SWOT ANALYSIS

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C H A P T E R 1

Foundations of Strategic Marketing Management

The primary purpose of marketing is to create long-term and mutually beneficial exchange relationships between an entity and the publics (individuals and organizations) with which it interacts. Though this fun- damental purpose of marketing is timeless, the manner in which organi-

zations undertake it continues to evolve. No longer do marketing managers function solely to direct day-to-day operations; they must make strategic decisions as well. This elevation of marketing perspectives to a strategic position in organizations has resulted in expanded responsibilities for marketing managers. Increasingly, they find themselves involved in charting the direction of the organization and contributing to decisions that will create and sustain a competitive advantage and affect long-term organizational performance.

The transition of the marketing manager from being only an implementer to being a maker of organization strategy has resulted in (1) the creation of the chief marketing officer (CMO) position in many organizations and (2) the popularity of strategic marketing management as a course of study and practice. Today, almost one- half of Fortune 1000 companies have a CMO. Although responsibilities vary across companies, a common expectation is that a CMO will assume a leadership role in defining the mission of the business; analysis of environmental, competitive, and busi- ness situations; developing business objectives and goals; and defining customer value propositions and the marketing strategies that deliver on these propositions. The skill set required of CMOs includes an analytical ability to interpret extensive market and operational information, an intuitive sense of customer and competitor motivations, and creativity in framing strategic marketing initiatives in light of implementation considerations and financial targets and results.1 Strategic marketing management consists of five complex and interrelated processes.

1. Defining the organization’s business, mission, and goals

2. Identifying and framing organizational growth opportunities

3. Formulating product-market strategies

4. Budgeting marketing, financial, and production resources

5. Developing reformulation and recovery strategies

The remainder of this chapter discusses each of these processes and their relation- ships to one another.

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■ DEFINING THE ORGANIZATION’S BUSINESS, MISSION, AND GOALS

The practice of strategic marketing management begins with a clearly stated business definition, mission, and set of goals or objectives. A business definition outlines the scope of a particular organization’s operations. Its mission is a written statement of organizational purpose. Goals or objectives specify what an organization intends to achieve. Each plays an important role in describing the character of an organization and what it seeks to accomplish.

Business Definition

Determining what business an organization is in is neither obvious nor easy. In many instances, a single organization may operate several businesses, as is the case with large Fortune 500 companies. Defining each of these businesses is a necessary first step in strategic marketing management.

Contemporary strategic marketing perspectives indicate that an organization should define a business by the type of customers it wishes to serve, the particular needs of those customer groups it wishes to satisfy, and the means or technology by which the organization will satisfy these customer needs.2 By defining a business from a customer or market perspective, an organization is appropriately viewed as a customer-satisfying endeavor, not a product-producing or service-delivery enterprise. Products and services are transient, as is often the technology or means used to pro- duce or deliver them. Basic customer needs and customer groups are more enduring. For example, the means for delivering prerecorded music has undergone significant change over the past 30 years. During this period, the dominant prerecorded music technologies and products evolved from plastic records, to eight-track tapes, to cas- settes, to compact discs. Today, digital downloading of music is growing. By compari- son, the principal consumer buying segment(s) and needs satisfied have varied little.

Much of the recent corporate restructuring and refocusing has resulted from senior company executives asking the question,“What business are we in?” The expe- rience of Encyclopaedia Britannica is a case in point.3 The venerable publishing com- pany is best known for its comprehensive and authoritative 32-volume, leather-bound book reference series first printed in 1768. In the late 1990s, however, the company found itself in a precarious competitive environment. CD-ROMs and the Internet had become the study tools of choice for students, and Microsoft’s Encarta CD-ROM and IBM’s CD-ROM joint venture with World Book were attracting Britannica’s core customers. The result? Book sales fell 83 percent between 1990 and 1997. Britannica’s senior management was confident that the need for dependable and trustworthy infor- mation among curious and intelligent customers remained. However, the technology for satisfying these needs had changed. This realization prompted Britannica to rede- fine its business. According to a company official: “We’re reinventing our business. We’re not in the book business. We’re in the information business.” By early 2006, the company had become a premier information site on the Internet. Britannica’s sub- scription service (eb.com) markets archival information to schools and public and business libraries. Its consumer Web site (britannica.com) is a source of information for about 200,000 subscribers and its search engine provides some 150,000 Web sites selected by expert Britannica staffers for information quality and accuracy.

Business Mission

An organization’s business mission complements its business definition. As a written statement, a mission underscores the scope of an organization’s operations apparent in its business definition and reflects management’s vision of what the organization

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DEFINING THE ORGANIZATION’S BUSINESS, MISSION, AND GOALS 3

seeks to do. Although there is no overall definition for all mission statements, most statements describe an organization’s purpose with reference to its customers, prod- ucts or services, markets, philosophy, and technology. Some mission statements are generally stated, such as that for Xerox Corporation:

Our strategic intent is to help people find better ways to do great work—by con- stantly leading in document technologies, products and services that improve our cus- tomers’ work processes and business results.

Others are more specifically written, like that for Hendison Electronics Corporation. Hendison Electronics Corporation aspires

to serve the discriminating purchasers of home entertainment products who approach their purchase in a deliberate manner with heavy consideration of long- term benefits. We will emphasize home entertainment products with superior perfor- mance, style, reliability, and value that require representative display, professional selling, trained service, and brand acceptance—retailed through reputable electronic specialists to those consumers whom the company can most effectively service.

Mission statements also apply to not-for-profit organizations. For instance, the mission of the American Red Cross is

to improve the quality of human life; to enhance self-reliance and concern for others; and to help people avoid, prepare for, and cope with emergencies.

A carefully crafted mission statement that succinctly conveys organizational pur- pose can provide numerous benefits to an organization, including focus to its market- ing effort. It can (1) crystallize management’s vision of the organization’s long-term direction and character; (2) provide guidance in identifying, pursuing, and evaluating market and product opportunities; and (3) inspire and challenge employees to do those things that are valued by the organization and its customers. It also provides direction for setting business goals or objectives.

Business Goals

Goals or objectives convert the organization’s mission into tangible actions and results that are to be achieved, often within a specific time frame. For example, the 3M Company emphasizes research and development and innovation in its business mis- sion. This view is made tangible in one of the company’s goals: 30 percent of 3M’s annual revenues must come from company products that are less than four years old.4

Goals or objectives divide into three major categories: production, financial, and marketing. Production goals or objectives apply to the use of manufacturing and service capacity and to product and service quality. Financial goals or objectives focus on return on investment, return on sales, profit, cash flow, and shareholder wealth. Marketing goals or objectives emphasize market share, marketing productivity, sales volume, profit, customer satisfaction, customer value creation, and customer lifetime value. When production, financial, and marketing goals or objectives are combined, they represent a composite picture of organizational purpose within a specific time frame; accordingly, they must complement one another.

Goal or objective setting should be problem-centered and future-oriented. Because goals or objectives represent statements of what the organization wishes to achieve in a specific time frame, they implicitly arise from an understanding of the current situation. Therefore, managers need an appraisal of operations or a situation analysis to determine reasons for the gap between what was or is expected and what has happened or will happen. If performance has met expectations, the question arises as to future directions. If performance has not met expectations, managers must diagnose the reasons for this difference and enact a remedial program. Chapter 3 pro- vides an expanded discussion on performing a situation analysis.

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■ IDENTIFYING AND FRAMING ORGANIZATIONAL GROWTH OPPORTUNITIES

Once the character and direction of the organization have been outlined in its business definition, mission, and goals or objectives, the practice of strategic market- ing management enters an entrepreneurial phase. Using business definition, mission, and goals as a guide, the search for and evaluation of organizational growth opportu- nities can begin.

Converting Environmental Opportunities into Organizational Opportunities

Three questions help marketing managers decide whether certain environmental opportunities represent viable organizational growth opportunities:

• What might we do?

• What do we do best?

• What must we do?

Each of these questions assists in identifying and framing organizational growth opportunities. They also highlight major concepts in strategic marketing management.

The what might we do question introduces the concept of environmental opportunity. Unmet or changing consumer needs, unsatisfied buyer groups, and new means or technology for delivering value to prospective buyers represent sources of environmental opportunities for organizations. In this regard, environmental opportu- nities are boundless. However, the mere presence of an environmental opportunity does not mean that an organizational growth opportunity exists. Two additional ques- tions must be asked.

The what do we do best question introduces the concept of organizational capa- bility, or distinctive competency. Distinctive competency describes an organization’s unique strengths or qualities, including skills, technologies, or resources that distin- guish it from other organizations.5 In order for any of an organization’s strengths or qualities to be considered truly distinctive and a source of competitive advantage, two criteria must be satisfied. First, the strength must be imperfectly imitable by competi- tors. That is, competitors cannot replicate a skill (such as the direct-marketing compe- tency of Dell Inc.) easily or without a sizable investment of time, effort, and money. Second, the strength should make a significant contribution to the benefits perceived by customers and, by doing so, provide superior value to them. For example, the ability to engage in technological innovation that is wanted and provides value to customers is a distinctive competency. Consider the Safety Razor Division of the Gillette Com- pany.6 Its distinctive competencies lie in three areas: (1) shaving technology and devel- opment, (2) high-volume manufacturing of precision metal and plastic products, and (3) marketing of mass-distributed consumer package goods. These competencies were responsible for the Gillete Fusion and Venus razor, which have sustained Gillette’s dom- inance of the men’s and women’s wet-shaving market.

Finally, the what must we do question introduces the concept of success require- ments in an industry or market. Success requirements (also called “key success fac- tors”) are basic tasks that an organization must perform in a market or industry to compete successfully. These requirements are subtle in nature and often overlooked. For example, distribution and inventory control are critical success factors in the cos- metics industry. Firms competing in the personal computer industry recognize that the requirements for success include low-cost production capabilities, access to dis- tribution channels, and continuous innovation.

The linkage among environmental opportunity, distinctive competency, and success requirements will determine whether an organizational opportunity exists.

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IDENTIFYING AND FRAMING ORGANIZATIONAL GROWTH OPPORTUNITIES 5

A clearly defined statement of success requirements serves as a device for matching an environmental opportunity with an organization’s distinctive competencies. If what must be done is inconsistent with what can be done to capitalize on an envi- ronmental opportunity, an organizational growth opportunity will fail to materialize. Too often, organizations ignore this linkage and pursue seemingly lucrative environ- mental opportunities that are doomed from the start. Exxon Mobil Corporation learned this lesson painfully after investing $500 million in the office products market over a 10-year period only to see the venture fail. After the company abandoned this venture, a former Exxon Mobil executive summed up what had been learned:“Don’t get involved where you don’t have the skills. It’s hard enough to make money at what you’re good at.”7 By clearly establishing the linkages necessary for success before tak- ing any action, an organization can minimize its risk of failure. An executive for L’eggs hosiery illustrates this point when specifying his new-venture criteria:

[P]roducts that can be sold through food and drugstore outlets, are purchased by women, . . . can be easily and distinctly packaged, and comprise at least a $500 mil- lion retail market not already dominated by one or two major producers.8

When one considers L’eggs’ past successes, it is apparent that whatever environ- mental opportunities are pursued will be consistent with what L’eggs does best, as illustrated by past achievements in markets whose success requirements are similar. An expanded discussion of these points is found in Chapter 4.

SWOT Analysis

SWOT analysis is a formal framework for identifying and framing organizational growth opportunities. SWOT is an acronym for an organization’s Strengths and Weaknesses and external Opportunities and T hreats. It is an easy-to-use framework for focusing attention on the fact that an organizational growth opportunity results from a good fit between an organization’s internal capabilities (apparent in its strengths and weaknesses) and its external environment reflected in the presence of environmental opportunities and threats. Many organizations also perform a SWOT analysis as part of their goal- or objective-setting process.

Exhibit 1.1 on page 6 displays a SWOT analysis framework depicting representa- tive entries for internal strengths and weaknesses and external opportunities and threats. A strength is something that an organization is good at doing or some charac- teristic that gives the organization an important capability. Something an organization lacks or does poorly relative to other organizations is a weakness. Opportunities rep- resent external developments or conditions in the environment that have favorable implications for the organization. Threats, on the other hand, pose dangers to the wel- fare of the organization.

A properly conducted SWOT analysis goes beyond the simple preparation of lists. Attention needs to be placed on evaluating strengths, weaknesses, opportunities, and threats and drawing conclusions about how each might affect the organization. The following questions might be asked once strengths, weaknesses, opportunities, and threats have been identified:

1. Which internal strengths represent distinctive competencies? Do these strengths compare favorably with what are believed to be market or industry success requirements? Looking at Exhibit 1.1, for example, does “proven inno- vation skill” strength represent a distinctive competency and a market success requirement?

2. Which internal weaknesses disqualify the organization from pursuing certain opportunities? Look again at Exhibit 1.1, and note that the organization acknowl- edges that it has a “weak distribution network and a subpar saleforce.”How might

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E X H I B I T 1 . 1

Sample SWOT Analysis Framework and Representative Examples

Selected Representative Selected Representative Internal External Factors Strengths Weaknesses Factors Opportunities Threats

Experienced Lack of Upturn in the Adverse shifts Management management management Economic business cycle; in foreign

talent depth evidence of exchange growing per- rates sonal dispos- able income

Well thought Weak distribu- Complacency Entry of Marketing of by buyers; tion network; Competition among domestic lower-cost

effective subpar sales competitors foreign advertising force competitors program

Available man- Higher overall Unfulfilled Growing Manufacturing ufacturing production costs Consumer customer preference for

capacity relative to key trends needs on high private-label competitors and low end products

of product category sug- gesting a prod- uct line expansion possibility

Proven inno- Poor track Patent protec- Newer R&D vation skills record in Technology tion of com- substitute

bringing inno- plementary technologies vations to the technology imminent marketplace ending

Little debt Weak cash Falling trade Increased U.S. Finance relative to flow position Legal/ barriers in regulation of

industry regulatory attractive product-testing average foreign markets procedures

and labeling

Unique, high- Too narrow a New distribu- Low-entry Offerings quality product line Industry/ tion channels barriers for

products market evolving that new structure reach a broader competitors

customer population

this organizational weakness affect the opportunity described as “new distribu- tion channels evolving that reach a broader customer population”?

3. Does a pattern emerge from the listing of strengths, weaknesses, opportunities, and threats? Inspection of Exhibit 1.1 reveals that low-entry barriers into the market/industry may contribute to the entry of lower-cost foreign competitors. This does not bode well for domestic competitors labeled as “complacent” and the organization’s acknowledged high production costs.

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FORMULATING PRODUCT-MARKET STRATEGIES 7

■ FORMULATING PRODUCT-MARKET STRATEGIES

In practice, organizational opportunities frequently emerge from an organization’s existing markets or from newly identified markets. Opportunities also arise for exist- ing, improved, or new products and services. Matching products and markets to form product-market strategies is the subject of the next set of decision processes.

Product-market strategies consist of plans for matching an organization’s existing or potential offerings with the needs of markets, informing markets that the offerings exist, having offerings available at the right time and place to facilitate exchange, and assigning prices to offerings. In short, a product-market strategy involves selecting specific markets and profitably reaching them through an integrated program called a marketing mix.

Exhibit 1.2 classifies product-market strategies according to the match between offerings and markets.9 The operational implications and requirements of each strat- egy are briefly described in the following subsections.

Market-Penetration Strategy

A market-penetration strategy dictates that an organization seeks to gain greater dominance in a market in which it already has an offering. This strategy involves attempts to increase present buyers’ usage or consumption rates of the offering, to attract buyers of competing offerings, or to stimulate product trial among potential customers. The mix of marketing activities might include lower prices for the offer- ings, expanded distribution to provide wider coverage of an existing market, and heavier promotional efforts extolling the “unique” advantages of an organization’s offering over competing offerings. For example, following the acquisition of Gatorade from Quaker Oats, PepsiCo has announced that it expects to increase Gatorade’s already dominant share of the sports drink market through broader distribution, new flavors, and more aggressive advertising.10

Several organizations have attempted to gain dominance by promoting more fre- quent and varied usage of their offering. For example, the Florida Orange Growers Association advocates drinking orange juice throughout the day rather than for break- fast only. Airlines stimulate usage through a variety of reduced-fare programs and vari- ous family-travel packages designed to reach the primary traveler’s spouse and children.

Marketing managers should consider a number of factors before adopting a pene- tration strategy. First, they must examine market growth. A penetration strategy is usu- ally more effective in a growth market. Attempts to increase market share when volume is stable often result in aggressive retaliatory actions by competitors. Second, they must consider competitive reaction. Procter & Gamble implemented a penetration strategy

E X H I B I T 1 . 2

Product-Market Strategies

Markets

Existing New

Market Market penetration development

Offerings New offering development Diversification

Existing

New

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for its Folgers coffee in selected East Coast cities, only to run head-on into an equally aggressive reaction from Kraft Foods’ Maxwell House Division. According to one observer of the competitive situation:

When Folger’s mailed millions of coupons offering consumers 45 cents off on a one- pound can of coffee, Maxwell House countered with newspaper coupons of its own. When Folger’s gave retailers 15 percent discounts from the list price . . . , Maxwell House met them head-on. [Maxwell House] let Folger’s lead off with a TV blitz. . . . Then [Maxwell House] saturated the airwaves.11

The result of this struggle was no change in market share for either firm. Third, marketing managers must consider the capacity of the market to increase usage or consumption rates and the availability of new buyers. Both are particularly relevant when viewed from the perspective of the conversion costs involved in capturing buy- ers from competitors, stimulating usage, and attracting new users.

Market-Development Strategy

A market-development strategy dictates that an organization introduce its existing offerings to markets other than those it is currently serving. Examples include intro- ducing existing products to different geographical areas (including international expansion) or different buying publics. For example, Harley-Davidson engaged in a market-development strategy when it entered Japan, Germany, Italy, and France. Lowe’s, the home improvement chain, employed this strategy when it focused atten- tion on attracting women shoppers to its stores.

The mix of marketing activities used must often be varied to reach different mar- kets with differing buying patterns and requirements. Reaching new markets often requires modification of the basic offering, different distribution outlets, or a change in sales effort and advertising.

Like the market-penetration strategy, market development involves a careful con- sideration of competitor strengths and weaknesses and competitor retaliation poten- tial. Moreover, because the firm seeks new buyers, it must understand their number, motivation, and buying patterns in order to develop marketing activities successfully. Finally, the firm must consider its strengths, in terms of adaptability to new markets, in order to evaluate the potential success of the venture.

Market development in the international arena has grown in importance and usu- ally takes one of four forms: (1) exporting, (2) licensing, (3) joint venture, or (4) direct investment.12 Each option has advantages and disadvantages. Exporting involves mar- keting the same offering in another country either directly (through sales offices) or through intermediaries in a foreign country. Because this approach typically requires minimal capital investment and is easy to initiate, it is a popular option for developing foreign markets. Procter & Gamble, for instance, exports its deodorants, soaps, fra- grances, shampoos, and other health and beauty products to Eastern Europe and Russia. Licensing is a contractual arrangement whereby one firm (licensee) is given the rights to patents, trademarks, know-how, and other intangible assets by its owner (licensor) in return for a royalty (usually 5 percent of gross sales) or a fee. For example, Cadbury Schweppes PLC, a London-based multinational firm, licensed Hershey Foods to sell its candies in the United States for a fee of $300 million. Licensing provides a low-risk, quick, and capital-free entry into a foreign market. However, the licensor usu- ally has no control over production and marketing by the licensee. A joint venture, often called a strategic alliance, involves investment by both a foreign firm and a local company to create a new entity in the host country. The two companies share owner- ship, control, and profits of the entity. Joint ventures are popular because one company may not have the necessary financial, technical, or managerial resources to enter a mar- ket alone. This approach also often ensures against trade barriers being imposed on the foreign firm by the government of the host company. Japanese companies frequently

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FORMULATING PRODUCT-MARKET STRATEGIES 9

engage in joint ventures with American and European firms to gain access to foreign markets. A problem frequently arising from joint ventures is that the partners do not always agree on how the new entity should be run. Direct investment in a manufactur- ing and/or assembly facility in a foreign market is the most risky option and requires the greatest commitment. However, it brings the firm closer to its customers and may be the most profitable approach for developing foreign markets. For these reasons, direct investment must be evaluated closely in terms of benefits and costs. Direct investment often follows one of the three other approaches to foreign-market entry. For example, Mars, Inc. originally exported its M&Ms, Snickers, and Mars bars to Russia but now operates a $200 million candy factory outside Moscow.

Product-Development Strategy

A product-development strategy dictates that the organization create new offerings for existing markets. The approach taken may be to develop totally new offerings (product innovation) to enhance the value to customers of existing offerings (product augmen- tation), or to broaden the existing line of offerings by adding different sizes, forms, fla- vors, and so forth (product line extension). Apple Computer’s iPod is an example of product innovation. Product augmentation can be achieved in numerous ways. One is to bundle complementary items or services with an existing offering. For example, embedded software, application aids, and training programs for buyers enhance the value of personal computers. Another way is to improve the functional performance of the offering. Digital camera manufacturers have done this by improving photo quality. Many types of product-line extensions are possible. Personal-care companies market deodorants in powder, spray, and gel forms; Gatorade is sold in more than 20 flavors; and Frito-Lay offers its Lay’s potato chips in a number of package sizes.

Companies successful at developing and commercializing new offerings lead their industries in sales growth and profitability. The likelihood of success is increased if the development effort results in offerings that satisfy a clearly understood buyer need. In the toy industry, for instance, these needs translate into products with three qualities: (1) lasting play value, (2) the ability to be shared with other children, and (3) the ability to stimulate a child’s imagination.13 Successful commercialization occurs when the offering can be communicated and delivered to a well-defined buyer group at a price it is willing and able to pay.

Important considerations in planning a product-development strategy concern the market size and volume necessary for the effort to be profitable, the magnitude and timing of competitive response, the impact of the new product on existing offer- ings, and the capacity (in terms of human and financial investment and technology) of the organization to deliver the offerings to the market(s). More important, successful new offerings must have a significant “point of difference” reflected in superior prod- uct or service characteristics that deliver unique and wanted benefits to consumers. Two examples from General Mills illustrate this view.14 The company introduced Frin- gos, a sweetened cereal flake about the size of a corn chip. Consumers were supposed to snack on them, but they didn’t. The point of difference was not significant enough to get consumers to switch from competing snacks such as popcorn, potato chips, or tortilla chips. On the other hand, General Mills’ Big G Milk ’n Cereal Bar, which com- bines cereal and a milk-based layer, has succeeded because it satisfies convenience- oriented consumers who desire to “eat and go.”

The potential for cannibalism must be considered with a product-development strategy. Cannibalism occurs when sales of a new product or service come at the expense of sales of existing products or services already marketed by the firm. For example, it is estimated that 75 percent of Gillette’s Gillete Fusion razor volume came from the company’s other razors and shaving systems. Cannibalism of this degree is likely to occur in many product-development programs. The issue faced by the manager

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is whether it detracts from the overall profitability of the organization’s total mix of offerings. At Gillette, the cannibalism rate for Fusion is viewed favorably since its gross profit margin is significantly higher than the company’s other razors.15

Diversification

Diversification involves the development or acquisition of offerings new to the orga- nization and the introduction of those offerings to publics not previously served by the organization. Many firms have adopted this strategy in recent years to take advan- tage of perceived growth opportunities. Yet diversification is often a high-risk strategy because both the offerings (and often their underlying technology) and the public or market served are new to the organization.

Consider the following examples of failed diversification. Anheuser-Busch recorded 17 years of losses with its Eagle Snacks Division and incurred a $206 million write-off when the division was finally shut down. Gerber Products Company, which holds 70 percent of the U.S. baby-food market, has been mostly unsuccessful in diver- sifying into child-care centers, toys, furniture, and adult food and beverages. Coca- Cola’s many attempts at diversification—acquiring wine companies, a movie studio, and a pasta manufacturer, and producing television game shows—have also proven to be largely unsuccessful. These examples highlight the importance of understanding the link between market success requirements and an organization’s distinctive com- petency. In each of these cases, a bridge was not made between these two concepts and, thus, an organizational opportunity was not realized.16

Still, diversifications can be successful. Successful diversifications typically result from an organization’s attempt to apply its distinctive competency in reaching new markets with new offerings. By relying on its marketing expertise and extensive distri- bution system, Procter & Gamble has had success with offerings ranging from cake mixes to disposable diapers to laundry detergents.

Strategy Selection

A recurrent issue in strategic marketing management is determining the consistency of product-market strategies with the organization’s definition, mission and capabilities, market capacity and behavior, environmental forces, and competitive activities. Proper analysis of these factors depends on the availability and evaluation of relevant informa- tion. Information on markets should include data on size, buying behavior, and require- ments. Information on environmental forces such as social, legal, political, demographic, and economic changes is necessary to determine the future viability of the organization’s offerings and the markets served. In recent years, for example, orga- nizations have had to alter or adapt their product-market strategies because of political actions (deregulation), economic fluctuations (income shifts and changes in disposable personal income), sociodemographic trends (increasing racial and ethnic diversity), attitudes (value consciousness), technological advances (the growth of the Internet), and population shifts (city to suburb and northern to southern United States)—to name just a few of the environmental changes. Competitive activities must be moni- tored to ascertain their existing or possible strategies and performance in satisfying buyer needs.

In practice, the strategy selection decision is based on an analysis of the costs and benefits of alternative strategies and their probabilities of success. For example, a manager may compare the costs and benefits involved in further penetrating an exist- ing market to those associated with introducing the existing product to a new market. It is important to make a careful analysis of competitive structure; market growth, decline, or shifts; and opportunity costs (potential benefits not obtained). The prod- uct or service itself may dictate a strategy change. If the product has been purchased

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by all of the buyers it is going to attract in an existing market, opportunities for growth beyond replacement purchases are reduced. This situation would indicate a need to search out new buyers (markets) or to develop new products or services for present markets.

The probabilities of success of the various strategies must then be considered. A. T. Kearney, a management consulting firm, has provided rough probability estimates of success for each of the four basic strategies.17 The probability of a successful diversifi- cation is 1 in 20. The probability of successfully introducing an existing product into a new market (market-development strategy) is 1 in 4. There is a 50–50 chance of success for a new product being introduced into an existing market (product-development strat- egy). Finally, minor modification of an offering directed toward its existing market (mar- ket-penetration strategy) has the highest probability of success.

A useful technique for gauging potential outcomes of alternative marketing strate- gies is to array possible actions, the response to these actions, and the outcomes in the form of a decision tree, so named because of the branching out of responses from action taken. This implies that for any action taken, certain responses can be antici- pated, each with its own specific outcomes. Exhibit 1.3 shows a decision tree.

As an example, consider a situation in which a marketing manager must decide between a market-penetration strategy and a market-development strategy. Suppose the manager recognizes that competitors may react aggressively or passively to either strat- egy. This situation can be displayed vividly using the decision-tree scheme, as shown in Exhibit 1.4. This representation allows the manager to consider actions, responses, and outcomes simultaneously. The decision tree shows that the highest profits will result if a

E X H I B I T 1 . 3

Decision-Tree Format

Action Response Outcome

R 1

O 1

A 1

R 2

O 2

R 1

O 3

A 2

R 2

O 4

E X H I B I T 1 . 4

Sample Decision Tree

Action Response Outcome

Aggressive competition Estimated profit Market-penetration of $2 million strategy

Passive competition Estimated profit of $3 million

Aggressive competition Estimated profit Market-development of $1 million strategy

Passive competition Estimated profit of $4 million

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market-development strategy is enacted and competitors react passively. The manager must resolve the question of competitive reaction because an aggressive response will plunge the profit to $1 million, which is less than either outcome under the market- penetration strategy. The manager must rely on informed judgment to assess subjec- tively the likelihood of competitive response. Chapter 3 provides a more detailed description of decision analysis and its application.

The Marketing Mix

Matching offerings and markets requires recognition of the other marketing activities available to the marketing manager. Combined with the offering, these activities form the marketing mix.

A marketing mix typically encompasses activities controllable by the organization. These include the kind of product, service, or idea offered (product strategy), how it will be communicated to buyers (communication strategy), the method for distributing the offering to buyers (channel strategy), and the amount buyers will pay for the offering (price strategy). Each of these individual strategies is described later in this book. Here it is sufficient to note that each element of the marketing mix plays a complementary role in stimulating a market’s (buyers’) willingness and ability to buy and creating customer value. For example, communications—personal selling, advertising, sales promotion, and public relations—inform and assure buyers that the offering will meet their needs. Marketing channels satisfy buyers’ shopping patterns and purchase requirements in terms of point-of-purchase information and offering availability. Price represents the value or benefits provided by the offering to buyers.

Formulating the Marketing Mix The appropriate marketing mix for a product or service depends on the success requirements of the market at which it is directed. The “rightness” of the marketing mix depends on the market served. Consider the case of Cover Girl Cosmetics in China. The marketing mix for Cover Girl in China shares only one common element with its marketing mix in other countries—the brand name. All product shades, textures, and colors had to be adjusted to ensure they looked appealing on Chinese skin. Products have been packaged in small containers that resemble pieces of colorful candy, unlike other markets. The advertising and sales effort is localized expressly for the Chinese and on-site beauty consultants assist buyers in Chinese department stores—not in self-service drug or grocery stores as in Cover Girl’s other markets. Cover Girl pricing reflects local competitive conditions. According to Cover Girl’s marketing director, “You can’t just import cosmetics here. Companies have to understand what beauty means to Chinese women and what they look for, and product offerings, distribution, pricing and communication has to be adjusted accordingly to be right for the market.”18

Internet-based technologies have created another market setting, called the mar- ketspace. Companies that succeed in the new marketspace deliver customer value through the interactive capabilities of these technologies, which allow for greater flexibility in managing marketing mix elements. For example, online sellers routinely adjust prices to changing environmental conditions, purchase situations, and pur- chase behaviors of online buyers. Also, interactive two-way Internet-enabled capabili- ties in marketspace allow a customer to tell a seller exactly what his or her buying interests and requirements are, making possible the transformation of a product or service into a customized solution for the buyer. In addition, the purpose and role of marketing communications and marketing channels in this market setting change as described in Chapters 6 and 7, respectively.

In addition to being consistent with the needs of markets served, a marketing mix must be consistent with the organization’s capacity, and the individual activities must complement one another. Several questions offer direction in evaluating an

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organization’s marketing mix. First, is the marketing mix internally consistent? Do the individual activities complement one another to form a whole, as opposed to frag- mented pieces? Does the mix fit the organization, the market, and the environment into which it will be introduced? Second, are buyers more sensitive to some market- ing mix activities than to others? For example, are they more likely to respond favor- ably to a decrease in price or an increase in advertising or sales promotion? Third, what are the costs of performing marketing mix activities and the costs of attracting and retaining buyers? Do these costs exceed their benefits? Can the organization afford the marketing mix expenditures? Finally, is the marketing mix properly timed? For example, are communications scheduled to coincide with product availability? Is the entire marketing mix timely with respect to the buying cycle of consumers, com- petitor actions, and the ebb and flow of environmental forces?

Implementing the Marketing Mix Implementation of the marketing mix is as much an art as a science. Successful implementation requires an understanding of markets, environmental forces, organizational capacity, and marketing mix activities with a healthy respect for competitor reactions. These topics are raised again in Chapter 10. An example of an implementation with less than successful results is that of A&P’s WEO (Where Economy Originates) program. Prior to implementing the program, A&P had watched its sales volume plateau with shrinking profits, while other grocery retailers continued to increase sales volume and profits. When the WEO program was initiated, it emphasized discount pricing (price strategy) with heavy promotional expenditures (communication strategy). The program increased sales volume by $800 million but produced a profit loss of over $50 million. In the words of one industry observer at the time:

Its competitors are convinced that A&P’s assault with WEO was doomed from the start. Too many of its stores are relics of a bygone era. Many are in poor locations [dis- tribution strategy]. . . . They are just not big enough to support the tremendous vol- ume that is necessary to make a discounting operation profitable [capacity] . . . stores lack shelf space for stocking general merchandise items, such as housewares and chil- dren’s clothing [product strategy].19

The product-market strategy employed by A&P could be classified as a market-pen- etration strategy. Its implementation, however, could be questioned in terms of internal consistency, costs of the marketing mix activities, and fit with organizational capacity. Moreover, the retail grocery industry was plagued at the time by rising food and energy costs. Both environmental factors had a destructive effect on A & P’s strategy success.

■ BUDGETING MARKETING, FINANCIAL, AND PRODUCTION RESOURCES

The fourth phase in the strategic marketing management process is budgeting. A budget is a formal, quantitative expression of an organization’s planning and strategy initiatives expressed in financial terms. A well-prepared budget meshes and balances an organization’s financial, production, and marketing resources so that overall orga- nizational goals or objectives are attained.

An organization’s master budget consists of two parts: (1) an operating budget and (2) a financial budget. The operating budget focuses on an organization’s income statement. Since the operating budget projects future revenues and expenses, it is sometimes referred to as a pro forma income statement or profit plan. The financial budget focuses on the effect that the operating budget and other initiatives (such as capital expenditures) will have on the organization’s cash position. For example, the

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14 CHAPTER 1 FOUNDATIONS OF STRATEGIC MARKETING MANAGEMENT

master budget for General Motors includes an income statement that details revenues, expenses, and profit for existing Hummer models. Its financial budget included the capital expenditures for the new midsize Hummer H3 model.

In addition to the operating and financial budget, many organizations prepare supplemental special budgets, such as an advertising and sales budget, and related reports tied to the master budget. For example, a report showing how revenues, costs, and profits change under different marketing decisions and competitive and economic conditions is often prepared. As indicated, budgeting is more than an accounting and finance function. It is an essential element of strategic marketing management as well.

A complete description of the budgetary process is beyond the scope of this section. However, Chapter 2,“Financial Aspects of Marketing Management,”provides an overview of cost concepts and behavior. It also describes useful analytical tools for dealing with the financial dimensions of strategic marketing management, including cost-volume-profit analysis, discounted cash flow, customer lifetime value analysis, and the preparation of pro forma income statements.

■ DEVELOPING REFORMULATION AND RECOVERY STRATEGIES

Reformulation and recovery strategies form the cornerstone of adaptive behavior in organizations. Strategies are rarely timeless. Changing markets, economic conditions, and competitive behavior require periodic, if not sudden, adjustments in marketing strategy.

Marketing audit and control procedures are fundamental to the development of reformulation and recovery strategies. The marketing audit has been defined as follows:

A marketing audit is a comprehensive, systematic, independent, and periodic exami- nation of a company’s—or business unit’s—marketing environment, objectives, strate- gies and activities with a view of determining problem areas and opportunities and recommending a plan of action to improve the company’s marketing performance.20

The audit process directs the manager’s attention to both the strategic fit of the organization with its environment and the operational aspects of the marketing pro- gram. Strategic aspects of the marketing audit address the synoptic question,“Are we doing the right things?” Operational aspects address an equally synoptic question— “Are we doing things right?”

The distinction between strategic and operational perspectives, as well as the implementation of each, is examined in Chapter 9. Suffice it to say here that marketing audit and control procedures underlie the processes of defining the organization’s business, mission, and goals or objectives, identifying external opportunities and threats and internal strengths and weaknesses, formulating product-market strategies and marketing mix activities, and budgeting resources. The intellectual process of developing reformulation and recovery strategies during the planning process serves two important purposes. First, it forces the manager to consider the “what if” ques- tions. For example,“What if an unexpected environmental threat arises that renders a strategy obsolete?” or “What if competitive and market response to a strategy is incon- sistent with what was originally expected?” Such questions focus the manager’s atten- tion on the sensitivity of results to assumptions made in the strategy-development process. Second, preplanning of reformulation and recovery strategies, or contingency plans, leads to a faster reaction time in implementing remedial action. Marshaling and reorienting resources is a time- consuming process itself without additional time lost in planning.

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■ DRAFTING A MARKETING PLAN

A marketing plan embodies the strategic marketing management process. It is a formal, written document that describes the context and scope of an organization’s marketing effort to achieve defined goals or objectives within a specific future time period. Marketing plans go by a variety of names depending on their particular focus. For example, there are business marketing plans, product marketing plans, and brand mar- keting plans. At Frito-Lay, Inc., for instance, a marketing plan is drafted for a particular business (snack chips), for a product class (potato chips, tortilla chips, corn chips), and for specific brands (Lay’s potato chips, Doritos tortilla chips, Fritos corn chips). Market- ing plans also have a time dimension. Short-run marketing plans typically focus on a one-year period and are called annual marketing plans. Long-run marketing plans often have a three- to five-year planning horizon.

A formal, written marketing plan represents a distillation of and the attention and thought given the five interrelated analytical processes in this chapter. It is the tangible result of an intellectual effort. As a written document, a marketing plan also exhibits certain stylistic elements. Although there is no “generic” marketing plan that applies to all organizations and all situations, marketing plans follow a general format. The appen- dix at the end of this chapter provides an actual example of a condensed marketing plan for Paradise Kitchens®, Inc., a company that produces and markets a unique line of single-serve and microwavable Southwestern/Mexican-style frozen chili products. This example illustrates both the substance and style of a five-year marketing plan.

■ MARKETING ETHICS AND SOCIAL RESPONSIBILITY

On a final note, it must be emphasized that matters of ethics and social responsibility permeate every aspect of the strategic marketing management process. Indeed, most marketing decisions involve some degree of moral judgment and reflect an organiza- tion’s orientation toward the publics with which it interacts. Enlightened marketing executives no longer subscribe to the view that if an action is legal, then it is also ethi- cal and socially responsible. These executives are sensitive to the fact that the market- place is populated by individuals and groups with diverse value systems. Moreover, they recognize that their actions will be judged publicly by others with different val- ues and interests.

Enlightened ethical and socially responsible decisions arise from the ability of mar- keters to discern the precise issues involved and their willingness to take action even when the outcome may negatively affect their standing in an organization or the com- pany’s financial interests. Although the moral foundations on which marketing deci- sions are made will vary among individuals and organizations, failure to recognize issues and take appropriate action is the least ethical and most socially irresponsible approach. A positive approach to ethical and socially responsible behavior is illustrated by Anheuser-Busch, which has spent more than $500 million since 1982 to promote responsible drinking of alcoholic beverages through community-based programs and national advertising campaign. Anheuser-Busch executives acknowledge the potential for alcohol abuse and are willing to forgo business generated by misuse of the com- pany’s products. These executives have discerned the issues and have recognized an ethical obligation to present and potential customers. They have also recognized the company’s social responsibility to the general public by encouraging safe driving and responsible drinking habits.21

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16 CHAPTER 1 FOUNDATIONS OF STRATEGIC MARKETING MANAGEMENT

N O T E S

1. Roger A. Kerin, “Strategic Marketing and the CMO,” Journal of Marketing (October 2005): 12–14; and Gail McGovern and John A. Quelch,“The Fall and Rise of the CMO,” Strategy & Business (Winter 2004): 44–48ff.

2. Derek E. Abell, Defining the Business: The Starting Point of Strategic Planning (Upper Saddle River, NJ: Prentice Hall, 1980); and Roger A. Kerin, Vijay Mahajan, and P. Rajan Varadarajan, Contemporary Perspectives on Strategic Market Planning (Boston: Allyn and Bacon, 1990).

3. “New Britannica Keeps Pace with Change,” Encyclopaedia Britannica News Release, March 23, 2005.

4. Eric von Hippel, Stephan Thomke, and Mary Sonnack,“Creating Breakthroughs at 3M,” Harvard Business Review (September–October 1999): 47–56.

5. Robert A. Pitts and David Lei, Strategic Management: Building and Sustaining Com- petitive Advantage, 4th ed. (St. Paul, MN: West Publishing Company, 2006): 6.

6. “Gillette Safety Razor Division,” Harvard Business School case #9-574-058; and “Gillette’s Edge,” BRANDWEEK (May 28, 2001): 5.

7. “Exxon’s Flop in Field of Office Gear Shows Diversification Perils,” Wall Street Journal (September 3, 1985): 1ff.

8. “Hanes Expands L’eggs to the Entire Family,” Business Week (June 14, 1975): 57ff. 9. This classification is adapted from H. Igor Ansoff, Corporate Strategy (New York:

McGraw-Hill, 1964): Chapter 6. For an extended discussion on product-market strategies, see Roger A. Kerin, Vijay Mahajan, and P. Rajan Varadarajan, Contemporary Perspectives on Strate- gic Market Planning (Boston: Allyn and Bacon, 1990): Chapter 6.

10. “In Lean Times, Big Companies Make a Grab for Market Share,” Wall Street Journal (September 5, 2003): A1, A6.

11. H. Menzies,“Why Folger’s Is Getting Creamed Back East,” Fortune (July 17, 1978): 69. 12. Philip R. Cateora and John L. Graham, International Marketing, 12th ed. (Burr Ridge,

IL: McGraw-Hill/Irwin, 2005): Chapter 11. 13. “Hasbro, Inc.,” in Eric N. Berkowitz, Roger A. Kerin, Steven N. Hartley, and William

Rudelius (eds.), Marketing, 5th ed. (Chicago: Richard D. Irwin, 1997): 656–657. 14. Greg Burns,“Has General Mills Had Its Wheaties?”Business Week (May 8, 1995): 68–69;

and Julie Forster,“The Lucky Charm of Steve Sanger,” Business Week (March 26, 2001): 75–76. 15. “Gillette’s New Edge,” Business Week (February 6, 2006): 44. 16. Failed diversification attempts, along with advice on diversification, are detailed in

Chris Zook with James Allen, Profit from the Core (Cambridge, MA: Harvard Business School Press, 2001).

17. These estimates were reported in “The Breakdown of U.S. Innovation,” Business Week (February 16, 1976): 56ff.

18. “P&G Introduces Cover Girl: U.S. Beauty Brand Gets Local Color,” AdAgeChina.com, downloaded October 25, 2005.

19. Robert F. Hartley, Marketing Mistakes, 5th ed. (New York: John Wiley & Sons, 1992). Items in brackets added for illustrative purposes.

20. Philip Kotler and Kevin Lane Keller, Marketing Management, 12th ed. (Upper Saddle River, NJ: Prentice Hall, 2006): 719.

21. “Our Commitment to Preventing Alcohol Abuse and Underage Drinking,” beeresponsible.com, downloaded January 10, 2006.

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A P P E N D I X A

A Sample Marketing Plan

Crafting a marketing plan is hard but satisfying work. When completed, a marketing plan serves as a roadmap that details the context and scope of marketing activities including, but not limited to, a mission statement, goals and objectives, a situation analysis, growth opportunities, target market(s) and marketing (mix) program, a budget, and an implementation schedule.

As a written document, the plan conveys in words the analysis, ideas, and aspira- tions of its author pertaining to a business, product, and/or brand marketing effort. How a marketing plan is written communicates not only the substance of the market- ing effort but also the professionalism of the author. Writing style will not overcome limitations in substance. However, a poorly written marketing plan can detract from the perceived substance of the plan.

■ WRITING AND STYLE CONSIDERATIONS

Given the importance of a carefully crafted marketing plan, authors of marketing plans adhere to certain guidelines. The following writing and style guidelines generally apply:

• Use a direct, professional writing style. Use appropriate business and marketing terms without jargon. Present and future tenses with active voice are generally better than past tense and passive voice.

• Be positive and specific. At the same time, avoid superlatives (“terrific,” “wonderful”). Specifics are better than glittering generalities. Use numbers for impact, justifying computations and projections with facts or reasonable quantitative assumptions where possible.

• Use bullet points for succinctness and emphasis. As with the list you are reading, bullets enable key points to be highlighted effectively and with great efficiency.

• Use “A-level” (the first level) and “B-level” (the second level) headings under major section headings to help readers make easy transitions from one topic to another. This also forces the writer to organize the plan more carefully. Use these headings liberally, at least once every 200 to 300 words.

• Use visuals where appropriate. Illustrations, graphs, and charts enable large amounts of information to be presented succinctly.

• Shoot for a plan 15 to 35 pages in length, not including financial projections and appendices. An uncomplicated small business may require only 15 pages, while a new business startup may require more than 35 pages.

• Use care in layout, design, and presentation. Laser or ink-jet printers give a more professional look than do dot matrix printers. A bound report with a cover and clear title page adds professionalism.

This appendix is adapted from Roger A. Kerin, Steven W. Hartley, Eric N. Berkowitz, and William Rudelius, Marketing, 8th ed. (Burr Ridge, IL: McGraw-Hill/Irwin, 2006). Used with permission.

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18 CHAPTER 1 FOUNDATIONS OF STRATEGIC MARKETING MANAGEMENT

■ SAMPLE FIVE-YEAR ANNOTATED MARKETING PLAN FOR PARADISE KITCHENS®, INC.

The marketing plan that follows for Paradise Kitchens®, Inc. is based on an actual plan developed by the company. To protect proprietary information about the company, a number of details and certain data have been altered, but the basic logic of the plan has been preserved. Various appendices are omitted due to space limitations.

Notes in the margins next to the Paradise Kitchens®, Inc. marketing plan fall into two categories:

1. Substantive notes elaborate on the rationale or significance of an element in the marketing plan.

2. Writing style, format, and layout notes explain the editorial or visual ration- ale for the element.

As you read the marketing plan, you might consider adding your own notes in the margins related to the discussion in the text. For example, you may wish to compare the application of SWOT analysis and reference to “points of difference” in the Par- adise Kitchens®, Inc. marketing plan with the discussion in Chapter 1. As you read additional chapters in the text, you may return to the marketing plan and insert addi- tional notes pertaining to terminology used and techniques employed.

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FIVE-YEAR MARKETING PLAN

Paradise Kitchens®, Inc.

Table of Contents

1. Executive Summary

2. Company Description

Paradise Kitchens®, Inc. was started by cofounders Randall F. Peters and Leah E. Peters to develop and market Howlin’ Coyote®

Chili, a unique line of single serve and microwavable Southwest- ern/ Mexican style frozen chili products. The Howlin’ Coyote® line of chili was first introduced into the Minneapolis–St. Paul market and expanded to Denver two years later and Phoenix two years after that.

To the Company’s knowledge, Howlin’ Coyote® is the only premium-quality, authentic Southwestern/Mexican-style, frozen chili sold in U.S. grocery stores. Its high quality has gained fast, widespread acceptance in these markets. In fact, same-store sales doubled in the last year for which data are available. The Company believes the Howlin’ Coyote® brand can be extended to other categories of Southwestern/Mexican food products such as tacos, enchiladas, and burritos.

Paradise Kitchens believes its high-quality, high-price strategy has proven successful. This marketing plan outlines how the Company will extend its geographic coverage from 3 markets to 20 markets by the year 2010.

3. Strategic Focus and Plan

This section covers three aspects of corporate strategy that influence the marketing plan: (1) the mission, (2) goals, and (3) core competence/sustainable competitive advantage of Paradise Kitchens.

MISSION

The mission and vision of Paradise Kitchens are to market lines of high-quality Southwestern/Mexican food products at premium prices that satisfy consumers in this fast-growing food segment while providing challenging career opportunities for employees and above-average returns to stockholders.

The Table of Contents provides quick access to the topics in the plan, usually organized by section and subsection headings.

Seen by many experts as the single most important element in the plan, the Executive Summary, with a maximum of two pages, “sells” the document to readers through its clarity and brevity.

The Company Description highlights the recent history and recent successes of the organization.

The Strategic Focus and Plan sets the strategic direction for the entire organization, a direction with which proposed actions of the marketing plan must be consistent. This section is not included in all marketing plans.

The Mission Statement focuses the activities of Paradise Kitchens for the stakeholder groups to be served.

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The Situation Analysis is a snapshot to answer the question,“Where are we now?”

GOALS

For the coming five years, Paradise Kitchens seeks to achieve the following goals:

• Nonfinancial goals

1. To retain its present image as the highest-quality line of Southwestern/Mexican products in the food categories in which it competes.

2. To enter 17 new metropolitan markets.

3. To achieve national distribution in two convenience store or supermarket chains by 2005 and five by 2006.

4. To add a new product line every third year.

5. To be among the top three chili lines—regardless of packaging (frozen, canned) in one-third of the metro markets in which it competes by 2006 and two-thirds by 2008.

• Financial goals

1. To obtain a real (inflation adjusted) growth in earnings per share of 8 percent per year over time.

2. To obtain a return on equity of at least 20 percent.

3. To have a public stock offering by the year 2006.

CORE COMPETENCY AND SUSTAINABLE COMPETITIVE ADVANTAGE

In terms of core competency, Paradise Kitchens seeks to achieve a unique ability (1) to provide distinctive, high-quality chilies and related products using Southwestern/Mexican recipes that appeal to and excite contemporary tastes for these products and (2) to deliver these products to the customer’s table using effective manufacturing and distribution systems that maintain the Company’s quality standards.

To translate these core competencies into a sustainable competitive advantage, the Company will work closely with key suppliers and distributors to build the relationships and alliances necessary to satisfy the high taste standards of our customers.

4. Situation Analysis

This situation analysis starts with a snapshot of the current environment in which Paradise Kitchens finds itself by providing a brief SWOT (strengths, weaknesses, opportunities, threats) analysis. After this overview, the analysis probes ever-finer levels of detail: industry, competitors, company, and consumers.

The Goals section sets both the financial and nonfinancial targets— where possible in quantitative terms—against which the company’s performance will be measured.

Lists use parallel construction to improve readability—in this case a series of infinitives starting with “To . . .”

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SWOT ANALYSIS

Figure 1 shows the internal and external factors affecting the market opportunities for Paradise Kitchens. Stated briefly, this SWOT analysis highlights the great strides taken by the Company since its products first appeared on grocers’ shelves. In the Company’s favor internally are its strengths of an experienced management team and board of directors, excellent acceptance of its lines in the three metropolitan markets in which it competes, and a strong manufacturing and distribution system to serve these limited markets. Favorable external factors (opportunities) include the increasing appeal of Southwestern/Mexican foods, the strength of the upscale market for the Company’s products, and food-processing technological breakthroughs that make it easier for smaller food producers to compete.

Figure 1. SWOT Analysis for Paradise Kitchens

Internal Factors Strengths Weaknesses

Management Experienced and Small size can entrepreneurial restrict options management and board

Offerings Unique, high-quality, Many lower-quality, high-price lower-price products competitors

Marketing Distribution in three No national markets with awareness or excellent acceptance distribution; restricted

shelf space in the freezer section

Personnel Good work force, Big gap if key though small; employee leaves little turnover

Finance Excellent growth in Limited resources sales revenues may restrict growth

opportunities when compared to giant competitors

Manufacturing Sole supplier ensures Lack economies of high quality scale of huge

competitors

R&D Continuing efforts to Lack of canning and ensure quality microwavable food- in delivered products processing expertise

The SWOT Analysis identifies strengths, weaknesses, opportunities, and threats to provide a solid foundation as a springboard to identify subsequent actions in the marketing plan.

Each long table, graph, or photo is given a figure number and title. It then appears as soon as possible after the first reference in the text, accommodating necessary page breaks. This also avoids breaking long tables like this one in the middle. Short tables or graphs that are less than 11⁄2 inches are often inserted in the text without figure numbers because they don’t cause serious problems with page breaks.

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22 CHAPTER 1 FOUNDATIONS OF STRATEGIC MARKETING MANAGEMENT

Figure 1. SWOT Analysis for Paradise Kitchens (continued )

External Factors Opportunities Threats

Consumer/Social Upscale market, likely Premium price may to be stable; limit access to Southwestern/Mexican mass markets; food category is consumers value a fast-growing segment strong brand name due to growth in Hispanic American population and desire for spicier foods

Competitive Distinctive name and Not patentable; packaging in competitors can its markets attempt to duplicate

product; others better able to pay slotting fees

Technological Technical break- Competitors have throughs enable gained economies smaller food produ- in canning and cers to achieve many microwavable economies available to food processing large competitors

Economic Consumer income is Many households high; convenience im- “eating out,” and portant to U.S. bringing prepared households take-out into home

Legal/Regulatory High U.S. Food & Mergers among large Drug Admin. standards competitors being eliminate fly-by-night approved by competitors government

Among unfavorable factors, the main weakness is the limited size of Paradise Kitchens relative to its competitors in terms of the depth of the management team, available financial resources, and national awareness and distribution of product lines. Threats include the danger that the Company’s premium prices may limit access to mass markets and competition from the “eating-out”and “take-out”markets.

INDUSTRY ANALYSIS: TRENDS IN SPICY AND MEXICAN FOODS

Frozen Foods. According to Grocery Headquarters, consumers are flocking to the frozen-food section of grocery retailers. The reasons: hectic lifestyles demanding increased convenience and an abundance of new, tastier, and nutritious products. By 2004, total sales of frozen food in grocery retailers, drugstores, and mass merchandisers, such as Target and Costco (excluding Wal-Mart), reached $27.6 billion. Prepared frozen meals, which are defined as meals or entrees that are frozen and require minimal preparation, accounted for $7.3 billion, or 26 percent of the total frozen-food market, which is shown in Figure 2.

The Industry Analysis section provides the backdrop for the sub-sequent, more detailed analysis of competition, the company, and the com- pany’s customers. Without an in-depth understanding of the industry, the remain- ing analysis may be mis- directed.

Even though relatively brief, this in-depth treatment of the Spicy Southwestern/Mexican food industry in the United States demonstrates to the plan’s readers the com- pany’s understanding of the industry in which it com- petes. It gives readers con- fidence that the company thoroughly understands its own industry.

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Figure 2. Some Frozen Entrees Included in the Prepared Frozen- Food Product Category, 2004

Frozen dinners $1,323 18%

Italian entrees 1,231 17

Meat entrees 721 10

Mexican entrees 506 7

Oriental entrees 479 7

Poultry entrees 1,617 22

Seafood entrees 190 3

Other entrees 1,281 16

Total $7,348 100%

Handheld entrees, such as Hot Pockets ($1.1 billion), comprise a significant portion of the “Other entrees” category. However, frozen pizza/snacks, which are not included in this category, accounted for an additional $3.3 billion in frozen-food sales in 2004. Heavy consumers of frozen meals, those who eat five or more meals every two weeks, tend to be kids, teens, and young adults 35–44 years old.

Mexican Foods. Currently, Mexican foods such as burritos, enchiladas, and tacos are used in two-thirds of American households. These trends reflect a generally more favorable attitude on the part of all Americans toward spicy foods that include red chili peppers. Grocery marketers and retailers have tried to capitalize on this trend by developing meals targeted to those who desire this type of food. Considering the current desire for convenience, several major food processors, such as Hormel, Tyson Foods, and ConAgra, as well as Hispanic-owned firms, such as Goya (Mission Foods), Ruiz Foods, and Don Miguel’s, have introduced many new frozen Mexican food entrees over the past few years. The growing Hispanic population in the U.S., about 36 million and almost $600 billion in purchasing power in 2004, partly explains the increasing demand for Mexican food.

COMPETITORS IN THE CHILI MARKET

The chili market represents over $500 million in annual sales. On average, consumers buy five to six servings annually. The products fall primarily into two groups: canned chili (70 percent of sales) and dry chili (25 percent of sales). The remaining 5 percent of sales go to frozen chili products. Besides Howlin’ Coyote®, Stouffer’s offers a frozen chili product (Slowfire Classic’s Chunky Beef & Bean Chili) as part of its broad line of frozen dinners and entrees. Major canned chili brands include Hormel,Wolf, Dennison, Stagg, Austin’s, and Castleberry’s. Their retail prices range from $1.49 to $2.49. In the fall of 2004, Campbell’s, the world’s largest maker of soup, and Bush Brothers, a privately held marketer of baked beans, will enter the canned chili market. However, Bush will use a glass bottle to package its Homestyle Chili brand.

As with the Industry Analysis, the Competitor Analysis demonstrates that the company has a realistic understanding of who its major competitors are and what their marketing strategies are. Again, a realistic assessment gives confidence to readers that subsequent marketing actions in the plan rest on a solid foundation.

This summary of sales of key entrees in the prepared frozen-food product category, showing Mexican entrees are significant, provides a variety of future opportunities for Paradise Kitchens.

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24 CHAPTER 1 FOUNDATIONS OF STRATEGIC MARKETING MANAGEMENT

Bluntly put, the major disadvantage of the segment’s dominant product, canned chili, is that it does not taste very good. A taste test described in an issue of Consumer Reports magazine ranked 26 canned chili products “poor” to “fair” in overall sensory quality. The study concluded,“Chili doesn’t have to be hot to be good. But really good chili, hot or mild, doesn’t come out of a can.”

Dry mix brands include such familiar spice brands as McCormick (which has 40 percent of this market), Lawry’s, French’s, and Durkee, along with smaller offerings such as Wick Fowler’s and Carroll Shelby’s. Their retail prices range from $0.99 to $1.49. The Consumer Reports study was more favorable about dry chili mixes, ranking them from “fair” to “very good.”

COMPANY ANALYSIS

Currently, Howlin’ Coyote® products compete in the chili and Mexican frozen entree segments of the Southwestern/Mexican food market. While the chili obviously competes as a stand-alone product, its exceptional quality means it can complement such dishes as burritos, nachos, and enchiladas and can be readily used as a smothering sauce for pasta, rice, or potatoes. This flexibility of use is relatively rare in the prepared food marketplace. With Howlin’ Coyote®, Paradise Kitchens is broadening the position of frozen chili in a way that can lead to impressive market share for the new product category.

The Company now uses a single outside producer with which it works closely to maintain the consistently high quality required in its products. The greater volume has increased production efficiencies, resulting in a steady decrease in the cost of goods sold.

The Company Analysis provides details of the company’s strengths and marketing strategies that will enable it to achieve the mission and goals identified earlier.

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CUSTOMER ANALYSIS

In terms of customer analysis, this section describes (1) the characteristics of customers expected to buy Howlin’ Coyote®

products and (2) health and nutrition concerns of Americans today.

Customer Characteristics. Demographically, chili products in general are purchased by consumers representing a broad range of socioeconomic backgrounds. Howlin’ Coyote® chili is purchased chiefly by consumers who have achieved higher levels of education and whose income is $50,000 and higher. These consumers represent 50 percent of canned and dry mix chili users.

The household buying Howlin’ Coyote® has one to three people in it. Among married couples, Howlin’ Coyote® is predominantly bought by households in which both spouses work. While women are a majority of the buyers, single men represent a significant segment. Anecdotally, Howlin’ Coyote® has heard from fathers of teenaged boys who say they keep a freezer stocked with the chili because the boys devour it.

Because the chili offers a quick way to make a tasty meal, the product’s biggest users tend to be those most pressed for time. Howlin’ Coyote®’s premium pricing also means that its purchasers are skewed toward the higher end of the income range. Buyers range in age from 25 to 54. Because consumers in the western United States have adopted spicy foods more readily than the rest of the country, Howlin’ Coyote®’s initial marketing expansion efforts will be concentrated in that region.

This “introductory over- view” sentence tells the reader the topics covered in the section—in this case customer characteristics and health and nutrition concerns. While this sentence may be omitted in short memos or plans, it helps readers see where the text is leading. These sentences are used throughout this plan.

The higher-level “A heading” of Customer Analysis has a more dom- inant typeface and position than the lower-level “B heading” of Customer Characteristics. These headings introduce the reader to the sequence and level of topics covered.

Satisfying customers and providing genuine value to them is why organizations exist in a market economy. This section addresses the question of “Who are the customers for Paradise Kitchens’ products?”

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Health and Nutrition Concerns. Coverage of food issues in the U.S. media is often erratic and occasionally alarmist. Because Americans are concerned about their diets, studies from organiza- tions of widely varying credibility frequently receive significant attention from the major news organizations. For instance, a study of fat levels of movie popcorn was reported in all the major media. Similarly, studies on the healthfulness of Mexican food have received prominent “play” in print and broadcast reports. The high caloric levels of much Mexican and Southwestern-style food had been widely reported and often exaggerated. Some Mexican frozen-food competitors, such as Don Miguel, Mission Foods, Ruiz Foods, and Jose Ole, plan to offer or have recently offered more “carb-friendly” and “fat-friendly” products in response to this concern.

Howlin’ Coyote® is already lower in calories, fat, and sodium than its competitors, and those qualities are not currently being stressed in its promotions. Instead, in the space and time available for promotions, Howlin’ Coyote®’s taste, convenience, and flexibility are stressed.

5. Product-Market Focus

This section describes the five-year marketing and product objectives for Paradise Kitchens and the target markets, points of difference, and positioning of its lines of Howlin’ Coyote® chilies.

MARKETING AND PRODUCT OBJECTIVES

Howlin’ Coyote®’s marketing intent is to take full advantage of its brand potential while building a base from which other revenue sources can be mined—both in and out of the retail grocery business. These are detailed in four areas below:

• Current markets. Current markets will be grown by expanding brand and flavor distribution at the retail level. In addition, same-store sales will be grown by increasing consumer awareness and repeat purchases. With this increase in same-store sales, the more desirable broker/ware- house distribution channel will become available, increasing efficiency and saving costs.

The chances of success for a new product are signifi- cantly increased if objec- tives are set for the product itself and if target market segments are identified for it. This section makes these explicit for Paradise Kitchens. The objectives also serve as the planned targets against which marketing activities are measured in program implementation and control.

This section demonstrates the company’s insights into a major trend that has a potentially large impact.

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• New markets. By the end of Year 5, the chili, salsa, burrito, and enchilada business will be expanded to a total of 20 metropolitan areas. This will represent 70 percent of U.S. food store sales.

• Food service. Food service sales will include chili products and smothering sauces. Sales are expected to reach $693,000 by the end of Year 3 and $1.5 million by the end of Year 5.

• New products. Howlin’ Coyote®’s brand presence will be expanded at the retail level through the addition of new products in the frozen-foods section. This will be accom- plished through new product concept screening in Year 1 to identify new potential products. These products will be brought to market in Years 2 and 3. Additionally, the brand may be licensed in select categories.

TARGET MARKETS

The primary target market for Howlin’ Coyote® products is households with one to three people, where often both adults work, with household income typically above $50,000 per year. These households contain more experienced, adventurous consumers of Southwestern/Mexican food and want premium quality products.

POINTS OF DIFFERENCE

The “points of difference”—characteristics that make Howlin’ Coyote® chilies unique relative to competitors—fall into three important areas:

• Unique taste and convenience. No known competitor offers a high-quality,“authentic” frozen chili in a range of flavors. And no existing chili has the same combination of quick preparation and home-style taste.

• Taste trends. The American palate is increasingly intrigued by hot spices, and Howlin’ Coyote® brands offer more “kick” than most other prepared chilies.

• Premium packaging. Howlin’ Coyote®’s high-value packaging graphics convey the unique, high-quality product contained inside and the product’s nontraditional positioning.

This section identifies the specific niches or target markets toward which the company’s products are directed. When appropriate and when space permits, this section often includes a product-market matrix.

An organization cannot grow by offering only “me-too products.” The greatest single factor in a new product’s failure is the lack of significant “points of difference” that set it apart from competitors’ sub- stitutes. This section makes these points of difference explicit.

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28 CHAPTER 1 FOUNDATIONS OF STRATEGIC MARKETING MANAGEMENT

POSITIONING

In the past chili products have been either convenient or tasty, but not both. Howlin’ Coyote® pairs these two desirable character- istics to obtain a positioning in consumers’ minds as very high- quality “authentic Southwestern/Mexican tasting” chilies that can be prepared easily and quickly.

6. Marketing Program

The four marketing mix elements of the Howlin’ Coyote® chili marketing program are detailed below. Note that “chile” is the vegetable and “chili” is the dish.

PRODUCT STRATEGY

After first summarizing the product line, the approach to product quality and packaging is covered.

Product Line. Howlin’ Coyote® chili, retailing for $3.99 for an 11-ounce serving, is available in five flavors. The five are:

• Green Chile Chili: braised extra-lean pork with fire-roasted green chilies, onions, tomato chunks, bold spices, and jalapeno peppers, based on a Southwestern favorite.

• Red Chile Chili: extra-lean cubed pork, deep-red acho chilies, and sweet onions; known as the “Texas Bowl of Red.”

• Beef and Black Bean Chili: lean braised beef with black beans, tomato chunks, and Howlin’ Coyote®’s own blend of red chilies and authentic spicing.

• Chicken Chunk Chili: hearty chunks of tender chicken, fire- roasted green chilies, black beans, pinto beans, diced onions, and zesty spices.

• Mean Bean Chili: vegetarian, with nine distinctive bean varieties and fire-roasted green chilies, tomato chunks, onion, and a robust blend of spices and rich red chilies.

Unique Product Quality. The flavoring systems of the Howlin’ Coyote® chilies are proprietary. The products’ tastiness is due to extra care lavished upon the ingredients during production. The ingredients used are of unusually high quality. Meats are low-fat cuts and are fresh, not frozen, to preserve cell structure and moistness. Chilies are fire-roasted for fresher taste, not the canned variety used by more mainstream products. Tomatoes and vegetables are select quality. No preservatives or artificial flavors are used.

Using parallel structure, this bulleted list presents the product line efficiently and crisply.

A positioning strategy helps communicate the company’s unique points of difference of its products to prospective customers in a simple, clear way. This section describes this positioning.

Everything that has gone before in the marketing plan sets the stage for the marketing mix actions covered in the marketing program.

This section describes in detail three key elements of the company’s product strategy: the product line, its quality and how this is achieved, and its “cutting edge” packaging.

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Packaging. Reflecting the “cutting edge” marketing strategy of its producers, Howlin’ Coyote® bucks conventional wisdom in packaging. It avoids placing predictable photographs of the product on its containers. (Head to any grocer’s freezer and you will be hardpressed to find a product that does not feature a heavily stylized photograph of the contents.) Instead, Howlin’ Coyote®’s package shows a Southwestern motif that communicates the product’s out-of-the-ordinary positioning. This approach signals the product’s nontraditional qualities: “adventurous” eating with minimal fuss—a frozen meal for people who do not normally enjoy frozen meals.

PRICE STRATEGY

Howlin’ Coyote® chili is, at $3.99 for an 11-ounce package, priced comparably to the other frozen offerings and higher than the canned and dried chili varieties. However, the significant taste advantages it has over canned chilies and the convenience advantages over dried chilies justify this pricing strategy.

PROMOTION STRATEGY

Key promotion programs feature in-store demonstrations, recipes, and cents-off coupons.

In-Store Demonstrations. In-store demonstrations will be conducted to give consumers a chance to try Howlin’ Coyote®

products and learn about their unique qualities. Demos will be conducted regularly in all markets to increase awareness and trial purchases.

Recipes. Because the products’ flexibility of use is a key selling point, recipes will be offered to consumers to stimulate use. The recipes will be given at all in-store demonstrations, on the back of packages, and through a mail-in recipe book offer. In addition, recipes will be included in coupons sent by direct-mail or free- standing inserts. For new markets, recipes will be included on in- pack coupon inserts.

Cents-Off Coupons. To generate trial and repeat-purchase of Howlin’ Coyote® products, coupons will be distributed in four ways:

• In Sunday newspaper inserts. Inserts are highly read and will help generate awareness. Coupled with in-store

Elements of the Promotion Strategy are highlighted here with B-headings in terms of the three key promotional activities the company is emphasizing for its product line: in-store demonstrations, recipes featuring its Howlin’ Coyote® chilies, and cents-off coupons.

This Price Strategy section makes the company’s price point very clear, along with its price position relative to potential substitutes. When appropriate and when space permits, this section might contain a break-even analysis.

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demonstrations, this has been a very successful technique so far.

• In-pack coupons. Inside each box of Howlin’ Coyote® chili will be coupons for $1 off two more packages of the chili. These coupons will be included for the first three months the product is shipped to a new market. Doing so encour- ages repeat purchases by new users.

• Direct-mail chili coupons. Those households that fit the Howlin’ Coyote® demographics described above will be mailed coupons. This is likely to be an efficient promotion due to its greater audience selectivity.

• In-store demonstrations. Coupons will be passed out at in-store demonstrations to give an additional incentive to purchase.

DISTRIBUTION STRATEGY

Howlin’ Coyote® is distributed in its present markets through a food distributor. The distributor buys the product, warehouses it, and then resells and delivers it to grocery retailers on a store-by-store basis. This is typical for products that have moderate sales— compared with, say, staples like milk or bread. As sales grow, we will shift to a more efficient system using a broker who sells the products to retail chains and grocery wholesalers.

7. Financial Data and Projections

PAST SALES REVENUES

Historically, Howlin’ Coyote® has had a steady increase in sales revenues since its introduction in 1997. In 2001, sales jumped, due largely to new promotion strategies. Sales have continued to rise, but at a less dramatic rate. The trend in sales revenues appears in Figure 3.

Figure 3. Sales Revenues for Paradise Kitchens®, Inc.

Another bulleted list adds many details for the reader, including methods of gaining customer awareness, trial, and repeat purchases as Howlin’ Coyote® enters new metropolitan areas.

The Distribution Strategy is described here in terms of both (1) the present method and (2) the new one to be used when the increased sales volume makes it feasible.

All the marketing mix decisions covered in the marketing program have both revenue and expense effects. These are summar- ized in this section of the marketing plan.

The graph shows more clearly the dramatic growth of sales revenue than data in a table would do.

1997

60 210 360

600

1650

2428

3174

4067

5123 5,500

4,000

4,500

5,000

3,500

3,000

2,500

2,000

1,500

1,000

500

1998 1999 2000 2001

Year

S al

es R

ev en

u es

( $

1 ,0

0 0

)

2002 2003 2004 2005

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FIVE-YEAR PROJECTIONS

Five-year financial projections for Paradise Kitchens®, Inc. appear below:

Projections

Financial Actual Year 1 Year 2 Year 3 Year 4 Year 5 Element Units 2006 2006 2007 2008 2009 2010

Cases sold 1,000 353 684 889 1,249 1,499 1,799

Net sales $1,000 5,123 9,913 12,884 18,111 21,733 26,080

Gross profit $1,000 2,545 4,820 6,527 8,831 10,597 12,717 Selling and general and admin. expenses $1,000 2,206 3,835 3,621 6,026 7,231 8,678

Operating

profit (loss) $1,000 339 985 2,906 2,805 3,366 4,039

These projections reflect the continuing growth in number of cases sold (with 8 packages of Howlin’ Coyote® chili per case) and increasing production and distribution economies of scale as sales volume increases.

Because this table is very short, it is woven into the text, rather than given a table number and title.

The Five-Year Financial Projections section starts with the judgment forecast of cases sold and the resulting net sales. Gross profit and then operating profit—critical for the company’s survival—are projected. An actual plan often contains many pages of computer-generated spreadsheet projections, usually shown in an appendix to the plan.

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8. Implementation Plan

Introducing Howlin’ Coyote® chilies to 17 new metropolitan areas is a complex task and requires that creative promotional activities gain consumer awareness and initial trial among the target market households identified earlier. The anticipated rollout schedule to enter these metropolitan markets appears in Figure 4.

Figure 4. Rollout Schedule to Enter New U.S. Markets

New Markets Cumulative Cumulative Percentage Year Added Markets of U.S. Market

Today (2005) 2 5 16

Year 1 (2006) 3 8 21

Year 2 (2007) 4 12 29

Year 3 (2008) 2 14 37

Year 4 (2009) 3 17 45

Year 5 (2010) 3 20 53

The diverse regional tastes in chili will be monitored carefully to assess whether minor modifications may be required in the chili recipes. For example, what is seen as “hot” in Boston may not be seen as “hot” in Dallas. As the rollout to new metropolitan areas continues, Paradise Kitchens will assess manufacturing and distribution trade-offs. This is important in determining whether to start new production with selected high-quality regional contract packers.

9. Evaluation and Control

Monthly sales targets in cases have been set for Howlin’ Coyote® chili for each metropolitan area. Actual case sales will be compared with these targets and tactical marketing programs modified to reflect the unique sets of factors in each metropolitan area. The speed of the roll out program may increase or decrease, depending on Paradise Kitchens’ performance in the successive metropolitan markets it enters. Similarly, as described above in the section on the implementation plan, Paradise Kitchens may elect to respond to variations in regional tastes by using contract packers, which will reduce transportation and warehousing costs but will require special efforts to monitor production quality.

10. Appendices

The Implementation Plan shows how the company will turn plans into results. Gantt charts are often used to set deadlines and assign responsibilities for the many tactical marketing decisions needed to enter a new market.

The essence of Evaluation and Control is comparing actual sales with the targeted values set in the plan and taking appropriate actions. Note that the section briefly describes a contingency plan for alter- native actions, depending on how successful the entry into a new market turns out to be.

Various appendices may appear at the end of the plan, depending on the purpose and audience for them. For example, detailed financial spreadsheets often appear in an appendix.

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