels. For example, top executives will develop strategic plans

for the corporation as a whole. These are corporate level plans. In addition, many large firms

have different divisions, or businesses, called strategic business units. A strategic business unit (SBU) is a business or product line within an organization that has

its own competitors, customers, and profit center for accounting purposes. A firm's SBUs may

also have their own mission statements (purpose) and will generally develop strategic plans for

themselves. These are called business level plans. The different departments, or functions (accounting, finance, marketing, and so forth) within a

company or SBU might also develop strategic plans. For example, a company may develop a

marketing plan or a financial plan. They are functional level plans.

Figure 1.5

Many consumers recognize the Goodyear blimp. Goodyear's strategic business units are North

American Tire; Latin American Tire; Asia Pacific Tire; and Europe, Middle East, and Africa

Tire. Goodyear's SBUs are set up to satisfy customers' needs in different worldwide markets

(Goodyear Tire and Rubber Company).

Source: Photo by Regular Daddy. (2009). Wikimedia Commons. Used under the terms of the Creative Commons Attribution-ShareAlike 3.0 Unported license.

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Figure 1.6, "Strategic Planning Levels in an Organization," shows an example of different strategic

planning levels that can exist within an organization's structure. The number of levels can vary,

depending on the size and structure of an organization. Not every organization will have every

level or have every type of plan.

Figure 1.6 Strategic Planning Levels in an Organization

The strategies and actions implemented at the functional (department) level must be consistent

with and help an organization achieve its objectives at both the business and corporate levels and

vice versa. The SBUs at the business level must also be consistent with and help an organization

achieve its corporate-level objectives. For example, if a company wants to increase its profits at

the corporate level and owns multiple business units, each unit might develop strategic plans to

increase its own profits and thereby the firm's profits as a whole. At the functional level, a firm's

marketing department might develop strategic plans to increase sales and the market share of the

firm's most profitable products, which will increase profits at the business level and help the

corporation's profitability. Both business level and functional plans should help the firm increase

its profits, so that the company's corporate-level strategic objectives can be met. For example, take PepsiCo, which has committed itself to achieving business and financial success

while leaving a positive imprint on society. PepsiCo identifies its three divisions (business units)

as (1) PepsiCo Americas Beverages, which is responsible for Pepsi soft drinks, Aquafina waters,

21

Tropicana juices, and Gatorade products; (2) PepsiCo Americas Foods, which is responsible for

Frito-Lay and Quaker Oats products; and (3) PepsiCo International, which consists of PepsiCo's

businesses in Asia, Africa, Europe, and Australia (PepsiCo [a.], 2009). To support PepsiCo's

overall corporate strategy, all three business units must develop strategic plans to profitably

produce offerings while demonstrating that they are committed to society and the environment.

Figure 1.7

The new Aquafina bottle uses less plastic and has a smaller

label, reducing waste and helping the environment.

Source: Wikipedia. At the functional (marketing) level, to increase PepsiCo's profits, employees responsible for

different products or product categories such as beverages or foods might focus on developing

healthier products and making their packaging more environmentally friendly so the company

captures more market share. For example, the new Aquafina bottle uses less plastic and has a

smaller label, which helps the environment by reducing the amount of waste. Organizations can use multiple methods and strategies at different levels in the corporation to

accomplish their various goals just as you may use different strategies to accomplish your goals.

However, the basic components of the strategic planning process are the same at each of the

different levels. Next, we'll take a closer look at the components of the strategic planning process.

1 . 6 K E Y T A K E A W A Y

Strategic planning can occur at different levels (corporate, business, and functional) in an organization. The number of levels may vary. However, if a company has multiple planning levels, the plans must be consistent, and all must help achieve the overall goals of the corporation. The best strategic plans are customer-focused.

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1.7 Components of the Strategic Planning Process

L E A R N I N G O B J E C T I V E S

1. Explain how a mission statement helps a company with its strategic planning. 2. Describe how a firm analyzes its internal environment. 3. Describe the external environment a firm may face and how it is analyzed.

The strategic planning process includes conducting a situation analysis and developing the

organization's mission statement, objectives, value proposition, and strategies. Figure 1.8, "The

Strategic Planning Process," shows the components of strategic planning. Let's now look at each

of these components.

Figure 1.8 The Strategic Planning Process

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Conducting a Situation Analysis As part of the strategic planning process, a situation analysis must be conducted before a

company can decide on specific actions. A situation analysis involves analyzing both the external

(outside the organization) and the internal (company) environments, as Figure 1.8, "The Strategic

Planning Process," shows. The firm's internal environment—such as its financial resources,

technological resources, and the capabilities of its personnel and their performance—has to be

examined. It is also critical to examine the external environment the firm faces, such as the

economy and its competitors. The external environment significantly affects the decisions a firm

makes, and thus must be continuously evaluated. For example, during the economic downturn in

2008–2009, businesses found that many competitors cut the prices of their products drastically.

Other companies reduced package sizes or the amount of product in packages. Firms also offered

customers incentives (free shipping, free gift cards with purchase, rebates, etc.) to purchase their

goods and services online, which allowed businesses to cut back on the personnel needed to staff

their brick-and-mortar stores. While a business cannot control what competitors do, it must

decide what actions to take to be proactive to changes in the internal and external environments

and remain competitive.

Conducting a SWOT Analysis Based on the situation analysis, organizations analyze their strengths, weaknesses, opportunities,

and threats, conducting what is called a SWOT analysis. Strengths and weaknesses are internal

factors and are somewhat controllable. For example, an organization's strengths might include its

brand name, efficient distribution network, reputation for great service, and strong financial

position. A firm's weaknesses might include lack of awareness of its products in the marketplace,

a lack of human resources talent, and a poor location. Opportunities and threats are factors that

are external to the firm and largely uncontrollable. Opportunities might entail the international

demand for the type of products the firm makes, few competitors, and favorable social trends

such as people living longer. Threats might include a bad economy, high interest rates that

increase a firm's borrowing costs, and an aging population that makes it hard for the business to

find workers.

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Figure 1.9 Elements of a SWOT Analysis

The easiest way to determine if a factor is external or internal is to take away the company,

organization, or individual and see if the factor still exists. Internal factors such as strengths and

weaknesses are specific to a company or individual, whereas external factors such as

opportunities and threats affect multiple individuals and organizations in the marketplace. For

example, if you are doing a situation analysis on PepsiCo and are looking at the weak economy,

take PepsiCo out of the picture and see what factors remain. If the factor—the weak economy—is

still there, it is an external factor. Even if PepsiCo hadn't been around in 2008–2009, the weak

economy reduced consumer spending and affected a lot of companies.

Assessing the Internal Environment As we have indicated, when an organization evaluates which factors are its strengths and

weaknesses, it is assessing its internal environment. Once companies determine their strengths,

they can use those strengths to capitalize on opportunities and develop their competitive

advantage. For example, strengths for PepsiCo are what are called "mega" brands, or brands that

individually generate over $1 billion in sales (PepsiCo [b.], 2009). These brands are also designed

to contribute to PepsiCo's environmental and social responsibilities. PepsiCo's brand awareness, profitability, and strong presence in global markets are also

strengths. Especially in foreign markets, the loyalty of a firm's employees can be a major strength,

which can provide it with a competitive advantage. Loyal and knowledgeable employees are easier

to train and tend to develop better relationships with customers. This helps organizations pursue

more opportunities.

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Although the brand awareness for PepsiCo's products is strong, smaller companies often struggle

with weaknesses such as low brand awareness, low financial reserves, and poor locations. When

organizations assess their internal environments, they must look at factors such as performance

and costs as well as brand awareness and location. Managers need to examine both the past and

current strategies of their firms and determine what strategies succeeded and which ones failed.

This helps a company plan its future actions and improves the odds those actions will be

successful. For example, a company might look at packaging that worked very well for a product

and use the same type of packaging for new products. Firms may also look at customers' reactions

to changes in products, including packaging, to see what works and doesn't work. When PepsiCo

changed the packaging of major brands in 2008, customers had mixed responses. Tropicana

switched from the familiar orange with the straw in it to a new package, and customers did not

like it. As a result, Tropicana changed back to its familiar orange with a straw after spending $35

million for the new package design.

Assessing the External Environment Analyzing the external environment involves tracking conditions in the marketplace that,

although largely uncontrollable, affect the way an organization does business. As we have

mentioned, these factors include competition and the economy. Other external factors include

cultural and social trends, political and legal regulations, technological changes, and the price and

availability of natural resources. When firms globalize, analyzing the environment becomes more

complex because they must examine the external environment in each country in which they do

business. Regulations, competitors, technological development, and the economy may be

different in each country and will affect how firms do business.

Although the external environment affects all organizations, companies must focus on factors that

are relevant for their operations. For example, government regulations on food packaging will

affect PepsiCo but not Goodyear. Similarly, students getting a business degree don't need to focus

on job opportunities for registered nurses.

The Competitive Environment

All organizations must consider their competition, whether it is direct or indirect competition

vying for the consumer's dollar. Both nonprofit and for-profit organizations compete for

customers' resources. Coke and Pepsi are direct competitors in the soft drink industry, Hilton and

Sheraton are competitors in the hospitality industry, and organizations such as United Way and

the American Cancer Society compete for resources in the nonprofit sector. However, hotels must

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also consider other options that people have when selecting a place to stay, such as hostels,

dorms, bed and breakfasts, or rental homes. A group of competitors that provide similar products or services forms an industry. Michael

Porter, a professor at Harvard University and a leading authority on competitive strategy,

developed an approach for analyzing industries. Called the five forces model (Porter, 1980, p. 3–

33) and shown in Figure 1.10, "Five Forces Model," the framework helps organizations

understand their current competitors as well as organizations that could become competitors in

the future. As such, firms can find the best way to identify their market position. This tells the

company if it is the market leader, market challenger, market follower, or market nicher.

Figure 1.10 Five Forces Model

Source: Porter. (1980). p. 4.

Competitive Analysis

When a firm conducts a competitive analysis, it tends to focus on direct competitors and tries to

determine another firm's strengths and weaknesses, its image, and its resources. Doing so helps

the firm figure out how much money a competitor may be able to spend on things such as

research, new product development, promotion, and new locations. Competitive analysis involves

looking at any information (annual reports, financial statements, news stories, observation details

obtained on visits, etc.) available on competitors. Mystery shoppers, or people who act like

customers, might visit competitors to learn about their customer service and their products.

Competitors battle for the customer's dollar and they must know what other firms are doing.

Individuals and teams also compete for jobs, titles, and prizes and must figure out the

27

competitors' weaknesses and plans in order to take advantage of their strengths and have a better

chance of winning. According to Porter, in addition to their direct competitors (competitive rivals), organizations

must consider the strength and impact the following could have (Porter, p. 3–33):

● Substitute products ● Potential entrants (new competitors) in the marketplace ● The bargaining power of suppliers ● The bargaining power of buyers

When any of these factors change, companies may have to respond by changing their strategies.

For example, because buyers are consuming fewer soft drinks, companies such as Coke and Pepsi

have had to develop new, substitute offerings such as vitamin water and sports drinks. However,

other companies such as Dannon or Nestlé may also be potential entrants in the flavored water

market. When you select a hamburger fast-food chain, you also had the option of substitutes such

as getting food at the grocery or going to a pizza place. When computers entered the market, they

were a substitute for typewriters.

Figure 1.11

When personal computers were invented, they were a

serious threat to typewriter makers like Smith Corona.

Source: (Left) Photo by mpclemens, Flickr. Used under the terms of the Creative Commons Attribution 2.0 Generic license. (Right) Flickr.

Porter's Five Forces Model is only one way to look at competition. Some companies commit

themselves so totally to serving customer needs that they spend little if any time worrying about

the competition. These strategies are called value proposition as suggested by Treacy and

Wiersema (1997). They include operational excellence (deliver quality, price, and ease of purchase

28

and use), product leadership (creating the best products or services), and customer intimacy

(delivering what specific customers want). An addition to the literature on competitive strategies is Blue Ocean Strategy, which suggests a

firm should strive to make the competition irrelevant by finding an uncontested market space, or

a blue ocean (Kim & Mauborgne, 2005). Firms do this by finding customers with needs that thus

far have been unmet by any organization. A good example is again Apple, with the development of

the first tablet product. The iPad filled a need for mobile connectivity and productivity consumers

needed and wanted. This is the uncontested market space Apple managed to fill and many

companies have since copied. Suppliers, the companies that supply ingredients as well as packaging materials to other

companies, must also be considered. If a company cannot get the supplies it needs, it's in trouble.

Also, sometimes suppliers see how lucrative their customers' markets are and decide to enter

them. Buyers, who are the focus of marketing and strategic plans, must also be considered

because they have bargaining power and must be satisfied. If a buyer is large enough, and doesn't

purchase a product or service, it can affect a selling company's performance. Walmart, for

instance, is a buyer with a great deal of bargaining power. Firms that do business with Walmart

must be prepared to make concessions if they want their products on the company's store shelves. Finally, the world is becoming "smaller" and a more of a global marketplace. Companies

everywhere are finding that no matter what they make, numerous firms around the world are

producing the same "widget" or a similar offering (substitute) and are eager to compete with

them. Employees are in the same position. The Internet has made it easier than ever for

customers to find products and services and for workers to find the best jobs available, even if

they are abroad. Companies are also acquiring foreign firms. These factors all have an effect on

the strategic decisions companies make.

The Political and Legal Environment

All organizations must comply with government regulations and understand the political and

legal environments in which they do business. Different government agencies enforce the

numerous regulations that have been established to protect both consumers and businesses. For

example, the Sherman Act (1890) prohibits US firms from restraining trade by creating

monopolies and cartels. The regulations related to the act are enforced by the Federal Trade

Commission (FTC), which also regulates deceptive advertising. The US Food and Drug

Administration (FDA) regulates the labeling of consumable products, such as food and medicine.

One organization that has been extremely busy is the Consumer Product Safety Commission, the

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group that sets safety standards for consumer products. Unsafe baby formula and toys with lead

paint caused a big scare among consumers in 2008 and 2009.

Figure 1.12

The US Food and Drug Administration prohibits companies from using unacceptable levels of

lead in toys and other household objects, such as utensils and furniture. Mattel voluntarily

recalled Sarge cars made in mid-2000.

Source: US Consumer Product Safety Commission. In the public domain.

As we have explained, when organizations conduct business in multiple markets, they must

understand that regulations vary across countries and across states. Many states and countries

have different laws that affect strategy. For example, suppose you are opening a new factory

because you cannot keep up with the demand for your products. If you are considering opening

the factory in France (perhaps because the demand in Europe for your product is strong), you

need to know that it is illegal for employees in that country to work more than 35 hours per week.

The Economic Environment

The economy has a major impact on spending by both consumers and businesses, which, in turn,

affects the goals and strategies of organizations. Economic factors include variables such as

inflation, unemployment, interest rates, and whether the economy is in a growth period or a

recession. Inflation occurs when the cost of living continues to rise, eroding the purchasing power

of money. When this happens, you and other consumers and businesses need more money to

purchase goods and services. Interest rates often rise when inflation rises. Recessions can also

occur when inflation rises because higher prices sometimes cause low or negative growth.

During a recessionary period, it is possible for both high-end and low-end products to sell well.

Consumers who can afford luxury goods may continue to buy them, while consumers with lower

30

incomes tend to become more value-conscious. Other goods and services, such as products sold in

traditional department stores, may suffer. In the face of a severe economic downturn, even the

sales of luxury goods can suffer. The economic downturn that began in 2008 affected consumers

and businesses at all levels worldwide. Consumers reduced their spending, holiday sales dropped,

financial institutions went bankrupt, the mortgage industry collapsed, and the "Big Three" US

auto manufacturers (Ford, Chrysler, and General Motors) asked for emergency loans.

The Social and Cultural Environment

The social and cultural environment—including social trends, such as people's attitudes toward

fitness and nutrition; demographic characteristics, such as people's age, income, marital status,

education, and occupation; and culture, which relates to people's beliefs and values—is changing

in the global marketplace. Fitness, nutrition, and health trends are affecting the product offerings

of many firms. For example, PepsiCo produces vitamin water and sports drinks. More women are

working, which has led to a rise in the demand for services such as house cleaning and day care.

US baby boomers are reaching retirement age, sending their children to college, and trying to take

care of their elderly parents all at the same time. Firms are responding to the time constraints

their buyers face by creating products that are more convenient, such as frozen meals and

nutritious snacks. The composition of the population is also constantly changing. Hispanics are the fastest-growing

minority in the United States. Consumers in this group and other diverse groups prefer different

types of products and brands. In many cities, stores cater specifically to Hispanic customers.

Technology

The technology available in the world is changing the way people communicate and the way firms

do business. Everyone is affected by technological changes. Self-scanners and video displays at

stores, ATMs, the Internet, and mobile phones are a few examples of how technology is affecting

businesses and consumers. Many consumers get information, read the news, use text messaging,

and shop online. As a result, marketers have begun allocating more of their promotion budgets to

online ads and mobile marketing and not just to traditional print media such as newspapers and

magazines.

Natural Resources

Natural resources are scarce commodities, and consumers are becoming increasingly aware of

this fact. Today, many firms are doing more to engage in "sustainable" practices that help protect

the environment and conserve natural resources. Green marketing involves marketing

environmentally safe products and services in a way that is good for the environment. Water

31

shortages often occur in the summer months, so many restaurants now only serve patrons water

upon request. Hotels voluntarily conserve water by not washing guests' sheets and towels every

day unless they request it. Reusing packages (refillable containers) and reducing the amount of

packaging, paper, energy, and water in the production of goods and services are becoming key

considerations for many organizations, whether they sell their products to other businesses or to

final users (consumers). Green marketing not only helps the environment but also saves the

company, and ultimately the consumer, money. Sustainability, ethics (doing the right things), and

social responsibility (helping society, communities, and other people) influence an organization's

planning process and the strategies it implements.

Once the situation analysis is complete, it becomes a critical input to an organization's or an

individual's strategic plan. Let's look at the other components of the strategic planning process.

The Mission Statement The firm's mission statement states the purpose of the organization and why it exists. Both

profit and nonprofit organizations have mission statements, which they often publicize.

Earlier, we discussed the mission statements of John Deere, IBM, Coca-Cola, McDonald's and

Merck.

Sometimes SBUs develop separate mission statements. For example, PepsiCo Americas

Beverages, PepsiCo Americas Foods, and PepsiCo International might each develop a different

mission statement. SBU mission statements must support the corporate mission statement and

be specifically customer-focused to those customers served by the SBU.

1 . 7 K E Y T A K E A W A Y

A firm must analyze factors in the external and internal environments it faces throughout the strategic planning process. These factors are inputs to the planning process. As they change, the company must be prepared to adjust its plans. Different factors are relevant for different companies. Once a company has analyzed its internal and external environments, managers can begin to decide which strategies are best, given the firm's mission statement.

1.8 Developing Organizational Objectives and Formulating Strategies

L E A R N I N G O B J E C T I V E S 1. Explain how companies develop the objectives driving their strategies. 2. Describe the different types of product strategies and market entry strategies that companies pursue.

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Developing Objectives Objectives are what organizations want to accomplish—the end results they want to achieve—in

a given time frame. In addition to being accomplished within a certain time frame, objectives

should be realistic (achievable) and be measurable, if possible. "To increase sales by 2 percent by

the end of the year" is an example of an objective an organization might develop. You have

probably set objectives for yourself that you want to achieve in a given time frame. For example,

your objectives might be to maintain a certain grade-point average or find a new career within

two years. Objectives help guide and motivate a company's employees and give its managers reference points

for evaluating the firm's marketing actions. Although many organizations publish their mission

statements, most for-profit companies do not publish their objectives. Accomplishments at each

level of the organization have helped PepsiCo meet its corporate objectives over the course of the

past few years. PepsiCo's business units (divisions) have increased the number of their facilities to

grow their brands and enter new markets. PepsiCo's beverage and snack units have gained market

share by developing healthier products and products that are more convenient to use. A firm's marketing objectives should be consistent with the company's objectives at other levels,

such as the corporate level and business level. An example of a marketing objective for PepsiCo

might be "to increase by 4 percent the market share of Gatorade by the end of the year." While a

company generally has one mission statement, there are usually numerous corporate objectives.

Formulating Strategies Strategies are the means to the ends, or what a firm is going to do to meet its objectives.

Successful strategies help organizations establish and maintain a competitive advantage that

competitors cannot imitate easily. PepsiCo attempts to sustain its competitive advantage by

constantly developing new products and innovations, including "mega brands," which are 18

individual brands that generate over $1 billion in sales each. Firms often use multiple strategies to accomplish their objectives and capitalize on marketing

opportunities. For example, in addition to pursuing a low-cost strategy (selling products

inexpensively), Walmart has simultaneously pursued a strategy of opening new stores rapidly

around the world. Many companies develop marketing strategies as part of their general, overall

business plans. Other companies prepare separate marketing plans.

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A marketing plan is a strategic plan at the functional level that provides a firm's marketing group with direction. It is a road map that improves the firm's understanding of its competitive

situation. The marketing plan also helps the firm allocate resources and divvy up the tasks that

employees need to do for the company to meet its objectives. The different components of

marketing plans will be discussed throughout the book and then discussed together at the end of

the book. Next, let's take a look at the different types of basic market strategies firms pursue

before they develop their marketing plans.

Figure 1.13 Product and Market Entry Strategies

The different types of product and market entry strategies

a firm can pursue in order to meet their objectives. Market penetration strategies focus on increasing a firm's sales of its existing products to its

existing customers. Companies often offer consumers special promotions or low prices to increase

their use and encourage them to buy products. When Frito-Lay distributes money-saving coupons

to customers or offers them discounts to buy multiple packages of snacks, the company is using a

penetration strategy. The Campbell Soup Company gets consumers to buy more soup by

providing easy recipes using its soup as an ingredient for cooking quick meals. Product development strategies involve creating new products for existing customers. A new

product can be a totally new innovation, an improved product, or a product with enhanced value,

such as one with a new feature. Cell phones that allow consumers to charge purchases with the

phone or take pictures are examples of a product with enhanced value. A new product can also be

one that comes in different variations, such as new flavors, colors, and sizes. Mountain Dew

Voltage, introduced by PepsiCo Americas Beverages in 2009, is an example. Keep in mind,

34

however, that what works for one company might not work for another. For example, just after

Starbucks announced it was cutting back on the number of its lunch offerings, Dunkin' Donuts

announced it was adding items to its lunch menu. Market development strategies focus on entering new markets with existing products. For

example, during the economic downturn of the first decade of the 2000s, manufacturers of high-

end coffee makers began targeting customers who go to coffee shops. The manufacturers are

hoping to develop the market for their products by making sure consumers know they can brew a

great cup of coffee at home for a fraction of what they spend at Starbucks. New markets can include any new groups of customers such as different age groups, new

geographic areas, or international markets. Many companies, including PepsiCo and Hyundai,

have entered—and been successful in—rapidly emerging markets such as Russia, China, and

India.

As Figure 1.13, "Product and Market Entry Strategies," shows, there are different ways, or

strategies, by which firms can enter international markets. The strategies vary in the amount of

risk, control, and investment that firms face. Firms can simply export, or sell their products to

buyers abroad, which is the least risky and least expensive method but also offers the least

amount of control. Many small firms export their products to foreign markets. Firms can also license, or sell the right to use some aspect of their production processes,

trademarks, or patents to individuals or firms in foreign markets. Licensing is a popular strategy,

but firms must figure out how to protect their interests if the licensee decides to open its own

business and void the license agreement. The French luggage and handbag maker Louis Vuitton

faced this problem when it entered China. Competitors started illegally putting the Louis Vuitton

logo on different products, which cut into Louis Vuitton's profits.

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Figure 1.14

The front of a KFC franchise in Asia may be much larger than

KFC stores in the United States. Selling franchises is a popular

way for firms to enter foreign markets.

Source: Photo by Christopher Augapfel. (2008). Wikimedia Commons. Used under the terms of the Creative Commons Attribution 2.0 Generic license.

Franchising is a longer-term form of licensing that is extremely popular with service firms, such

as restaurants like McDonald's and Subway, hotels such as Holiday Inn Express, and cleaning

companies such as Stanley Steamer. Franchisees pay a fee for the franchise and must adhere to

certain standards; however, they benefit from the advertising and brand recognition the

franchising company provides.

Contract manufacturing allows companies to hire manufacturers to produce their products in

another country. The manufacturers are provided specifications for the products, which are then

manufactured and sold on behalf of the company that contracted the manufacturing. Contract

manufacturing may provide tax incentives and may be more profitable than manufacturing the

products in the home country. Examples of products in which contract manufacturing is often

used include cell phones, computers, and printers.

Joint ventures combine the expertise and investments of two companies and help companies

enter foreign markets. The firms in each country share the risks as well as the investments. Some

countries such as China often require companies to form a joint venture with a domestic firm in

order to enter the market. After entering the market in a partnership with a domestic firm and

becoming established in the market, some firms may decide to separate from their partner and

become their own businesses. Fuji Xerox Co., Ltd., is an example of a joint venture between the

Japanese Fuji Photo Film Co. and the American document management company Xerox. Another

example of a joint venture is Sony Ericsson. The venture combined the Japanese company Sony's

electronic expertise with the Swedish company Ericsson's telecommunication expertise.

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Direct investment (owning a company or facility overseas) is another way to enter a foreign

market. For example, In Bev, the Dutch maker of Beck's beer, was able to capture market share in

the United States by purchasing St. Louis-based Anheuser-Busch. A direct investment strategy

involves the most risk and investment but offers the most control. Other companies such as

advertising agencies may want to invest and develop their own businesses directly in international

markets rather than trying to do so via other companies.

Figure 1.15 Market Entry Methods

Diversification strategies involve entering new markets with new products or doing

something outside a firm's current businesses. Firms that have little experience with different

markets or different products often diversify their product lines by acquiring other companies.

Diversification can be profitable, but it can also be risky if a company does not have the expertise

or resources it needs to successfully implement the strategy. Warner Music Group's purchase of

the concert promoter Bulldog Entertainment is an example of a diversification attempt that failed.

1 . 8 K E Y T A K E A W A Y

The strategic planning process includes a company's mission (purpose), objectives (end results desired), and strategies (means). Sometimes, the different SBUs of a firm have different mission statements. A firm's objectives should be realistic (achievable) and measurable. The different product market strategies firms pursue include market penetration, product development, market development, and diversification. Global expansion generally involves a market development strategy with different ways to enter global markets based on the degree of risk a company wishes to assume.

1.9 Strategic Portfolio Planning Approaches

L E A R N I N G O B J E C T I V E S

1. Explain how SBUs are evaluated using the Boston Consulting Group matrix. 2. Explain how businesses and the attractiveness of industries are evaluated using the General Electric

approach.

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If a company has several strategic business units (SBUs), each is generally treated for strategic

planning purposes as a separate company. When a firm such as PepsiCo has multiple strategic

business units, it must decide what are the objectives and strategies for each business and how to

allocate resources among them. A group of businesses can be considered a portfolio, just as a

collection of artwork or investments compose a portfolio. In order to evaluate each business,

companies sometimes use what is called a portfolio planning approach.

A portfolio planning approach involves analyzing a firm's entire collection of businesses

relative to one another. Two of the most widely used portfolio planning approaches include the

Boston Consulting Group (BCG) matrix and the General Electric (GE) approach.

The Boston Consulting Group Matrix

Figure 1.16 The Boston Consulting Group (BCG) Matrix

The Boston Consulting Group (BCG) matrix helps companies evaluate each of its strategic

business units based on two factors: (1) the SBU's market growth rate (i.e., how fast the unit is

growing compared to the industry in which it competes) and (2) the SBU's relative market share

(i.e., how the unit's share of the market compares to the market share of its competitors). Because

the BCG matrix assumes that profitability and market share are highly related, it is a useful

approach for making business and investment decisions. However, the BCG matrix is subjective,

and managers should also use their judgment and other planning approaches before making

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decisions. Using the BCG matrix, managers can categorize their SBUs (products) into one of four

categories, as shown in Figure 1.16, "The Boston Consulting Group (BCG) Matrix."

Stars

Everyone wants to be a star. A star is a product with high growth and a high market share. To

maintain the growth of its star products, a company may have to invest money to improve them

and how they are distributed as well as promote them. The iPod, when it was first released, was

an example of a star product.

Cash Cows

A cash cow is a product with low growth and a high market share. Cash cows have a large share

of a shrinking market. Although they generate a lot of cash, they do not have a long-term future.

For example, DVD players are a cash cow for Sony. Eventually, DVDs are likely to be replaced by

digital downloads, just like MP3s replaced CDs. Companies with cash cows need to manage them

so that they continue to generate revenue to fund star products.

Question Marks or Problem Children

Did you ever hear an adult say they didn't know what to do with a child? The same question or

problem arises when a product has a low share of a high-growth market. Managers classify these

products as question marks or problem children. They must decide whether to invest in

them and hope they become stars or gradually eliminate or sell them. For example, as the price of

gasoline soared in 2008, many consumers purchased motorcycles and mopeds, which get better

gas mileage. However, some manufacturers have a very low share of this market. These

manufacturers now have to decide what they should do with these products.

Dogs

In business, it is not good to be considered a dog. A dog is a product with low growth and low

market share. Dogs do not make much money and do not have a promising future. Companies

often get rid of dogs. However, some companies are hesitant to classify any of their products as

dogs. As a result, they keep producing products and services they shouldn't or invest in dogs in

hopes they'll succeed.

The BCG matrix helps managers make resource allocation decisions once different products are

classified. Depending on the product, a firm might decide on a number of different strategies for

it. One strategy is to build market share for a business or product, especially a product that might

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become a star. Many companies invest in question marks because market share is available for

them to capture. The success sequence is often used as a means to help question marks become

stars. With the success sequence, money is taken from cash cows (if available) and invested into

question marks in hopes of them becoming stars. Holding market share means the company wants to keep the product's share at the same level.

When a firm pursues this strategy, it only invests what it has to in order to maintain the product's

market share. When a company decides to harvest a product, that company lowers its

investment in the product. The goal is to try to generate short-term profits from the product

regardless of the long-term impact on its survival. If a company decides to divest a product, the

firm drops or sells it. That's what Procter & Gamble did in 2008 when it sold its Folgers coffee

brand to Smuckers. Procter & Gamble also sold Jif peanut butter brand to Smuckers. Many dogs

are divested, but companies may also divest products because they want to focus on other brands

they have in their portfolio. As competitors enter the market, technology advances, and consumer preferences change, the

position of a company's products in the BCG matrix is also likely to change. The company has to

continually evaluate the situation and adjust its investments and product promotion strategies

accordingly. The firm must also keep in mind that the BCG matrix is just one planning approach,

and that other variables can affect the success of products.

The General Electric Approach Another portfolio planning approach that helps a business determine whether to invest in

opportunities is the General Electric (GE) approach. The GE approach examines a business's

strengths and the attractiveness of the industry in which it competes. As we have indicated, a

business's strengths are factors internal to the company, including strong human resources

capabilities (talented personnel), strong technical capabilities, and the fact that the firm holds a

large share of the market. The attractiveness of an industry can include aspects such as whether

or not there is a great deal of growth in the industry, whether the profits earned by the firms

competing within it are high or low, and whether or not it is difficult to enter the market. For

example, the automobile industry is not attractive in times of economic downturn such as the

recession in 2009, so many automobile manufacturers don't want to invest more in production.

They want to cut or stop spending as much as possible to improve their profitability. Hotels and

airlines face similar situations. Companies evaluate their strengths and the attractiveness of industries as high, medium, and low.

The firms then determine their investment strategies based on how well the two correlate with

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one another. As Figure 1.17, "The General Electric (GE) Approach" shows, the investment options

outlined in the GE approach can be compared to a traffic light. For example, if a company feels

that it does not have the business strengths to compete in an industry and that the industry is not

attractive, this will result in a low rating, which is comparable to a red light. In that case, the

company should harvest the business (slowly reduce the investments made in it), divest the

business (drop or sell it), or stop investing in it, which is what happened with many automotive

manufacturers.

Figure 1.17 The General Electric (GE) Approach

Although many people may think a yellow light means "speed up," it actually means caution.

Companies with a medium rating on industry attractiveness and business strengths should be

cautious when investing and attempt to hold the market share they have. If a company rates itself

high on business strengths and the industry is very attractive (also rated high), this is comparable

to a green light. In this case, the firm should invest in the business and build market share.

During bad economic times, many industries are not attractive. However, when the economy

improves, businesses must reevaluate opportunities.

1 . 9 K E Y T A K E A W A Y

A group of businesses is called a portfolio. Organizations that have multiple business units must decide how to allocate resources to them and decide what objectives and strategies are feasible for them. Portfolio planning approaches help firms analyze the businesses relative to each other. The BCG and GE approaches are two of the most common portfolio planning methods.

W E E K 2 P R E V I E W

Week 1 emphasized the central role of customers in all marketing activities. To quote Sam Walton, founder of Walmart, "There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else" (Brainyquote).

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Therefore, the focus of Week 2 is on customers and companies' relationship with them. We will explore the role technology plans in empowering customers to be an integral part in the creating, communication, delivering and exchanging value, the importance of loyalty and customer satisfaction in retaining customers, and some of the ethical and legal issues in customer empowerment.

Week 1 References Section 1.1 American Marketing Association (AMA). (2009). About AMA. Definition of marketing. Retrieved December 3, 2009, from https://www.ama.org/AboutAMA/Pages/Definition-of-Marketing.aspx Section 1.3 Famous Quotes & Authors. (2009). Franklin D. Roosevelt quotes and quotations. Retrieved December 7, 2009, from http://www.famousquotesandauthors.com/authors/franklin_d__roosevelt_quotes.html Section 1.4 Apple, Inc. (2009). Apple's app store downloads top 1.5 billion in first year. Retrieved December 3, 2009, from http://www.apple.com/hk/en/pr/library/2009/07/14apps.html The Coca-Cola Company. (2009). Mission, vision, & values. Retrieved December 3, 2009, from http://www.thecoca-colacompany.com/ourcompany/mission_vision_values.html IBM. (2009). About IBM. Retrieved December 3, 2009, from http://www.ibm.com/ibm/us/en/ John Deere. [a.] (2009). John Deere: A biography. Retrieved December 3, 2009, from http://www.deere.com/en_US/compinfo/history/johndeere2.html John Deere [b.] (2009). John Deere strategy. Retrieved December 3, 2009, from http://www.deere.com/en_US/compinfo/strategy/index.html McDonald's. (2009). Our company. Retrieved December 3, 2009, from http://aboutmcdonalds.com/mcd/our_company/mcd_faq/student_research.html#1 Merck & Co., Inc. (2009). The new Merck. Retrieved December 7, 2009, from http://www.merck.com/about/Merck%20Vision%20Mission.pdf Section 1.5 Lake, L. (2009). Develop your value proposition. Retrieved December 7, 2009 from http://marketing.about.com/od/marketingplanandstrategy/a/valueprop.htm Section 1.6 Goodyear Tire and Rubber Company. (2009). Retrieved December 7, 2009, from http://goodyear.com PepsiCo. Inc. [a]. (2009). The PepsiCo family. Retrieved December 7, 2009, from http://www.pepsico.com/Company/The-Pepsico-Family.html Section 1.7 PepsiCo. Inc. [b] PepsiCo brands. Retrieved December 7, 2009 from http://www.pepsico.com/Company/Our-Brands.html Porter, M. E. (1980). Competitive strategy. New York: The Free Press. p. 3–33.

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Treacy, M., & Wiersema, F. (1997). The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus: Dominate Your Market. Massachusetts: Addison-Wesley. Kim, W. C., & Mauborgne, R. (2005). Blue Ocean Strategy. Massachusetts: Harvard Business School Press. Week 2 Preview Brainyquote. (n.d.). Retrieved January 28, 2015 from http://www.brainyquote.com/quotes/quotes/s/samwalton146810.html#SEk6cB5tGW3Be5GM.99